On September 14th, 2007, the collapse of Lehman Brothers, one of the five most important global financial services firms in Wall Street, marked the beginning of a global financial crisis which lasted for more than two years. This crisis had effects on every kinds of financial markets and all over the world. Some lessons have to be remembered from this crisis, and the events and causes of the crisis must be used as landmarks to improve the regulatory organization of the financial markets. The main problem is to determine, whether or not, the financial markets were efficiently and sufficiently regulated by the financial authorities, and if these authorities ought to have intervened more than they did to protect the stability of the financial sector. The issue revolves around the extent of the power of intervention granted to the regulatory authorities in charge of ensuring the stability of the financial sector, and the way they are expected to use this power. Three years after the beginning of the crisis, it should be easier to analyse a posteriori which were the gaps in the financial regulatory system, and the failures of the authorities. However, the exact causes of the crisis remain still blurred today. Furthermore, as this question deals with the dilemma between the interventionist theory and the laissez-faire theory, there may still be divergences about the way the situation should have been dealt with by the authorities, and about how the financial system should have been regulated. These two doctrines have been opposed for centuries now, and both have demonstrated their advantages and drawbacks. The proponents of the former theory state that "the role of the government is to mitigate the undesirable consequences of market activity through regulation" whereas the partisans of the latter consider that without any governmental intervention, the markets would succeed to automatically correct their failures. In spite of these doctrinal oppositions, it must be recognized by both sides that the financial system did not succeed to avoid the crisis without the intervention of the financial regulatory authorities and that those authorities did not fulfil their obligations to keep the financial markets stable and made several mistakes in their way to protect the markets. This acknowledgement implies that these authorities had a role to play in order to avoid the crisis and that the financial markets may need the intervention of authorities to limit the risk of crisis. As the G20 noticed in its Declaration on Strengthening the Financial System of April 2nd, 2009 "the global financial crisis thus renders visible and urgent a perennial tension in financial regulation with respect to the extent to which governments should intervene to fix the financial markets". The financial crisis is therefore an indicator of the need of interventionism from the regulatory authorities to protect the stability of the market. This new regulatory organization must be based on the support of the central banks.
I - A global financial crisis caused by the mistakes and the gaps of the regulatory authorities in the accomplishment of their duty The financial crisis had its roots long before the collapse of Lehman Brothers in the end of 2008. Indeed, the situation of the financial sector had begun to deteriorate already in 2007 with the problems on the sub-prime market, as illustrated by the financial difficulties of Northern Rock, the United Kingdom's fifth-largest mortgage lender, until its nationalisation by the British Treasury. But the financial crisis really began when Lehman Brothers was forced to file for Chapter 11 bankruptcy protection in September 2008. Lehman Brothers had to go into liquidation after the refusal of the American Federal Reserve to support the firm. This refusal had started the worst global financial crisis since the Great Depression in the 30's. This decision of the Federal Reserve not to help Lehman Brothers was surprising, because the American financial authorities had already had to intervene to help the purchase of Bear Stearns by JP Morgan, and to nationalize Freddie Mac and Fannie Mae. Besides, few days after the collapse of Lehman Brothers, the Federal Reserve accepted to support American International General (AIG). This behaviour of the Federal Reserve made the public believe that the intervention plan of the authorities had not been fully thought and created a feeling of "uncertainty about what the Government would do to aid the financial institutions". The public did not understand why the Federal Reserve had refused to save Lehman Brothers, and the collapse of the firm, facilitated by the passivity of the American financial authorities, created a panic among the markets' participants. The lack of clarify in the actions of the financial authorities caused a massive loss of confidence of the public and the investors. The confidence of the public is really important in the financial sector because the stability of the financial markets depends on the confidence of the market's participants. It is therefore the responsibility of the financial authorities to maintain the confidence in the markets by ensuring their stability and integrity. The maintenance of confidence is at the heart of much financial regulation. The Federal Reserve by its refusal to help Lehman Brothers provoked a loss of confidence among the public and the investors which started the crisis. Even if the crisis has many other causes, this decision of the Federal Reserve not to intervene has been determinant in the worsening of the situation. After the collapse of Lehman Brothers, the loss of confidence led to a run at the banks and the withdrawal of funds by professional investors which provoked the transformation of the credit contraction and the sub-prime crisis into a global financial crisis. It appears from these facts that the main reason of the crisis is to the lack of general oversight of the financial sector as a whole by the regulatory authorities. They failed to assess the real dangerousness of the situation before the global crisis. This is one of the reason why the Federal Reserve refused to help Lehman Brothers when it had the opportunity to do so. They thought that the financial markets would be able to recover from the collapse of Lehman Brothers. The failures of the American Financial Reserve in assessing the consequences of the collapse of Lehman Brothers highlights the idea that there is a need for a modification of the way the financial authorities supervise and assess what happen on the markets. But the strength of the global financial crisis is also the result of some other failures of the financial authorities. They, as well in the United States as in the other western countries, failed to control the situation on the financial sector, and the inability of the markets to stop the crisis without the intervention of the regulatory authorities is the proof of the failure of the self regulation theory. The crisis would not have been so important if the regulatory authorities had dealt correctly with the difficulties and intervene properly to prevent the loss of confidence. Instead of intervening since the beginning of the difficulties on the sub-prime market, they just let the situation deteriorates. It is clear that the "national regulatory authorities failed to protect the financial systems against imprudence that created excessive systemic risk" This failure implies another one which is the failure of the financial markets and entities to regulate themselves. For decades, it was acknowledged that these entities did not need the intervention of governments because they were able to self regulate. However, the crisis of 2008-2009 proved this theory to be wrong, because only the late intervention of the governments succeeded to solve the situation and put an end to the worsening of the crisis. The whole theory of the self regulation was broken by the crisis which evidenced the inability of the markets to stop the contagion of the crisis. It emphasizes that the financial sector needs a new regulatory system with more intervention from the authorities. Actually, the situation began to calm down following the intervention of the governments. All the different countries which had faced the global crisis adopted bail-out plans to protect the financial institutions and prevent a new crisis. All the new rules adopted after the crisis must be seen as an acknowledgement of the need for formal regulatory intervention in the financial markets. The successive G20 summits which occurred in the course of the crisis called governments to take steps relating to the fiscal stimulus, so that, as during the 1930's after the Great Depression, the governments have a key role to play to stop the crisis and permit the recovery of the financial markets' functioning. As an example of this policy of intervention, the U.S Government established the Troubled Asset Relief Program, referred as the TARP, a programme to purchase troubled assets from institutions with the aim of strengthening its financial sector. The last global financial crisis emphasized all the gaps of the former regulatory system on the financial markets, and the failures of the financial authorities which took a long time before intervening to solve the situation and where not able to correctly assess the situation and the risk of collapse of the system. As a consequence, a new regulatory system based on more intervention from the governments and authorities has to be defined.
II - A new regulatory system with more intervention from the authorities and a leading role granted to the central banks The complex nature of the financial markets creates a need for a new regulatory system. The different financial markets are too sophisticated and connected between themselves to be able of self regulation. Besides the consequences of the crisis on the financial markets, which has harmful repercussions on the whole economy, oblige the government to intervene in order to prevent a crisis from happening. There is a risk of contagion of the difficulties from a market to another, and from the financial markets to the whole economy. The Federal Reserve in the United States, as many other financial regulators, forgot to take this reality into account. A regulatory system has to be implemented to deal with the systemic risk of the financial markets. The systemic risk may be defined as the "risk that an event will trigger a loss of economic value or confidence in [Ã¢â‚¬Â¦] a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy". The recent crises were a perfect illustration of the systemic nature of the risk on the financial markets, and the narrow interdependence between the markets and the economy. Consequently, the intervention of the governments and authorities is needed to protect the health of the economy from the problems which may arise on the financial markets. The governments cannot let the markets be self regulated because any malfunctioning on those markets could lead to the collapse of the economy. Therefore, the authorities have to intervene to regulate and supervise the financial markets, and settle the difficulties arising on them. This increased intervention from the authorities, in order to be efficient, must be accompanied by a reform of the way to assess the risk. A cause of the crisis was the inability of the authorities to assess the consequences of the problems on the sub-prime market. Indeed, the International Monetary Fund's Global Financial Stability Report of April 2007 suggested that the amount of the credit loss in the sub-prime mortgages, and the decrease of the house prices in the United States, would be fairly limited. In the same manner, the Federal Reserve in September 2007 had assessed that the markets would have been able to absorb the collapse of Lehman Brothers, and at that time the U.S. Treasury Secretary, Hank Paulson, received the support of the Congress for the refusal of the Federal Reserve to save the firm. The reason of this harmful decision was that there was no general oversight of the financial markets. The regulators should extend their oversight to all major participants in the financial system. The authorities have to implement a macro-prudential policy which consists in exercising their control over the financial system as a whole. They have to extend their scope of actions over institutions which were not until that time regulated, as one of the reason of the crisis was the lack of information concerning the situation of some institutions on the financial markets. All systemic institutions should be integrated within the macro-prudential regulatory perimeter. The amplest the supervision of the financial system by the regulators is, the more the risk of a contagion of the difficulties will be reduced. The central banks should play a key role in this new regulatory system. They must have a role of support of the financial institutions to prevent systemic risk. Central banks already played a critical role during the last crisis in maintaining the strength and viability of financial markets. They ensured the stability of the financial markets by injecting money in the system and supporting the institutions suffering difficulties. Central banks can be efficient in fulfilling their role of support through the mechanism of "lender of last resort". This mechanism consists for central banks in securing other banks and financial institutions against bankruptcy, to avoid a loss of confidence which could lead to a collapse of the markets. Under the "lender of last resort" procedure, central banks commit themselves to lend money to financial institutions in trouble. This commitment will have the effect of calming down the concern of the investors and the public about the financial situation of the institutions. If the public and the investors know that the institutions on the financial markets would be supported in case of difficulties, they will not run at the banks as they did during the last crisis. This crisis began after the refusal of the Federal Reserve to save Lehman Brothers against bankruptcy, that is to say after its refusal to act as a "lender of last resort". The "lender of last resort" is a mechanism which has proved its efficiency for a long time. It was introduced in the United States following the Panic of 1907 by two measures. The first measure was the Aldrich-Vreeland Act of 1908, it was followed five years later by the Federal Reserve Act of 1913 which established a public central bank. Since their implementation, several studies have analysed the results of this mechanisms. And it has been admitted that the "lender of last resort" has had beneficial effects on the economy. As an example, an analysis made for the National Bureau of Economic Research in October 2008 stated that the "lender of last resort" mechanism created in the United States in 1908 and 1913, reduced the volatility and the instability of the American financial markets in comparison with the situation before the Panic of 1907. Finally, the last drawback of the former regulatory system was the lack of cooperation between the different central banks of each country. Before the global crisis, there was no homogeneous policy to face the problems and restore the stability of the financial markets. Each single country was not able to stop the crisis by itself and the lack of cooperation between regulatory authorities was only likely to worsen the situation. This was illustrated by the French President, Nicolas Sarkozy, who said that "None of our countries acting alone could end this crisis". Therefore, the crisis evidenced the need for international cooperation to reduce efficiently the risk in the financial markets. As a consequence, since the beginning of the global crisis, there have been a multiplication of international summits to define a new framework for international cooperation. The meetings in Washington D.C. in November 2007 and London in April 2009 promoted a central bank cooperation. Nevertheless, most of these meetings were said to be unnecessary and many efforts still need to be made to create a real international cooperation between central banks. Finally, the new regulatory system must be moderate and financial authorities take into account that if there is too much support for the financial institutions, it could lead to a decrease of the efficiency and competitiveness of the markets. An excess of support could damage the integrity of the financial sector, and have the opposite effect to the one expected.
Conclusion There is a real need for more intervention of the authorities, mainly central banks, to maintain the stability of the markets, but a fair balance has to be found to avoid an excess of support reducing the competitiveness of those markets.