That said, some of the proposals do overlap and would benefit both individual participants as well as the system as a whole. A second issue is that we need to distinguish between proposals designed to ameliorate the current crises vs. proposals designed to improve the environment so as to avoid these crises from happening again. As it turns out, it may be necessary to deviate from the principles laid out for the latter in order to move ahead on the former. Institutions in the financial system transform savings into investment opportunities. The critical role is to price and manage risk.
Financial intermediaries take on risks it is what they are supposed to do.
But, whereas financial institutions should accurately price and manage their own risks, no financial institution prices into its services the possibility that it will have to absorb the consequences of a negative spillover from another institution. Nor should it, since doing so would lead to an inappropriately high price and thus small amount of intermediation. Because the social value of the financial system as a whole exceeds the value created by individual firms, there is a rationale for centralized scrutiny and possibly intervention. In today's global environment, national economic well-being increasingly relies on global production, distribution, consumption, and the web of international financial transactions that binds it all together. Contagion from a one national market to other national markets and the international financial system obviously happens and with great detriment to countries and to the system.