Making Sense of the GFC: Where did it Come from and what do we do Now?

The collapse of the global financial system following the events of September 2008 was unprecedented in its global reach and the response elicited from governments. The Global Financial Crisis has called into question the basic assumption of Efficient Markets Theory that traded financial instruments will always have a market price - indicating that capital markets as well as depository institutions can suffer liquidity crises or 'runs' due to asymmetric information. This paper traces the causes and implications of the GFC, focusing especially on the Australian financial system and its regulation. Attention is drawn to the need to review financial sector regulation in light of the GFC in order to rebalance the mix between competition and regulation in financial markets. But the paper also notes the danger of over-regulation with its potential to stifle innovation and constrain the risk-allocation function of financial markets. Copyright (c) 2009 The Economic Society of Australia.