Understanding Bank Risk through Market Measures

If we want to stop crises, we have to describe when we will say “good enough” and stop trying to fix things in the name of crisis prevention. My premise: an economy with booms and busts, risks taken, and losses transparently absorbed by falling prices, is good enough for now.
If we try to create a financial system in which nobody ever loses money, we will just create a system in which nobody ever takes any risk, and does not fund any remotely risky investment opportunity. That is the direction we are going. And steps that actually matter to fixing crises are getting lost in the effort rush to “fix” every perceived financial “problem.”
I do not mean that other financial regulation is not necessarily bad, or even that one shouldn’t contemplate policies to reduce stock market volatility. But if we actually want to fix crises, or end TBTF, we have to separate those other measures into everyday regulation.

John H. Cochrane

University of Chicago

May 16, 2016

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