The Chess Game of Financial Regulation

The financial crisis that began in the sub-prime mortgage market is at least the third major financial crisis to include a breakdown in the United States housing finance sector. During the Great Depression, banks and balloon mortgages were involved in a collapse. In the 1980's, we experienced the Savings and Loan Crisis. Currently, we are dealing with the aftermath of a boom-bust cycle in house prices that was exacerbated by risky lending practices.

A sobering fact is that the response to each of the first two crises helped to lay the groundwork for the next – and current -- crisis. It turns out that financial regulation is not like a math problem, which can be solved once and stays solved. Instead, financial regulation is like a chess game, in which moves and counter-moves proceed continually, eventually changing the board in ways that players have not anticipated...

FinReg21: The Chess Game of Financial Regulation