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Regulation/Deregulation - Essay Example

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Regulation of the financial system actually entails setting up rules and regulations and also establishing an enforcement mechanism that is designed to control the operation of the systems constituent institutions and markets (Macey, 5). The main objectives of regulation are…
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Download file to see previous pages Deregulation is basically concerned with reducing and redistributing rents, leading economic players to adjust in turn following this distribution. Unemployment may increase for a certain period while real wages may decrease before recovering. Deregulation put banks and other financial institutions in a situation where they took great risks resulting in their near insolvency. On the other hand, a large number of weak mortgages failed to regulate mortgage brokers (Macey, 14). Despite the fact that deregulation proves to be beneficial to some extent, it also comes along with strong distribution and dynamic effects.
From late 1930’s to the 1960’s, there were regulatory initiatives which constituted microeconomic stabilization (Macey, 3). This system controlled price and competition in all the industries in the country. The federal agencies had extra ordinary powers of shaping most aspects of the market structure in the industries. The main objectives of these federal regulations put were high quality, widely available service, secure contractual arrangements and stable pricing, and indeed they were able to accomplish them. This era was characterized by prosperity, strong economic growth, low inflation rates and low interest rates. The financial system appeared to work well under regulation and its assets quadrupled.
Financial deregulation then followed which went on for several decades prior to the financial crisis. Pre crisis disclosures pertaining off- balance sheet accounting and subsidized home ownership were imperfect (Macey, 6). The relaxation of credit standards and unsound governmental housing policies actually paved way to the crisis. The financial crisis which resulted from deregulation was a culmination of massive U.S. housing bubble which could have been prevented if the right regulatory measures had been employed at the right time. Some of the regulatory failures which led to the crisis are;
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