ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Do Not Be Distracted by Mr Madoff

Financial crashes do not occur randomly, but generally follow booms. Through a number of avenues, sometimes regulatory, sometimes not, though often in the name of risk-sensitivity, sophistication and modernity, the impact of current market prices on behaviour has increased. This increased use of market prices has increased the endogeneity of financial market risks. In the economic up-cycle, pricebased measures of asset values rise, price-based measures of risk fall and competition to grow bank profits increases. A critical component of the policy response to crisis should be for bank regulation to act as a countervailing force to the natural decline in measured risks in a boom and the subsequent rise in measured risks in the subsequent collapse.

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