Market failures in the financial system

New Vision, July 18, 2012

 "With the near collapse of the global economy in 2008, there is an increased awareness of the importance of market failures, those circumstances in which markets fail to act in an efficient and stable manner, in the way that they are supposed to. I already suggested one of the fundamental reasons for these market failures—a misalignment between private rewards and social returns.

Nowhere are market failures more pervasive or more important, with such profound consequences for our economic system, than in the financial sector. In this lecture, I will provide taxonomy of these market failures and how regulatory and other policies can help overcome them.

But rather than providing a simple list of the key market failures—from imperfections of competition, asymmetries of information, incompleteness of markets, coordination failures, externalities—I approach the subject from the perspective of the taxonomy of interventions—the key areas in which governments, all over the world, have intervened in financial markets, to help make them serve the public interest better."