Tackling Financial Problems Can Require Non-Financial Solutions

Financial regulation is most effective when it targets the origins of the problem it seeks to remedy. This is akin to the medical adage: treat the cause, not the symptom. Identifying the causal factors driving distress in financial markets is no easy task. One complication is that the cause might lie in non-financial markets. New research on the financial crisis highlights this point. Attempts to stem foreclosures and steady housing markets focused on interventions in credit markets like principal forgiveness or reductions in monthly payments. But the ultimate driver of foreclosure is, predominately, job loss. Given this, a more direct solution is a labor market policy: increase unemployment benefits to struggling homeowners in order to support their consumption and prevent default. Financial policymakers must be alert to the possibility that the best way to tackle a financial problem is through a (traditionally) non-financial policy option.