Parikh 1

Name: Sahil Parikh

Professor: Matthew Backes
Class: Junior Seminar
Date: December 12, 2017
Measures to avoid another Financial Crisis of 2008

During the period of economic growth in the 1980s and 1990s, the American middle

class saved their earnings in the form of cash in savings accounts. Except for the dot com

bubble bursting in 2001, financial markets maintained relative stability without significant

inflation or deflation. Starting in 2001, private banking institutions began to sell financial

products with the help of quantitative mathematics. Private institutions would sell mortgages,

bonds, and stocks in one package individual entities. However, private institutions ended up

selling the same products multiple times in different bundles, causing inflation and higher

index values. How is the middle class related to financial markets? Middle-class Americans

were not literate in financial planning in 2001 nor are they today. In order to achieve the

American dream, the middle-class American has to own a house, in order, to call his or her

family middle-class. In 2001, banks survey reports highlighted an increase in savings for the

American middle class between the age of 25-45. However, the middle class was reluctant to

directly invest in the financial markets with its savings due to uncertainty and financial

illiteracy. Instead, they decided to invest their savings in buying a house to achieve their

American dream. After the middle class invested their savings in mortgages, the banks sold

their mortgages to larger banks at a higher price. The larger banks decided to sell those

mortgages with other financial products such as bonds and debentures to multinational

companies and even foreign governments. Here is the catch, middle-class Americans were
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offered the loans at a lower rate, however, the rates increased over the years. The rates were

increased by small banks with the help or guidance of multinational banks. The reason to

increase the interest rates was human greed and the desire to make large chunk of money in a

short time. Due to higher interest rates, the middle-class American failed to make payments

on mortgages and declared bankruptcy. Middle-class Americans, failure to make interest

payments led to a decline in earnings in multinational banks. When markets realized the

discrepancy between the middle class’s ability to pay and market expectation, the markets

began to sink. Multinational banks such as Morgan Stanley, Chase and Lehman Brothers

were looking for a bail out from government or competitors. Some banks such as Lehman

brothers failed to survive, whereas, Chase merged with J.P Morgan. By this time, middle-

class Americans had lost their hard-earned savings to bankruptcy which resulted from

corporate manipulation of interest rates and speculation due to rebundling of products. What

if the middle class did not fall into the trap of buying cheap mortgages which would later

become overpriced? What if small banks didn’t sell the mortgages to larger banks at a

premium? Nowhere in this crisis, had any individual broken the law of the United States.

Still, middle-class Americans had virtually become bankrupt without any savings. Middle-

class Americans’ hard earned money vanished within a decade. Still, we call ourselves a

successful and free country where one can achieve dreams. Why did the economy suffer

billions of dollars of loss within a few days? We can learn from the history of the great

depression and analyze its solutions to avoid a similar crisis in the future.

Before the crisis of 1929, the companies inflated their earnings and stock prices to

avoid reporting the losses that occurred due to failed loans to countries like Germany. The
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American banking institutions had loaned millions of dollars to the bankrupt countries of

Europe after World War 1 to rebuild their respective countries. However, the countries failed

to make payments to American banking institutions. The great depression could have been

avoided if the government had set standards for banking institutions to loan money to

bankrupt countries. It was a similar situation to the financial crisis of 2008 where companies

took advantage of lack of regulation to overtrade by finding loopholes in the system. Like

banking institutions in 1928, banking institutions in 2000 took advantage of lack of

regulation and loaned mortgages to individuals without adequate financials. How can we

avoid another crisis like of 2008 in the future? After the great depression of 1928, the

government set up the SEC(Securities and Exchange Commission) to regulate the financial

markets and ensure fair reporting of financial statements of listed companies. Similarly,

today’s government can set up a committee to review the recommendations of the

committees after the crisis and suggest new regulations to SEC. The first job would be to

identify the loopholes in the regulation. Secondly, the committee would have to have

officials from both the private sector and government to ensure successful implementation of

regulations. The government would lobby on behalf of middle-class and working- class’ and

the private sector officials would represent their goals and mission to compete globally with

similar institutions of other countries and lobby for regulation to compete globally. Such a

committee should not tie private institutions to strict regulation which would stop private

institutions from competing globally and affect our economy negatively.

However, the committee cannot let the private sector make the same mistake in the

future and must pass necessary regulations to avoid such a crisis for atleast another 100
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years. Setting up a committee and regulations can stop another crisis to in the future by

fixing the loopholes in the system and avoiding any loopholes in the future. While the private

sector and the government promised each other financial returns to cover the loses of the

crisis of 2008, many middle-class Americans lost homes, jobs, and savings. Preventing such

widespread disaster demands oversight and regulation of multinational banks and financial

literacy for Americans.

Middle-class Americans saw an increase in savings after the dot com bubble and

decided to invest savings to achieve the American dream of home ownership. The dot com

bubble saw an increase in earnings for the private institutions that translated into higher

wages and salary to middle-class workers. However, an increase in savings or wages did not

result in increased investment in financial markets. Raghuram Rajan was an economist for

the International Monetary Fund and warned about the speculative growth of financial

markets. Rajan talks about Feldstein and Horioka’s economic analysis and states, “Feldstein

and Horoika pointed out that there seemed to be a much closer correlation between a

country’s savings and its investment than might be suggested by the existence of global

capital markets- national investment seemed to be constrained by national savings.” (Rajan).

In other words, the more people save, the less they invest. Due to the American middle

class’s financial illiteracy, middle class people have always been reluctant to invest in

complex financial products like debentures, bonds, and stocks. Madeline Farber an editor of

Fortune Magazine talks about the financial literacy of Americans. Madeline Farber states,

“All told, a new study, which was released today, estimate that nearly two-thirds of

Americans couldn’t pass a basic financial literacy test, meaning that they got fewer than four
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answers correct on a five question quiz. Worse, the percentage of those who can pass the test

has fallen consistently since the financial crisis to 37% last year, from 42% in 2009.”(Farber)

In order to avoid the complexity of financial markets, the middle class decides to invest in

real estate which is fairly easy, tangible, and visible as compared to financial products such

as stocks and bonds. According to federal reserve data, the average mortgage interest rate in

2003 was 5.24%, however, within three years interest rate increased to as much as 7.25%.

After the mortgages had been sold to the middle class through small banks, the mortgages

had been sold by smaller banks to multinational banks at premium with a profit. Hence, the

middle class’s savings invested in real estate to achieve the American dream had indirectly

ended up with corporate America through the capitalist practice of free trade.

Multinational banks began to use quantitative methods to sell financial products and

began to rebundle the mortgages and sell the same intangible products multiple times in

different packages. The practice of rebundling goes against the law of nature. For example: A

tangible pencil can only be sold to one person not three people. The first person can sell it to

the second person, but the original seller cannot the same pencil to the first and second

person. However, when dealing with intangible products like securities backed mortgages, it

becomes very difficult to source the true owner of the individual and rebundled products.

Rajan talks about the rebundling strategies of the banks and states, “Despite the fact that

rebundling can be a powerful tool to re-establish customers’ trust and increase profits…

banks tend to give a discount on the bundle and price promote the individual bundle items as

well: a very dangerous strategy.”(Rajan) In order to avoid the risk of selling high priced

bundles, the banks hedge their risk by individually selling the securities, which are a part of
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the bundle at a lower price. When banks sell financial products individually and through

rebundling, it becomes a very difficult to keep track of the products and to decide if the same

financial product is sold by two different brokers to two different parties. Financial markets

are comprised of multiple sectors including real estate, oil, and retail. Multinational banks

have interests in every sector of the financial markets. Multinational banks tend to offset

their losses in one business by putting pressure on another business without assessing the

feasibility of their actions. To cover losses in speculative trades and other sectors,

multinational banks began to increase the interest rate on mortgages purchased at a premium

from smaller banks. According to the federal reserve data, mortgages increased from 5.24%

in 2003 to 7.5% in 2006. The decision to increase the interest rates on mortgages proved to

be very expensive for multinational banks and middle-class homeowners. Due to increased

interest rates and mortgage payments, middle-class Americans began to default on their

mortgage payments and began to declare bankruptcy. Hence, multinational banks practice of

rebundling and unfeasible interest rates resulted in middle class Americans loosing their

savings and homes to corporate America.

Even if corporate America is to be blamed for the financial crisis, isn’t it the

responsibility of middle-class investors to protect themselves from vested interest of

corporate America? Were American homeowners literate enough to understand the mortgage

bought by them and understand that their mortgage was sold by small banks to multinational

banks? How many homeowners knew the difference between fixed interest rate and variable

interest rate? Madeline Farber talks about the mortgage interest rate and financial condition

of middle class and states, “The percentage of new lower-quality subprime mortgages rose
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from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much

higher ratios in some parts of the U.S.[1][2] A high percentage of these subprime mortgages,

over 90% in 2006 for example, were adjustable-rate mortgages. Further, U.S. households had

become increasingly indebted, with the ratio of debt to disposable personal income rising

from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.” Was

it the responsibility of homeowners to understand the changes in their mortgages? The

general consensus amongst Americans say that a middle-class homeowner is not financially

literate enough to understand its own financials and most importantly, its mortgage.

Madeline Farber states, “Bonds presented one of the biggest problems for respondents of

the survey. Just 28% knew what happens to bond prices when interest rates fall. (They

rise.) And less than half of all Americans appear to be able to answer basic questions

about financial risk.” Why is American middle class not financially educated? Do we

provide adequate education to americans in high school or teach healthy financial

practices? Lois A Vitt is a financial editor at Society of Financial Services professionals

and explains why americans need to be financially educated. Vitt talks about the risks of

financial illiteracy and states, “The worst recession since the 1930s followed, and many

individuals and families slipped into financial crisis from losses of income and wealth. The

dramatic downturn in home values removed the security of home equity and dashed the

retirement goals of many baby boomers. According to the Bureau of Labor Statistics,

workers ages 45 and over formed a disproportionate share of “the nation’s long-term

unemployed.” A recent study by Wellesley College economists shows that the labor market

downturn during and after the recession could have significant adverse health effects for

older boomers, and in some cases, cut life expectancy by up to three years.”(Vitt 3) Financial
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illiteracy just doesn’t affect middle-class financially, but also affects the health of middle-

class Americans. Healthy financial practices, such as savings, would prepare middle-class

Americans for economic shocks and unemployment. Savings would help Americans to

afford health care even during unemployment and not hesitate to go to a doctor due to

unending medical fees. Financial savings would also reduce anxiety and stress for the future,

which would help avoid mental and physical deterioration of Americans. Steven H. Woolf is

an author for Center on Society and Health which does active studies on middle-class and

health. Woolf associates income to mental health and states, “Income is also associated with

mental health. Compared with people from families who earn more than $100,000 a year,

those with family incomes below $35,000 a year are four times more likely to report being

nervous and five times more likely to report sadness “all or most of the time” (figure 2).11

Somatic complaints (i.e., the pain and other physical ailments that people experience due to

stress and depression) also occur more commonly among people with less income. Low

income cultivates multiple hallucinatory fears about the future. Most of the fears are related

to financial weakness and financial illiteracy makes mental conditions worse. If middle- class

Americans knew how to handle financial stress and uncertainty, they would be able to avoid

unnecessary anxiety which would improve their health. Hence, healthy financial practices

and financial literacy is not only essential towards stable financial life but also towards stable

physical and mental life.

Despite multiple attempts by scholar in the past, middle-class and government have

failed to understand the importance of financial literacy and its impact on Americans. In

addition to financial status and mental health, financial literacy also affects middle-class’s
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attempt to achieve self-actualization. Abraham Maslow was an American psychologist who

proved that every individual’s final goal in life is to achieve self-actualization. Maslow

suggested that the only way to achieve self-actualization is by acting on your thoughts and

achieve every need, wish, and desire. Most of the Americans, as part of the American dream,

want to own a house, which is part of the “desire” to achieve self-actualization. However,

American middle-class is not prepared to own or secure a house due to financial illiteracy.

The American middle-class loses its desire to own a house every time an economic shock

like 1929 or 2008 comes along. Maslow talks about how individuals take decisions in time of

uncertainty and states, “the decision maker (The Self) juggles motivational triggers

(“Wants,” “Needs,” “Shoulds,” and “Values”), while balancing thoughts and feelings that

occur when one or more such motivator is unsatisfied: “Frustration” occurs when wants are

blocked; “Deprivation” ensues when needs remain unmet; “Guilt” can be almost unbearable

if we do not live up to someone else’s (real or imagined) expectation; and “Shame” follows

our perceived failure to act in accordance with the values we set for ourselves.”(Vitt 83).

Financial illiteracy results in frustration due to uncertainty of the future and eventually leads

to shame which stops Americans from achieving self-actualization or spiritual health for the

rest of their life. Hence, financial illiteracy is the cause of majority of the problems with

Americans, including poor financial, emotional, and spiritual health. Therefore, middle class

represented United States government should educate middle class to help them live life with

stable health.
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In addition to financial education, the United States government has to pass

regulations to set oversight on the activities of businesses to avoid another crisis like 2008.

However, there are multiple economic theories through which the government can approach

the problem. First, public interest theory tries to argue that market is full of inefficiency and

it is job of the government to make market more efficient. Also, the theory assumes that it
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virtually costs nothing to regulate the market. Richard A Posner is an economist at National

Bureau of Economic Research, Inc. Posner talks about the economic theories which have

been used in the past, including the great depression, to regulate the markets. Posner talks

about the government sponsored programs in relation to public interest theory and argues,

“With these assumptions, it was very easy to argue that the principal government

interventions in the economy——trade union protection, public utility and common carrier

regulation, public power and reclamation programs, farm subsidies, occupational licensure,

the minimum wage, even tariffs——were simply responses of government to public

demands for the rectification of palpable, and remediable, inefficiencies and inequities in the

operation of the free market.”(Posner 3) Public interest theory argues that it is the

government’s job to find the efficiency in the market and pass regulation to avoid

discrepancy in reporting. In addition, it favors government when it passes regulation such as

minimum wage, farm subsidies supporting weaker section of the society. Public interest

theory gives extensive responsibilities to the government and diminishes middle class’s role.

It argues that middle class elects the government and it is government’s responsibility to help

middle class.

However, public interest theory sometimes works against itself in modern age. Posner

talks about the contradictory relationship between economic efficiency and benefit to weaker

section of the society, including middle-class and states, “Few, if any, responsible students of

the airline industry, for example, believe that there is some intrinsic peculiarity about the

market for air transportation that requires prices and entry to be fixed by the government.

The same may be said for trucking, taxi service, stock brokerage, ocean shipping, and many
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other heavily regulated industries. Even the danger of "market failure" in such traditionally

unquestioned areas of regulation as health care, the legal profession, and the safety of drugs

and other products is increasingly discounted. The conception of government as a costless

and dependably effective instrument for altering market behavior has also gone by the

boards.”(Posner 3) Posner talks about the airline industry and argues that it would be

beneficial and fair to middle class if air tickets are made affordable, however, it may result in

financial loss for the airline industry. Similarly, public interest theory can be used to remove

inefficiencies in the airline industry by increasing the ticket price which would make air

travel unaffordable to middle-class.

Larry Bumgardner is a professor at Pepperdine University and has written a paper

describing the events after the great depression and the government’s attempt to turn around

the economy. Bumgardner states, “Hoover, as the leader of the pro-business and laissez-faire

Republican Party, was overly reluctant to act in response to the market turmoil, or to address

the needs of millions of unemployed Americans who suffered from the resulting Depression.

Far too often, he indicated that the economy was on the verge of turning around, only to be

disappointed. By 1932, Hoover had become frustrated that the New York Stock Exchange

had not taken stronger self-regulatory action in response to reported market abuses. He then

supported a congressional investigation into market manipulation, which he believed had

contributed to the crash”(Bumgardner 4). President Hoover had to interfere in the financial

market or New York Stock Exchange after New York Stock Exchange failed to correct itself.

Hoover took the public interest theory approach where he used the government to act on
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behalf of the middle- class Americans after financial institutions such as New York Stock

Exchange failed to take any action.

After SEC(Securities and Exchange Commission) Act was drafted, many pro-

business lobbyists argued against the passing of such bill arguing that such act would cause

inefficiencies in the market. Bumgardner talks about the critics of SEC act and states,

“Similarly, a prominent corporate attorney of the day wrote in Fortune magazine that the law

might “seriously retard economic recovery” by making it difficult for companies to raise

capital – causing “American corporations to go abroad for capital.” Arguing in effect that the

law was overkill, attorney Arthur Dean added: “With the purposes of the Act, the writer is in

full sympathy, but it seems hardly necessary to burn down the house to exterminate

vermin.”(Bumgardner 4) The critics argued that the extra reporting of financials would put

extra pressure on businesses during depression, which would delay the economic recovery of

the country. Also, other critic argued that businesses have to be allowed to function

independently for speedy recovery of the economy. Similarly, the critics in favor of the

regulation argued that businesses cannot be trusted without regulation and United States

cannot afford another market crash which would double the damage and recovery time.

Therefore, it is essential to understand that government represents multiple sections of the

society with different ideas and government always tries to find a middle ground like in the

case of depression. President Hoover respected the liberty of New York Stock Exchange and

waited two years before he ordered a formal inquiry into the economic crash. Failure of New

York Stock Exchange to solve the problem resulted in President Hoover interfering with an

institution’s liberty. Solving of great depression is a successful example of government’s role

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in solving economic crisis. Hence, the public interest theory can be used to approach the

2008 financial crisis like great depression, however, the complexity of financial markets

must be considered to avoid contradictory results before passing any regulation.

In addition to public interest theory, Posner talks about capture theory and states,

“This theory holds that regulation is supplied in response to the demands of interest groups

struggling among themselves to maximize the incomes of their members.”(Posner 1) Capture

theory understands that a society is made up of different class and occupations and every

section of the society has different needs and demands. Unlike the public interest theory

where the society is divided into two sections: Government and citizens, capture theory is

more realistic and recognizes different sections of the society such as businesses, workers,

large businesses, and gender based groups. It argues that different sections of the society use

the government to advance their collective motive to increase welfare of that particular

group. Capture theory is more realistic option and can help finding a feasible solution for

financial crisis of 2008. Capture theory is a fusion of multiple theories including liberals,

muckrakers, Marxists, and free—market economists. Posner states, “Big business——the

capitalists——control the institutions of our society. Among those institutions is regulation.

The capitalists must therefore control regulation. The syllogism is false. A great deal of

economic regulation serves the interests of small—business——or nonbusiness——groups,

including dairy farmers, pharmacists, barbers, truckers, and, above all, union labor. Such

forms of regulation are totally unexplained (and usually either ignored or applauded) in this

version of the interest—group or "capture" theory.”(Posner 1) The capture theory when

measured on the Marxist scale argues that private institutions have their own regulations and
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government regulations are unduly favored towards small business or nonbusiness. It also

states that middle class workers have undue advantage towards government regulation due to

its ability to form government. Middle class workers form the government based on higher

votes compared to rich. Therefore, it favors rich private institutions having their own

regulation without any interference from the government to secure their independence from

middle class backed government. However, the Marxist theory is irrelevant in present as

government is highly influenced by private institutions and fails to address the needs of

middle-class.

The capture theory has evolved with time and recognizes the interdependence on

government and private institution. Posner talks about regulations as a weapon used against

each other by different institutions and states, “The theory is based on two simple but

important insights. The first is that since the coercive power of government can be used to

give valuable benefits to individuals or groups, economic regulation——the expression of

that power in the economic sphere——can be viewed as a product whose allocation is

governed by laws of supply and demand. The second insight is that the theory of cartels may

help us locate the demand and supply curves.”(Posner 16) Capture theory of regulation

argues that different section, including middle-class, large businesses, and unions, use

government as a battle background to protect its interest and advance control on other

institutions by passing laws and regulation. Sometime multiple institutions form cartels and

fight against each other to pursue collective interest. For example: large businesses of 1930s

would see SEC(Securities and Exchange Commission) Act as a weapon used against them by

trade-unions and socialists to control their actions and limit their control over economy.
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Whereas, the trade-unionists and socialists would see SEC as a weapon or regulation through

which members of those institutions can safeguard their interest against large businesses.

Unlike, public interest theory where government is perceived as an independent organization,

capture theory of regulation perceives government as a large institution made up of multiple

institutions such as businesses, unionists and socialist where each side is using regulations or

laws to “capture” its own interest. In present, capture theory of regulation helps to

understand the complex political machinery where different sections of society are

represented in the government and use government to advance or “capture” its interest.

Therefore, a feasible solution can be formulated and executed through capture theory of

regulation to avoid another financial crisis of 2008.

In response to financial crisis, the United States government passed Dodd-Frank Act,

which regulated the financial markets, especially complex quantitative financial instruments

that were the main reason behind the financial crisis. A part of the Dodd-Frank Act a

Financial Stability Oversight council was established to oversee the financial markets and

especially pattern trading and big transactions that led to the previous crisis. The power and

duties of Financial Stability Oversight council are stated as “The Council is charged with the

goal of identifying risks to US financial stability that could arise from the material financial

distress or failure, or ongoing activities, of large, interconnected bank holding companies or

non-bank financial companies, or risks that could arise outside the financial services

marketplace. The Council is also supposed to promote market discipline and respond to

emerging threats to US financial markets.”(Guynn 42). The council meets once a year and

goes over the overall conditions of the financial markets and keeps an eye on institutions
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with holdings of more than $50 billion to avoid collusion. The council is comprised of 15

members as stated, “15 members: ten voting and five non-voting. The voting members are

the Treasury Secretary, who serves as chairman, and the heads of the Federal Reserve, the

Office of the Comptroller of the Currency (OCC), which regulates national banks, the new

Bureau of Consumer Financial Protection (Consumer Bureau), the Securities and Exchange

Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), the Commodity

Futures Trading Commission (CFTC), the National Credit Union Administration (NCUA),

the Federal Housing Finance Agency (FHFA) and an independent member with insurance

expertise. The non-voting members are the Directors of the Office of Financial Research

(OFR) and the Federal Insurance Office (FIO), a state insurance commissioner, a state

banking supervisor and a state securities commissioner.”(Guynn 42) There are multiple

loopholes in formation of council and powers given to council. First, the council is

comprised of officials from government agencies only. The private institutions are not given

any role in the council despite the important role played by private institutions such as

Goldman Sachs and JP Morgan. There can be two reasons why private sector officials are

not allowed to participate in the council. First, government agencies do not want private

sector influence on the council, which is risky because private sector can add realistic spin to

the problems and combine their knowledge of future risks and opportunities. One needs to

understand that financial markets are a platform for United Stated to compete globally,

therefore, role of private sector in decision making of council is important and should be

reconsidered to avoid differences between private sector and government officials.

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Secondly, private institution officials are not part of the council because they do not

want to be held accountable or want to resist the influence of government as discussed earlier

in capture theory of regulation. Professor Seigel from Wharton school of business talks about

the Financial Stability Oversight Council and its virtual monopoly over the overview of

financial markets and states, “The creation of the new Financial Stability Oversight Council

— designed to watch for systemic risk that could topple the entire financial system and

comprising representatives of nine federal agencies and an independent member from the

insurance industry, in addition to five non-voting members — has the potential to help avert

a future crisis, Siegel states, "It might not be bad to have another set of eyes on excesses in

the market to see what is justified and what is not."(Seigel 2) Siegel tries to point out that

there would be only one institution that would be in charge of overseeing the market, which

could be risky if they make the same mistake as Federal reserve made by not foreseeing the

crisis 0f 2008. Siegel also said, “However, there is a danger that the council could become

"overbearing." It is possible that new innovations in finance might not be fully understood by

council representatives, Siegel says; as a result, the council might choke off potential sources

of new growth out of concern that the financial services industry is again tilting toward

overexpansion.”(Seigel 2) The council is responsible to oversee the activities of financial

institutions. The fact that the council is only comprised of government officials, it might fail

to understand the business side of the market, which may or may not lead to condemn of new

financial practices that might lead to stagnation in the markets. Hence, it is necessary to

include the private sector officials in the council to make the council more innovative,

realistic and accountable.

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In addition to private sector officials, the council lacks a representative from

academia who would represent the middle class and its issues such as unemployment and

pay parity. The financial stability oversight council is responsible for overseeing the market

and correct the market in case of discrepancy. However, the council lacks a human element

to its decision-making process. For example: If the market has a discrepancy and the market

are turning speculative due to the discrepancy, the academic representative would help

council to consider a human approach towards solving the problem. Without the academic

representative, the council might recommend a decision which might lay off thousands of

middle class workers at one time. However, with the help of academic professional the

council can decide a process through which minimum people would be laid off from work

and discrepancy solved with minimum damage to economy and individual middle-class

workers. Therefore, the academic professional representing middle class workers can give

the financial council a human touch to it when solving economic problems to spread

jurisprudence in the market.

Hence, the capture theory of regulation can help us understand the structure of

Financial Stability Oversight Council and recommend changes and improvements to the

structure of council to ensure fair representation of every section of society. Financial

Stability Oversight Council can help financial markets solve discrepancies and bubbles in the

initial stages without doing any significant damage to the economy and minimal damage to

employment statistics. However, a serious thought needs to be given to allow private sector

officials in the council as it will help increase accountability and help reach realistic

solutions without damaging international competitiveness and prospects of market growth. A

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council made up of both private and government officials will avoid the blame game and

held every player responsible for its actions. In addition to macroeconomic solution of the

financial crisis, the government must financially educate its citizen to save themselves from

financial blunders and avoid falling into debt traps in case government machinery fails to

locate discrepancy and bubbles in markets. The two approaches of education and regulation

will help United States avoid another financial crisis of 2008.

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