In the aftermath of the financial crisis, it has been written that credit cycles, boom and bust etc are all inevitable. As such it has been suggested that government should set financial markets free and let them feel the effects on their own.
The author of the article begs to differ, he says rather than giving up on regulation, regulators should try and focus on the timing of regulation.
They also recognize the fact, banks will always try and innovate over regulation, unless a law is passed setting the reserve requirements at 100%.
However the two authors differ over how to regulate and what regulations will be effective.
http://www.economist.com/news/finance-and-economics/21595010-welcome-burst-new-thinking-financial-regulation-inevitability
The author of the article begs to differ, he says rather than giving up on regulation, regulators should try and focus on the timing of regulation.
They also recognize the fact, banks will always try and innovate over regulation, unless a law is passed setting the reserve requirements at 100%.
However the two authors differ over how to regulate and what regulations will be effective.
http://www.economist.com/news/finance-and-economics/21595010-welcome-burst-new-thinking-financial-regulation-inevitability
3 comments:
I agree that we cannot have the government completely take their hand out of the market. If they do there would be multiple market failures (i.e. insurance wouldn't be provide, people would pollute consistently). The idea that they should focus on the timing of regulation because we can predict to a degree the business cycle is a good one. Being proactive instead of reactive may help us lessen the shock of business lows and maybe help get out these lows quicker.
I, too, like the idea of being proactive in our economic approach. The history of business cycles can tell us a lot. If we use that as a guiding post, hopefully the government won't have to step in and regulate after its too late.
The market is not perfect, so government should be involved. History shows that regulations have positive effect on the economy, but they were usually passed after bad things had already happened. Debt is the main problem for many financial crises, yet banks always try to find a way to make profit by creating new kinds of financial products. Thus, I agree that there should be more regulations, not just on debt, but also on potential financial products that banks come up with.
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