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Financial Reform: Unfinished Business

By Paul Volcker, New York Review of Books - November 11, 2011

It should be clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations, market efficiencies, and the techniques of modern finance. That faith was stoked in part by the huge financial rewards that enabled the extremes of borrowing, the economic imbalances, and the pretenses and assurances of the credit-rating agencies to persist so long. A relaxed approach by regulators and legislators reflected the new financial zeitgeist.

All the seeming mathematical precision that was brought to investment, all the complicated new products, including the explosion of derivatives, that were intended to diffuse and minimize risk, did not work as had been claimed. Instead, the vaunted efficiency helped justify an explosion of weak credit and an emphasis on trading along with exceedingly large compensation for traders.

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