11 Though they are far from the whole story, such dynamics are central to the understanding of the current financial crisis. 12 The first line of defence is better regulation While misery loves company, we must be careful not to generalize recent failings.
The foregoing description of liquidity cycles assumes that agents can extend mismatches, increase leverage, and boost collateral-based finance if conditions appear favourable. In other words, regulatory quiescence or arbitrage is also required. Neither has been universal. The oft-derided existing regulatory tool kit has been deployed more effectively in some jurisdictions than in others.