The title of Paul Mahoney's excellent book on financial reform harkens back to Rahm Emanuel's cryptic statement, “you never want a serious crisis to go to waste,” intimating that one should not let the moment to enact critically important legislation pass. However, Mahoney argues that the drafters of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank) did in fact “waste a crisis” by following the well-worn path of a “market failure narrative” in support of the legislation. Mahoney's purpose in writing the book is to examine the evidence supporting the narrative. Finding it too early to reliably judge the efficacy of Dodd–Frank, he focuses for the most part on New Deal securities legislation. Four of the book's eight chapters are adaptations from previously published articles. The book covers a panoply of securities laws: English securities law reform in the 1690s, the Blue Sky Laws, regulation of the public offering process, disclosure regulation, antimanipulation regulation, the Public Utility Holding Company Act of 1935, and the Investment Company Act of 1940. In nearly all cases, Mahoney concludes that the market failure narrative is incorrect by pursuing politically expedient objectives in lieu of regulation that remedies an actual problem. Mahoney's convincing empirical analysis is a significant contribution to the literature on financial market reform, most of which accepts the market failure thesis.

A common theme emerges in Mahoney's discussion of Depression era securities legislation. Policymakers often use regulation to mandate “best practices” of the industry because of their own limited knowledge. They ask how “high-quality” firms behave and then require that all firms do the same. However, this gives the leading firms a substantial market and cost advantage. Costly regulatory mandates can drive small businesses out of the market, lessening competition to the public detriment. The reform, instead of promoting a social good, serves the particular interests of certain industry participants. A strong motivating reason for policy makers to push the market failure narrative is that the competing explanation for a financial and economic crisis is government failure, by omission or commission. Instead, regulators find a scapegoat for blame, for which Wall Street and the securities markets provide ample targets.

The book truly brings public choice theory to a new level of analysis through its use of event-study methodology, an established means of using econometrics for policy analysis that offers a productive way to measure welfare implications of government actions. Mahoney is masterful in garnering empirical evidence by creatively selecting proxy variables to test the effectiveness of a law in achieving its stated regulatory objective. His approach is to test hypotheses that a market failure exists and to control for extraneous variables that may yield a false negative before offering his final conclusion. In many cases, he uses the venerable database of the Center for Research in Securities Prices, which has supported path-breaking financial market research for several decades.

A good example of Mahoney's approach is his evaluation of the effectiveness of the mandatory disclosure regime implemented by the Securities and Exchange Commission (SEC) in 1934. The Securities Exchange Act of 1934 (Exchange Act) was prompted, among other things, by the belief that disclosure was inadequate on the organized exchanges. In creating a new Form 10, the SEC relied heavily on the New York Stock Exchange (NYSE)’s existing periodic disclosure rules. On this basis, Mahoney hypothesizes that the Exchange Act forced the smaller exchanges to bring their disclosure standards, or disclosure “best practices,” up to those of the NYSE, while not improving disclosure for NYSE-listed firms. The reform may have improved disclosure practices on smaller exchanges, but at a cost that may have contributed to their demise. (Mahoney notes that roughly one quarter of the forty-one exchanges disappeared a few years after the Exchange Act.) However, a finding that Form 10 improved disclosure by large firms on the NYSE would support a market failure theory.

Mahoney tests his hypothesis by examining the impact of two events. First, he compares traders' reaction to earnings announcements before and after implementation of the new Exchange Act disclosure regime. Second, he gauges the impact of Form 10 filings taken alone. For the first event, he adapts recent research showing that in an improved information environment, traders' reactions to new information, measured by changes in price and trading volume, are dampened. Mahoney employs established econometric approaches, standardized absolute abnormal returns and standardized abnormal turnover, to quantify market reactions to earnings announcements. Specifically, these two metrics measure traders' aggregate repricing and individual portfolio rebalancing, respectively, in response to the unanticipated component of earnings. The theory is that these two metrics should show lower magnitudes in 1936, reflecting a superior information environment by that time.

Mahoney's analyses show that any differences between the pre- and post-Exchange Act disclosure regimes (in 1935 compared with 1936) are statistically insignificant, implying the absence of an improved disclosure regime. Mahoney runs additional regressions to rule out extraneous factors that may mask evidence that the new disclosure regime did improve the information environment, such as the effect of improving economic conditions from 1935 to 1936. Mahoney's research on the second event, the effect of a Form 10 filing, similarly fails to find an improvement in the trading information environment.

Mahoney ends his book with a discussion of Dodd–Frank. Given that the legislation had passed its fifth anniversary, one would have liked to have seen statistical analyses similar to those he undertakes for Depression era securities laws. Instead, he offers only general observations. He argues that the political economy of Dodd–Frank is substantially identical to that of the New Deal legislation. “In each, the market failure narrative was shaped to fit desired regulatory changes rather than to solve objectively identified problems.”

On the “too-big-to-fail” issue, Mahoney controversially argues that rather than bailing out large financial institutions in 2008, the government could have provided liquidity through secured loans to solvent financial institutions while allowing insolvent ones to enter bankruptcy. He finds no empirical basis to conclude that forgoing bailouts would have returned the situation to a “financial Stone Age.” However, in the midst of the systemic crisis that existed in 2008, it was difficult to distinguish a liquidity problem from a firm's insolvency, a finding that the Yale economist Gary Gorton has so well documented in bank runs throughout American history. Nevertheless, Mahoney's book is a thought-provoking and refreshing treatment of financial market regulation that takes an innovative approach to probing the motivations underlying post-crises legislation.