Can Crashes Be Prevented?

Regulation can reduce how often crashes happen and how bad they get, but probably cannot eliminate them entirely. Financial innovation keeps creating new risks faster than rules can catch up, and each crisis emerges from a blind spot in the existing framework.

The most effective measures are structural: higher capital requirements, leverage limits, and separating commercial from investment banking all reduce systemic risk. Stress tests force institutions to prepare for bad scenarios.

But the deepest cause of crashes — human psychology — cannot be regulated away. Greed, overconfidence, and herd behavior are built into human nature.