ABSTRACT
Financial crises are inevitable. Both government intervention and market innovations can influence the frequency and severity of these episodes, but they cannot eliminate them. Evolution toward stronger political and economic institutions is a discovery process, and the sometimes dramatic financial market adjustments labeled “crises” are an unavoidable part of that process. Government intrusions into financial markets typically make financial crises more serious. For the most part, official programs seem designed to act as sponges for absorbing risk exposures from particular groups of economic agents. This can lead market participants astray. Unless the resulting incentive to overinvest in risky projects is offset by an effective program of supervision, agents are likely to misallocate resources.
