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Self-Regulation of Financial Markets

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The strong belief in the forces of market economy can theoretically lead to two completely opposite results. On the one hand, the free markets are able to bring huge profits and increase well-being not only of elite social classes but also of common citizens. On the other hand, when out of control, the same forces can be like the uncontrollable natural disaster creating chaos and destruction. This is what essentially happened to American financial system. Although the crisis hit in 2008 there were long-foreseen but ignored signals of the economic downturn.

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Learning from the bitter experiences of the past more government regulation should be introduced into the sphere of financial institutions. According to Stiglitz, the core of the problem was the whole economic philosophy, which was extremely sure that the financial markets can and should regulate themselves. This conviction, in essence, made the economic crisis inevitable. The author is very logical in his argument of how individual and seemingly unrelated events or decisions perpetuated the vicious circle. In 1987 Alan Greenspan, who was opposed to the idea of governmental regulation of banks, assumed the position of chairman of the Federal Reserve Board. This was the start of bad economic choices. Further, Glass-Steagall Act was abolished in 1999, erasing the difference between commercial and investment banks. All these led to continuous deterioration of financial sector and economy in general.

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Because of all the above illustrations it can be argued that more government regulation is needed for financial markets to stay within reasonable boundaries. The concept of the invisible hand of the market is appealing but one can never forget that banks, insurance companies, etc. are operated by human beings who do not always fall under the rules of economic theories.

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