Luigi Zingales

Rep. Paul Ryan of Wisconsin name checks economists and National Affairs contributors Oliver Hart and Luigi Zingales on CNBC's Squawkbox.

Read the Hart-Zingales proposal for a market-based approach to large and complex financial institutions here.

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Financial markets are necessary because they put people in need of money in touch with people who have money to lend. This is the essence of capitalism. Somewhere along the line, however, our financial system went out of whack.

There were many causes. Americans were saving too little, and the Chinese were saving too much. The Federal Reserve kept interest rates too low for too long in the middle of the decade, creating a surplus of credit that went into risky investments. The housing sector ballooned out of control. A "shadow banking" system came into being that leveraged huge amounts of money with absolutely no oversight. The ratings agencies said risky mortgage backed securities were A-OK. Market agents responded to regulations by seeking out loopholes, capturing the regulatory institutions, or following the rules and creating unintended (and not always positive) consequences. The result was the financial crisis that began to unfurl in 2007 and came to a head with the collapse of Lehman Brothers in September 2008.