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Do financial regulations improve the current financial situation?

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Introduction

Do financial regulations improve the current financial situation? As a result of an ineffective financial regulatory system there was a sub-prime mortgage crisis three years ago. Ever since then, the Federal Reserve has been trying to help the country to overcome the worst financial crisis by introducing more and more financial regulations. Until today the society should have realized that solely introducing the regulations will not solve or prevent the current situation. Paul Krugman once said: ?We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of monetary policy ? above all the Federal Reserve?s ability to pump up the economy by cutting interest rates ? have lost all traction.? (Krugman, 2008).[1] It is now obvious that a new system needs to be established to prevent the crisis. In order to properly understand the problem, this essay will be divided into two parts: 1. Disadvantages of financial regulations and the possible implications of financial deregulation for businesses, 2. Deregulation of the banks Disadvantages of financial regulations and the possible implications of financial deregulation for businesses: Financial regulation is a form of supervision, which is established by authorities (usually the government or the central bank) ...read more.

Middle

Therefore, it is not to say that from now on we should implement no regulations at all, in fact a new system that can bring hope to the financial market is desired. Consequently, the problem does not lie in the regulations themselves but in the regulatory regime as a whole. Therefore the deregulation of the banks might be a solution to the deep recession. Deregulation of the banks The aftermath of pretty much every crisis is the introduction of various financial regulations by governments and central banks in order to help the situation. Unfortunately this process has not turned out to be effective. Therefore, instead of implementing more and more regulations, the authorities should try to deregulate the banks and leave the space for self-regulation. Financial regulations, issued in most cases by the central bank, require all banks to follow certain guidelines and restrictions. As a result, the banks have the same regulations in their own services what lowers the competitiveness between the banks. Nonetheless, under current circumstances and in the current financial system it is not impossible for the banks to self-regulate. The current system assesses the risk in a way that the taxpayers are usually the ones who have to bail out the cost in case of a failure. ...read more.

Conclusion

However, if we look back now, deregulation has affected the Chinese economy in a totally positive way. Much more foreign direct investment arrives into the country, and meanwhile the export industry of China got well opened up, and now it has became the largest exporter in the world. In addition, during the past three years, central banks have been trying to fix the current regulatory regime by implementing more and more ?effective? financial regulation. Yet, the result is unsatisfactory. We should realize now, that in order to help the current situation, and a new system needs to be introduced; a system which will consist of far less regulations that the country is facing now, and will effectively increase the business confidence of the economy. Conclusion Generally, the message remains the same. It is not the matter of the more the better or the less the better, but of the most suitable one for the current situation. There is absolutely no point of bureaucrats/regulators writing more and more regulations when it is not effective. Just as Prof Booth said: ?The key is a financial system where prudent behaviour runs with the grain of self-interest.?[5] Deregulation will provide more chances for the country to flourish again in the financial market. ...read more.

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