金融学essay:政府法规和政策对金融危机风险的影响

金融学essay:政府法规和政策对金融危机风险的影响

来源:www.liuxuelunwen.org作者:cinq发布时间:2015-01-06 16:54
在这篇文章中,讨论了政府法规和政策对金融危机的风险的影响。在第一部分,介绍了市场经济的特点和弊端,政府管制的讨论。然后,积极的影响(主要是快速摆脱金融危机)进行了讨论
金融学essay:政府法规和政策对金融危机风险的影响 The effect of government regulations and policies on the risk of financial crisis
 
 
Abstract:In this article, the effect of government regulations and policies on the risk of financial crisis is discussed. In the first section, the characteristics and drawbacks of market economyare introduced and the government regulation is discussed. Then, the positive effects (mainly rapid recovery from financial crises) are discussed, with U.S. in the 1930s, China in the past two financial crises (the 1997 Asian financial crisis and the 2008 global financial crisis) and India in the 2008global financial crisis as examples. Herein, the annual growth rates of Gross Domestic Product (GDP) of these countries in relation to their respective government regulations are depicted and discussed. However, government regulation can also have negative effects on the economy during financial crisis. In the third part, the negative effects of government regulation, including additional financial burden, disruption of free market and potential corruption, are discussed. Examples like the deflation policy by the Weimar government, the expanse and invasion by the Japanese government before World War II and the new policies by Obama government. Finally, recommendations on the government regulations are presented. Firstly, the regulation shall be applied at an appropriate time point and eliminated once the objective has been achieved. Secondly, the regulation should be strong enough to alter the market but not to disrupt it. Last but not least, the regulation should have a positive effect both in the short-term and in the long-term.
 
I. Introduction
By definition, government regulation is a legal norm serving as a remedy toconsequences caused by animperfect free market. In a market economy, all the actions related to economy (such as investment, production and distribution) are supposed to be decided based on supply and demand, and prices of goods and services are to be determined in a free pricing system. Before 1920s, this system worked perfectly and made a significant contribution to the great advancement of the society in the 19th century(Borts and Stein, 1964). Indeed, these principles were taken as the ‘Bible of Economy’ and people tend to believe that the effect of government regulation and policies should be minimized. Even nowadays, complainson government regulations and their restrictive nature are frequently heard. However, this system hasled to catastrophic financial crises,including the Great Depression in the beginning of the 20th century(Jordan, 1972).Indeed, financial crisishas become one of the most severe issues that have a global effect and can even alter the human history(Robbins, 2011). In the 1920s and 1930s, the Great Depression in U.S. resulted in severe economiclosses(collapse of stock market) and significant political effects (President Hoover failed in his re-election and Franklin Roosevelt was elected as the 32th U.S. president). In Germany and Japan, the financial crisis led to downfall of the ruling party and prevalence of Fascism.Nevertheless, attempts to save the economy in a peaceful way failed and the Fascist governments turned to aggressive wars. Therefore, it is appropriate to say that World War II, the most tragic war in the history of human beings, is a result of financial crisis.
After that, economists did some reflections on the market economy and the role of government regulation,which was considered an obstacle, in this system(Temin, 1991). As a key regulatory tool, the government regulation is an essential factor for the operation of market economy system. In the following section, positive effects of government regulations and policies on the risk of financial crisis are discussed, with United States, China and India in terms of GDP growth (in different periods) as an example.
 
II. Positive effects–rapid economic recovery
2.1 The Great Depression and the New Deal
As discussed in the previous section, it has been proved that appropriate government regulations can relieve financial crisis, instead of exacerbating it.Generally, regulations and policies should be involved in various cases, including market failure, increased social subordination, irreversible long-termside effects and endogenous preferences. In 1930s, FranklinRoosevelt, the then U.S. president, released a series of unprecedentedregulations and policies,known as ‘the New Deal’, to fight against the horrible economic depression(Stein and Roosevelt, 1984). The core part consists of Relief, Recovery and Reform. A considerable part of the Federal budget was distributed to constructionsof the infrastructure, including hospitals, schools, highways, airports and dams(Rothbard, 1972). Additionally, theFederal Emergency Relief Administration (FERA)and the Civilian Conservation Corps (CCC) were established to enable precise and prompt control over the economy. The former provided 500 million dollars to each state as a financial aid while the latter provided more than 250, 000 jobs in America. On the other hand, reforms regarding to the monetary system, stock market and unemployment rate were implemented. These actions and policies made a great contribution to the economic relief in America. As shown in Fig. 1, the GDP of U.S. dropped to 55 billion dollars (half of the value before the Great Depression) in 1933 and recovered immediately upon the release of the New Deal.More importantly, it provided an alternative and better solution to financial crises (the other solution is invasive war, as in the case of Germany and Japan) in the future.
 
Fig. 1 The Gross Domestic Product of U.S. in 1930s: the New Deal is released in 1934
2.2The Chinese government in recent financial crises
Another good example is the Chinese government in recent financial crises. The first case is the successful prevention of the HK financial market from being affected by the Asian financial crisis in 1997. Upon Quantum Fund was seen in the HK market, the Chinese government released a series of regulations and policies without the slightest hesitation. As a result, the HK financial market was not severely affected, as in the case of its neighbours,Thailand and Malaysia. In 2008, the domestic market in China was significantly affected by a global financial crisisstarting from U.S.due to the close economic and financial correlation between these two economic giants. To fight against the crisis, the Chinese government released a set of policies and regulations, among which the ‘4 trillion project’ is the most eye-catching one(Erkens et al., 2012). Indeed, the ‘4 trillion project’, which involves an investment of as much as 800 billion US dollars in the infrastructure construction(high-speed railway, schools in under-developed areas andscientific research) within two years, played a key role in the rapid economic relief of China from the financial crisis(Barboza, 2010). Fig. 2 illustrates the relation between government investment in infrastructure and the GDP growth of China based on data from the past decade.As we can see, appropriate government investment can effectivelystimulate the economic growth and lead to a higher annual GDP growth, although the relation is not necessarily linear(Morrison, 2009).
 
Fig. 2Regression analysis of effects of government investment in infrastructureand the annual GDP growth of China
2.3The Indian government in the 2008 financial crisis
Another rapidly growing economic giant, India, has also suffered from the severe global financial crisis in 2008 due to its close economic relation withthe United States(Fidrmuc and Korhonen, 2010). Like the Chinese government, the Indian authority made some efforts (administrative interventions and regulations) to prevent further decline and accelerate the economic relief(Deb and Mukherjee, 2008).However, regulations by the Indian authority have a different focus. The majority of the financial aids went to the industries (such as IT industry) that can result in immediate effects(in terms of GDP growth and economic return), instead of those fundamental ones thattake some time to function and can only bring long-term rewards.As a result, the annual GDP growth rate of India returned to 8.2 %immediately (from 3.9 %) in 2009, which is impressive as most of the economic entities were still struggling then (the annual GDP growth rate of China stayed at the same level as that in 2008). Nevertheless,GDP growth of India dropped drastically again upon 2010 asthe global market did not recovered from the financial crisisas expected. On the other hand, the annual GDP growth of China was kept constant from 2009 onwards, if the fluctuations of global market, the saturation of domestic market and other negative factors in the economywere taken into consideration. In summary, the Indian government achieved rapid recovery from the financial crisis, but failed to maintain the high growth rate from 2010 onwards due to its inappropriate regulations.
 
Fig. 3 Annual GDP growth of China and India from 2007 to 2012
 
III. Negative effects–accelerated economic collapse
In spite of various successful examples, the government regulation is not a universal solution to all financial crises.A typical example is the Weimar government, which is the German government before NAZI.The Weimar government actually released some political regulations and policies as an attempt to save the economyof Germany. As is known, instead to re-building the economy system, the new policies failed to build the citizens’confidence on the German economy, if not added to the disappointment of German people, who turned to Hitler and his National Socialism later. In this section, possible negative effects from the government regulation are discussed. In the first part, the example of Weimar Republic(deflation policy) in the 1930s is discussed. Then, the actions by the Japanese government (invasive wars) in the 1930s are examined. In the third part, the regulations in response to the 2008 financial crisis by the Obama government (tax reduction and increasing of public expenditure) are evaluated.
3.1The Weimar Republic
The Weimar Republic refers to the federal republic established in 1919 in Germany as a replacement of the imperial government due to its defeat in the World War I.In its 14-year history, the Weimar government faced a variety of problems, including hyperinflation and high unemployment rate. In spite of its contributions such as currency reform, the Weimar Republic was still devastated by the Great Depressionin the 1930s. The Weimar governmentwas supported by huge loans from the U.S. granted in 1924 (the Dawes Plan) and in 1929 (the Young Plan). Upon the Great Depression, the U.S government required immediate repayment (in 3 months) of these loans to survive the Great Depression, while other powers like UK, France and Russia were struggling as well and cannot provide cash injection to Germany. As a result,companies throughout the whole country(starting from the industrial zones such as the Ruhr) went bankrupt and thousands of workers were laid off, as shown in Fig. 4.
To deal with that, the governmentreleased a series of conservative policies. As shown in Fig 5, a deflationpolicy involving drasticreduction of state expenditurewasenacted. Theobligatory unemployment insurance was cancelled and the benefits for the sick, disabled and elderlywere cut. Also, as devaluation of the German currency was not allowed, the government triggereda deflationary internal devaluation,in which the prices, rents, salaries and wages were forced to be reduced by 20%. The government claimed that the deflation policy would eventually improve the economy and re-build the national competitiveness, although it may worsen the situation initially. However, the effectiveness of this policy was overestimated while the vulnerability of German economy was underestimated: no significant improvement was observed within the following two years. As a result, the Weimar government lost the election in 1932 and the Nazi took over the country.
 
Fig. 4 Total unemployed in Germany from 1928 to 1933
 
Fig. 5Gross national product (inflation adjusted) and price index in German between 1926 and 1936
3.2The Japanese government before World War II
In the beginning of the 20th Century, Japan is the only Asian country that adopted modern political and economic systems. In virtue of that, a fantastic market economy has been established in Japan and this system worked so well that the GDP per capita in Japan increased by 50 times in less than 30 years.By 1910s, Japan has become one of the powers that can have an effect on the political situation in Asia and even the world. Nevertheless, like otherindustrializednations, Japan was attacked by the Great Depression, resulted in hyperinflation and high unemployment rate. In the mid-1930s, the nominal wage rates in Japan were 10 times less than those in the U.S., while the price level is estimated to be about 44% of the price level in the U.S.(Fukao et al., 2007).Unlike the U.S., the Japanese government decided to solve the problem byacquiring more natural resources and enlarging its domestic market. To achieve that, Japan started aninvasive war and occupied Korea and a considerable part of China. In the beginning, this strategy worked well as the Japanese economy expanded considerably while other nations were shrinking. For instance, thesteel production rose from 6.4 million tonnes to 8.8 million tonnes. Nevertheless, this strategy requires an extremely high military expenditure, which can only be supported bycontinuouslyacquiringresource from occupied countries. Eventually, the resources in the occupied areas were used up and the GDP of Japan dropped drastically from 1942 onwards.
3.3The Obama government in the 2008 financial crisis
To fight against the 2008 financial crisis, the Obama government has released a series of new policies and regulations, including a 787-billion incentive planto promote the medical reformand provide subsidies for clean energy industry, stimulation of export, and direct financial support to the banking industry(Davidoff and Zaring, 2009).In this plan, 287 billion will be used for tax reduction, mainly the tax related to real estate (www.liuxuelunwen.org/dxessay/ the objective is a reduction of 8000 dollars per house). Additionally, to increase home ownership among minority and low-income groups, the U.S. government forced banks and private entities toreduce lending standards by political measures such as regulations and policies.On the other hand, 500 billion dollars will be spent on the public expenditure. Nevertheless, these regulations and policies have inflated the housing bubble and may magnify the effects of its bursting, resulting in financial criseseventually.These attempts seem not to be a sister copy of the New Deal, which rescued the country from the Great Depression. Unfortunately, it is considered as a bad example thatwell-intentionedgovernment intervention in the economy system can have devastating and catastrophic consequences, especially in the manufacturing industry. For instance, as shown in Table 1, the number of new ordersin 2008,which is a key parameter to evaluate the situation of manufacturing industry, dropped significantly as compared to the average value before the financial crisis.
Nov 2008
-
Dec 2008 Dec 2008
-
Jan 2009 Jan 2009
-
Feb 2009
The number of new orders as compared to the average value before 2008 -4.9 % - 8.6 % - 6.8 %
Table 1.The number of new orders in the manufacturing industry
IV. Conclusions
In summary, the effect of government regulations and policies on the risk of financial crisiscannot be concluded as positive or negative. If well designed, the government regulations and policies can make a significant contribution to the prevention of potential financial crises and rapid relief after financial crises.Examples include the New Deal that contributed to relief from the Great Depression in the 1930s and the ‘4 trillion project’by Chinese government to fight against the financial crisis in 2008. Nevertheless, inappropriate government regulations and policies can indeedexacerbate the financial crisis as this measure requires additional fiscal expenditure, which could be a heavy burden to the economy in the long term. Examples are the attempts by Weimar government in Germany and the Japanese government before the notorious ‘Hideki cabinet’. These attempts actually accelerate the economic collapse and result in no choice but war. Therefore, it is concluded that government regulation is of the same importance as the free pricing system in a market economy and should be used appropriately to prevent potential financial crises and relieve the economy after financial crises.
V. Recommendations
Based on a series of examples (both successful ones and bad ones), several recommendations on the government regulation can be given.
Firstly, the government regulations shall be applied at an appropriate time point and eliminated once the objective has been achieved.In other words, the regulations and policies should come neither too early nor too late.Indeed, it’s extremely challenging to distinguish between a marketfluctuationand a sign of financial crisis. In these cases, early regulations may be applied to afluctuating yet well-functioning market, resulting in significant disturbances to the economic system. On the other hand, if the regulations come too late, the financial crisis would be exacerbated and accelerated instead of being relieved as increased government expenditure is another burden to the economy.
Secondly,the regulation should be strong enough to alter the market but not to disrupt it. To huge economy entities such as U.S. and China, the market is such a dynamic and complicated one that regulations may not have immediate and significant effects on themarket. For instance, the Chinese government had to make an investment of 4 trillion RMB (equivalent to 800 billion USD), which is approximately half of its annual income, to stimulate the domestic economy and fight against the financial crisis in 2008. In 1934, the annual government expenditure of the Federal government was actually doubled as a result of the additional investment in the infrastructure.Nevertheless, strong regulations can also leave a permanently disrupted market which is no longer a free one. A typical example is Japan in the 1930s.Like other modern countries dominated by market economy, Japan was facing a severe financial crisis (increasing unemployment rate and huge adverse balance oftrade). To solve the problem, the government introduced a strong intervention to the domestic market and created thousands of jobs(Mason, 1992). However, the excessive goods and services producedcould notbe consumed due to the stagnant domestic economy, resulting in an even worse situation(Itō, 1992). As a result, the new military government started a war, which is the only choice left.
Last but not least,the regulation should have a positive effect both in the short-term and in the long-term.The short-term refers to 18 months and the long-term refers to 5-10 years.Basically, the regulation should take effect within 6 month since the market in a financial crisis is so vulnerable that it may crash at any moment.In the case of the Weimar government, the absence of immediate effect led to its failure in the election. On the other hand, as it brings disturbances to the economy, the government regulation is supposed to be used frequently. Therefore, idealgovernment regulations should have a long-term effect on the economy to prevent future financial crisis (at least for a reasonable duration). In the case of India in 2008, the lack of long-term incentives led to a drastic decrease of GDP growth, as discussed in previous sections.
In summary, the government regulations that are able to alter but not disrupt the market economy should be applied at an appropriate time point. Additionally, these regulations should have both immediate effectsand long-term influences on the economy so that the current financial crisis can be relieved and future financial crises can be prevented. 
 
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