In this Council Special Report, Benn Steil offers an incisive overview of the crisis and a comprehensive guide for reform. He starts by examining the factors that helped bring the crisis about and shows how a variety of policies and practices, ranging from a tax structure that encouraged leverage and home-buying to bank compensation that gave huge rewards for short-term gains, set up a system that collapsed after the housing market started to weaken. Steil then offers policy recommendations, principally for the U.S. government. First, he argues that given the shortcomings of regulation, policymakers should work to shape incentives so that the market largely regulates itself. Second, he explains why financial institutions must be made more resilient to broad economic distress and how this can be done. The report lays out a comprehensive agenda covering issues of leverage, capital requirements, corporate and mortgage finance, the screening and monitoring of mortgage borrowers, market infrastructure, corporate governance, monetary policy, and international financial architecture.
Lessons of the Financial Crisis is a much-needed work on an issue that could not be more timely or important. It covers complex issues in a highly readable manner. This report recommends an ambitious but practical list of measures to address the circumstances that have caused such a loss of wealth in the United States and around the world. The result is an invaluable assessment of how the economy has gotten to this point and what is necessary to reduce the chance of future crises.