ABSTRACT
According to a General Accountability Office study, the cumulative economic toll of the subprime crisis on the United States (US) economy in terms of lost output was as much as $13t. In comparison with the market-imperfection and behavioralist approaches, the Bagehot-Minsky-Kindleberger (BMK) tradition is a more fundamental challenge to standard economic theory. The basic efficient-market hypothesis (EMH) rests on the assumption that independent expected utility-maximizing agents operate in perfectly competitive markets and form rational expectations of future outcomes. In view of the large role of the banks in mortgage-backed-security (MBS), collateralized-debt-obligation (CDO), and credit-default-swap (CDS) trades in the 2007-8 crisis, Paul Volcker proposed banning banks from using deposits in high-risk speculative activities, such as proprietary trading. One idea incorporated into the Dodd-Frank Act requires banks with assets of more than $50b and non-bank financial companies specified by the Financial Stability Oversight Council (FSOC) to prepare and file "living wills" with the Fed and the Federal Deposit Insurance Corporation (FDIC).
