how Deregulation factor contributed to the financial crisis and the need for the government to take control of the financial institutions
Deregulation relations to the reduction of government power in a particular sector and this is done to increase the level of competition. This is one of the themes highlighted in the film” Inside Job,” and it contributed significantly towards the financial crisis. This idea has been stated to be the main factor that caused the problems in financial institutions such as banks, insurance organizations, and credit rating companies. Due to this act, the financial institutions got an opportunity to engage in their daily activities without any control from the government so that they would maximum benefits at the personal level. This discussion will focus on how this factor contributed to the financial crisis and the need for the government to take control of the financial institutions.
Discussion
According to the meaning associated with deregulation, it relates to the elimination of power. As a result of this, the cv involved in the financial industry gets the opportunity to carry out things on their own. This also results in a conflict of interest since the individuals included always want to benefit themselves fully, thereby abandoning their primary responsibility, which is contributing to the growth of the economy. As a result of deregulation in the 1980s, some banks were addicted, such as Kaupping and Iselandsbanki, and due to this, there was an economic burst in the year 2008. When banks were allowed to make risky investments, this failed some companies, while others got consolidated. Despite the crisis being experienced by the financial institutions, the government did not take any action, and due to this, some companies were closed. This also made many companies engage in fraud, such as fraud, giving wrong records, providing reports of improper performance, and money laundering.
Failure to put in place regulations, this subjects the stakeholders involved in the financial institutions to engage in wrongful acts. It also results in a decline in the level of investment since there is funds mismanagement. The level of economic growth is also reduced, and this is evident in the case of the US during this period, whereby there was an economic recession in the year 2008. This also reduced the level of safety in the banking industry since the investors may be discouraged from saving. Lack of regulation also results in a decline in the level of innovation in the banking industry, and this may reduce the rate at which new products are being introduced in the market(Chava et al., 2013). This, therefore, implies that when there is regulation, the level of innovation is very high. For example, in the 1990s, due to management, there was the introduction of derivatives; their market boomed as a result of regulation.
Conclusion
As seen from the discussion above, it is clear that deregulation can cause significant harm to the financial industry. There is thus the need for the government to put in place rules that will govern the operations of the financial institutions. This will ensure that instances of malpractices that may arise, such as giving wrong records and money laundering, are reduced. This will also result in the attraction of more investors in the banking sectors since they will be assured of safety. Conflict of interest will be reduced as the workers will concentrate on more productive ideas that will contribute towards the growth of the economy. Also, with rules and regulations in place, the individuals involved will be aware of what is expected of them.