How could government regulations have prevented or mitigated the credit crisis of 2008?

Discussion Question 2 for Bus 670, Week 3, Administrative Law and Business

In several ways, government regulation could have avoided or reduced the credit crunch of 2008. In order to limit the number of people who can get a loan, stricter guidelines should be introduced. It will prevent the lenders from giving loans to those who cannot afford to pay them. This reduces the chances of default. Government regulations may also limit the amount of money that banks are allowed to lend, as well as restrict certain risky investments like derivatives or mortgage-backed securities. In addition, regular stress testing and inspections can be conducted to verify that financial institutions adhere to proper risk management and are working within their budget. Government regulations could also provide banks with incentives to increase capital investment in low-income housing projects, rather than heavily relying on subprime loans which are particularly vulnerable to economic recessions.