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Re-Thinking Our Financial System

Working paper #634
Ethan Penner

Global financial markets are in disarray. Commercial banks, both in the United States and abroad, have taken massive write-downs. So are investment banking firms, which are further challenged by bleak prospects for their securitization businesses, which have been their primary earnings engines. The Fed is trying to balance the need to encourage liquidity so as to avert a deep recession, while managing the risks of inflation and a highly devalued dollar. The economy in many respects seems to be reasonably healthy, yet there is a real risk that a dysfunctional financial system could cause a severe recession. Securitization is experiencing its first real test. Clearly there will be modifications and adjustments. Yet there will surely continue to be a significant role for securitization. This is a time for thoughtful regulatory oversight, not the time to throw the baby out with the bathwater.

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