Lessons from the Crisis

This chapter aims to contribute to the debate on fi nancial system reform. In the fi rst part I describe what I perceive to be a massive regulatory failure, a breakdown that goes all the way from regulatory fundamentals to prudential implementation. Although there has been some truly shocking behavior in the world of fi nance, the universal denunciation of “fi nancial madness” is pointless. Managers and employees in the fi nancial industry, like all economic agents, react to the information and incentives with which they are presented. Bad incentives and bad information generate bad behavior. Accordingly, this chapter starts by listing the principal factors that led to the crisis. Although many excellent and detailed diagnoses are now available,1 the fi rst section