As a result of the recent financial crisis, there has been significant public debate on the role of the financial sector in bringing about the "Great Depression." More generally, there has been debate about whether the current industry structure has enhanced social welfare or served a detrimental role. This book is a collection of papers presented at the conference held at the Federal Reserve Bank of Chicago, in November 2012 that examined the social value of the financial sector as currently structured. Issues evaluated include what are the perceived benefits and costs of the current financial system? How valuable have industry innovations been for society? Should regulation be used to "move" the industry in a direction thought to be more valuable for society? Should "big" banks be broken up? What are the welfare implications of the current industry structure? In the book, leading industry scholars debate these issues with a goal of influencing public policy toward the industry.

There is virtually universal agreement that the fundamental cause of the global economic and financial crisis of 2007-2009 was the combination of a credit boom and a housing bubble, but it is much less clear why this combination of events led to such a severe financial crisis. Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-2009 argues that what made this economic shock unique and led to such a severe financial crisis was the behavior of many of the large, complex financial institutions (LCFIs) that today dominate the financial industry. These LCFIs ignored their own business model of securitization and chose not to transfer credit risk to other investors. Instead, they employed securitization to manufacture and retain tail risk that was systemic in nature and inadequately capitalized. Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-2009 provides a brief history of how the U.S. financial system evolved into its current form. It presents the manner in which banks built tail (systemic) risk exposures in large measure to get around capital requirements, in contrast to their earlier business models, and it explains how lax regulation contributed to these outcomes. It also examines alternative explanations for the financial crisis. The authors conclude that global imbalances and loose monetary policy were relevant proximate contributors to the crisis by producing an asset-price bubble in the United States that ultimately led to the financial crisis. Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-2009 concludes with a discussion of possible remedies to charge banks for manufacturing tail risks and to contain such propensity in the first place. And while the focus is on the United States, the authors review risk-taking and realized losses by LCFIs in other parts of the world.