Government Intervention in Financial Markets: Stabilizing or Destabilizing?
Financial Market Regulation in the Wake of Financial Crises: The Historical Experience Conference p. 207, 2009
18 Pages Posted: 8 Jul 2012
Date Written: April 16, 2009
The current world recession brings back the perennial debate over the role of financial instability as a cause of cyclical fluctuations in economic output and employment. The consensus that banks took on excessive risk leaves unanswered key questions. First, how should government regulate risk taking by banks? Should it extend and enhance the existing regulatory apparatus? Alternatively, should it introduce market discipline by limiting the financial safety net? Second, to what extent have bank portfolio losses caused the recession and to what extent are they symptoms? This essay highlights the issues confronting the policymakers who will reform the existing bank regulatory apparatus and offers some views on the fundamental issue of whether the recession reflects an inherent instability in private markets or failures of monetary and regulatory policy.
JEL Classification: G21, G28
Suggested Citation: Suggested Citation