The government of United States announced the decision to inject USD 700 billion to prevent some units from going bankrupt and insolvency in the mortgage industry. All over the world the governments of respective countries are injecting capital into the financial institutions to bail them out from the crisis situation in the past few months. Government intervention can restore public confidence in banks and financial institutions. Countries such as Germany and Ireland have taken steps to guarantee all private deposits in banks.
The governments see this as an important measure in reviving public confidence. Other governments have taken steps like cutting bank interest rates to help financial markets recover from the crisis. Australian government cut the interest rates and this move has greatly assisted the recovery of Asian markets. Market experts believe that “the Australian move is expected to insulate the country’s banks, households and firms from the meltdown in global financial markets” (domain-b. com, 2008).
Investors across the world are hoping that the European countries would take similar measures to combat the financial crisis that has hit them hard. Conclusion Unstable and unforeseen changes in the markets can result in large-scale changes in the economic conditions that affect all sectors of the economy. A free market economy does function smoothly and Hong Kong is one example of such a successful economy. Government intervention is minimal in this country and the market is allowed to automatically adjust to market driving forces.
Experts and economic analysts believe that government intervention in the financial markets should be limited to “setting policies, ensuring proper oversight of financial markets, monitoring and enforcement of policies, and building the legal and regulatory infrastructure needed for the private financial markets to operate” (Vives & Staking, 1997). Too much of government control and regulation can restrict the healthy growth of financial markets. Adequate government measures and control that allows the financial markets to operate in a free economic environment is ideal for facilitating competitive growth.
The current global financial crisis can be resolved through the implementation of adequate controls and regulations by the government bodies. When markets fail to respond appropriately to a crisis situation the government needs to intervene and implement decisions that can help in resolving and reviving the crisis. It is not enough for governments to implement policies and regulations without assessing the market conditions. This might adversely affect the existing situations. Hence, the governments need to assess and evaluate the market conditions before formulating and implementing regulatory practices. References: 1. Levine, Rose. 1996.
Financial sector policies. Chapter 8 from “Financial development and economic growth: theory and experiences from developing countries” by Niels Hermes and Robert Lensink. Published by Routledge. 2. Telegraph. 2008. G-20 governments must admit own errors if financial crisis is to end. Accessed on 18th November 2008 from http://www. telegraph. co. uk/finance/breakingviewscom/3475910/G-20-governments-must-admit-own-errors-if-financial-crisis-is-to-end. html 3. Devarajan, Shanta. 2008. Does the financial crisis signal the end of free markets and a return to state intervention?
Accessed on 18th November 2008 from http://africacan.worldbank. org/does-the-financial-crisis-signal-the-end-of-free-markets-and-a-return-to-state-intervention 4. Domain-b. com. 2008. Financial crisis spreads across boundaries. Accessed on 18th November from http://www. domain-b. com/investments/world_markets/20081007_financial_crisis. html 5. Economic Forum. 2008. Free markets and government intervention. Accessed on 18th November 2008 from http://info. hktdc. com/econforum/hkma/hkma050202. htm 6. Vives, Antonio and Staking, Kim B. 1997. Policy based finance: Is there a role for government intervention in financial markets? Journal from British Council Library.