Document Type

Working Paper

Publication Date

2016

Abstract

The standard story is that the financial crisis resulted in the loss of credit availability. Although the relationship between credit availability and financial decline leading to the crisis was somewhat interactive, I argue that a loss of credit availability appears to have caused the financial crisis more than the reverse. That can teach us at least three lessons. First, because credit availability is now dependent on financial markets as well as banks, financial regulation should be designed to protect the viability of markets as well as banks. Second, diversifying credit sources might increase financial stability. Third, we should try to identify and correct system-wide flaws that can undermine credit availability. One of the most intractable of these flaws is our own inherent human limitations, which we can do little to correct. That suggests an ongoing risk for credit availability, and thus an ongoing potential for new financial crises to arise.

Library of Congress Subject Headings

Financial crises, Credit, Loans, Default (Finance), Financial risk management

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