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Financial crisis and regulations

January 27th, 2009 · No Comments

Market participants continually discover new information, make errors and respond to errors. It is important that financial institutions are allowed to do things differently so that some (who use better and more efficient methods) succeed and others fail (indeed, it is important that institutions are allowed to fail).

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Hayek suggests, too, that booms and busts are the product of poor monetary policy. Central banks hold interest rates too low. People consume too much and invest in business projects that would not be profitable at higher levels of interest rates. Resources then get misallocated. And then the whole things goes bang and we get a recession (in this case accompanied by a banking crisis).

From here:Financial crisis shows why we should admire Freidrich Hayek

Tags: Economie