ABSTRACT
Thus far, this book has looked at the first three elements of the Financial Instability Hypothesis – the regulatory stimulus cycle (in Chapter 3), deteriorating legal compliance (or “compliance rot” in Chapter 4), and regulatory arbitrage frenzies (in Chapter 5) – in isolation. Of course, in real financial markets and real financial history, these phenomena do not operate independently of one another. On the contrary, regulatory stimulus – particularly deregulation – and regulatory arbitrage occur simultaneously or in sequence. Moreover, deregulation and regulatory arbitrage can reinforce and generate powerful feedback for one another. This feedback gains strength during bubble times.
