Brussels, 12/05/2009 (Agence Europe) - The widespread idea that the 2008 financial crisis was down to a lack of rules and failure of the market is wrong. That at least is the case argued by a group of leading economists from the Institute of Economic Affairs, a British free-market-leaning think tank. These economists suggest that governments played a leading role by creating the conditions that resulted in the crisis. In their analysis, they say that central banks held interest rates too low and failed to react to unprecedented levels of monetary inflation. Similarly, the US government forced banks to lend to borrowers in poor areas, despite the high risk that they would lie on their mortgage applications and never pay back their loans. These factors combined to produce the sub-prime crisis that triggered the crash. At that time, regulations designed to prevent such crises exacerbated the problem, encouraging new forms of risk-taking, the development of complex instruments and the adoption of uniform techniques of risk management across the industry. Regulation also undermined the incentives for shareholders to monitor banks and discipline them to behave cautiously and conservatively. “Before the crisis, regulators showed no special powers of foresight that would suggest that extending their powers would prevent such crises in the future. Instead, relatively simple changes to primary legislation and regulations could be made to restore market discipline,” said Professor Philip Booth. While players recognise the urgent need for reform of financial regulation, this reform should build on the checks and balances provided by the markets themselves. At the same time, central bank policies must be changed to prevent recurrence of high levels of asset-price inflation. The analysis is available at http://www.iea.org.uk/record.jsp?type=book&ID=453 (A.B./transl.rt)