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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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(p.287) 26 Conclusion
Connectedness and Contagion

Hal S. Scott

The MIT Press

This concluding chapter summarizes key themes and presents some final thoughts. This book's central concern is the fundamental stability of the US financial system upon which the viability of the economy, and ultimately the polity, rests. This stability depends on the ability of the government, and especially the Federal Reserve, to deal with panic runs—contagion—as it did during the financial crisis of 2008. In the aftermath of the crisis, however, those that saved the country—the Fed, FDIC, and Treasury—were demonized as bailing out Wall Street. As a result the powers of the government to deal with contagion in the future have been severely constrained. Strengthening the government's contagion fighting powers would reduce moral hazard, since the government would no longer have to “bail out” a large insolvent financial institution out of fear that contagion could spread to solvent financial institutions. Nonetheless, a strong lender of last resort should operate under a well-defined framework.

Keywords:   financial crisis, financial regulation, financial policy, Federal Reserve, contagion, US financial system

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