Is There a Soft Landing for the Financial Markets?

Abstract

Public policy, like the economy, runs in cycles. The 1980s were dominated by conservative thought with an emphasis on deregulation and laissez faire economics. But today the concern is that the 1980s agenda that produced financial deregulation also produced a deterioration in the quality of federal services. Just as the Coolidge era was followed by the New Deal, there are many signs that conservative 1980s economics will be succeeded by a period of liberal values and public purpose. Financing America through a laissez faire approach to regulatory policy is unlikely to persist. Problems of financial moral hazard in the thrift industry and corporate takeover market are even now leading to a more interventionist regulatory policy to curtail excessive risk-taking in the financial sector. Two factors suggest more active intervention: First, crises in the high yield bond market will force deal-makers to rely more heavily on bank finance in doing future LBOs. Since many of America's large commercial banks are poorly capitalized when their LDC loans are valued at market, it should be possible for the Fed to use more effective moral suasion over