How Efforts to Avoid Past Mistakes Created New Ones

Much has been written about the causes of the 2008 Financial Crisis. Not enough attention, however, has been focused on how regulators' attempts to correct for behaviors that led or contributed to previous crises—particularly the savings and loan crisis and the Great Depression—created new problems which culminated in the 2008 Financial Crisis and continue to present ongoing risks to the financial system. In many instances, policies adopted to address the “lessons learned†from one crisis eventually grew into regulatory blind spots and artificial market asymmetries that helped fuel the next. What then are policymakers to do? On one hand, they need to learn from the past and correct for government lapses and missteps of prior years. On the other hand, they need to do so in a way that doesn't create new problems. Government policymakers need not be caught between the proverbial rock (those who cannot remember the past are condemned to repeat it) and a hard place (first, do no harm). This paper seeks to illustrate the observation and offer some thoughts on how we might find a way through this challenge.