Causes of Financial Crises and Regulatory Failure

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This chapter explores the multifaceted causes of financial crises, including housing price appreciation, credit availability, and monetary and housing policies. It also discusses the increase in consumer debt, the role of regulation and supervision, and the connection between consumer indebtedness and the current account story.

Carmen Reinhart of the University of Maryland talks with EconTalk host Russ Roberts about the ideas in her book This Time is Different: Eight Centuries of Financial Folly (co-authored with Kenneth Rogoff). They discuss the role of capital inflows in financial crises, the challenges of learning the right lessons, and what is generally true about financial crises over time and place. Reinhart applies these observations to the current crisis, discusses the possibility of the U.S. defaulting on its sovereign debt, and discusses the possibility of financial reforms that might make a difference.