Given the immutable pathologies of human nature, the fundamental reasons why financial crises occur have changed little over time. Nevertheless, the structure of the financial system has undergone a dramatic transformation to a complex, interconnected, immediate, global sector mediated by capital markets. In this paper, we explain why this transformation went largely unnoticed by academics and regulators, and argue that an outdated view of the financial system that looks at “one piece at a time” and ignores the institutional context may do more harm than good. We articulate an alternative view, showing how a systemic analysis, focused on the structure of the sector and its evolution, can lead to a fresh set of proposals. We illustrate our evolutionary structural view with an account of the 2008 financial crisis and preceding events, and assess the fault-lines that currently remain in our financial system. We conclude with a set of concrete proposals that could improve the stability and performance of the financial sector, and help to reframe both analysis and regulation.
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