presents a case that there were four primary failures contributing to the crisis: excessive risk-taking in the financial sector … due to mispriced government guarantees; regulatory focus on individual institution risk rather than systemic risk; opacity …

case that there were four primary failures contributing to the crisis: excessive risk-taking in the financial sector due to … mispriced government guarantees; regulatory focus on individual institution risk rather than systemic risk; opacity of positions …

We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier … liquid assets. When risk-sharing is primitive, agents selfhedge and hold more liquid assets; this buffers aggregate risks …, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a …