Do the significant revaluation of stock quotes on stock exchanges occurring every few or a dozen years is an objective specific feature of this type of financial market or rather it is imperfection of these markets resulting from too high a level of liberalization and deregulation of the mechanisms of these markets, including the reduction control functions of financial supervision institutions?
Since the 1970s, the functioning of individual segments of financial markets has been successively liberalized and deregulated, including primarily the issue of investment banking, international markets and exchange rate systems, rating agencies, financial adversity institutions and financial entities and instruments operating on the securities market. During this time, the scale of the re-valuation of valuations of securities, derivatives, commodities and other assets on the capital markets reached ever higher levels, then spectacularly transformed into a strong decline in these valuations leading to a financial and economic crisis. The last financial crisis in 2008 in many respects, including numerous negative aspects, generated the unruly records characterizing the highest level of investment risk and the scale of financial losses generated by many commercial financial institutions and industrial corporations, which then under the active, interventionist, anti-crisis monetary policy of banking were financed indirectly by public finance funds. Due to this cyclical nature of capital markets, characterized by the growing amplitude of economic fluctuations during periods of bull market and bear market at high levels of overvaluation and investment risk levels and deeper global financial and economic crises, large financial institutions, including investment banks, are becoming larger entities and costs neutralizing the negative aspects of crises is paid off by the whole society, especially by the relatively less-earning middle class.
In the light of the above, encouraging discussion, I turn to you with the following question: Has the time finally come to reform the functioning process and the system of financial markets by restoring former control functions of financial supervision institutions that have been abolished, reduced since the 1970s?
Are increasingly deep financial crises derived from the liberalization and deregulation of financial markets?
Please, answer, comments. I invite you to the discussion.
I would propose that it is no coincidence that financial crises often coincide when markets cease to function, largely because governments intervene paradoxically to avert a collapse of certain firms or industries. Markets are precisely that: They tend to reward actions that are consistent with transparency and integrity, while failures tend to occur when interventions distort the appropriation of returns or rewards from risk taking.
Ironically, the 2008 financial collapse worsened when regulators believed there are firms that are too big to fail. By shoring the financial market, where the agents ceased to trust their counter-parties, large injections of cash did not help. All it did was to make banks look good accounting-wise, while the cash was redeposited with the Fed (which was the source of the cash injection). The circularity of the cash did not unblock the credit freeze that eventually hit the main street from Wall Street.
A food for thought ...
indeed, it depends on the countries, for which there is institutional instability, the occurrence of crises is greater
indeed, it depends on the countries, for which there is institutional instability, the occurrence of crises is greater
DEREGULATION is not the cause of problems. Problems come from the lack of compliance audits. Deregulation means liberalizing the sector. With strict or liberal regulation, problems in non-conformance to the legal requirements, and not discovered by compliance audits, will lead to sectoral problems. Unsolved problems accumulate and produce crisis, see accounting scandals for example. The purpose of deregulation or liberalized legal requirement means to remove unnecessary procedures to increase market and operation efficiency; it is not mean to replace the requisite audit function.
LINKS:
https://en.wikipedia.org/wiki/Accounting_scandals
https://www.wallstreetmojo.com/accounting-scandals/
I opine that, it is not the fault of the deregulation system. But, it is the misuse by the concerned people, financial Institutions, business men and traders etc.
Of course there is a relation between liberalization of financial markets, that is: liberalization of capital flows and financial crisis. From 1945 till the mid 1970s capital mobility was restricted and nearly no financial crisis did occur. Research is clear about this (Reinhart and Rogoff: This Time is different, 2009, p.156; Alan Taylor: The Great Leveraging, 2012, www.nber.org/papers/w18290.pdf).
Restricted capital mobility is at the heart of the financial stability under the Bretton Woods regime in the 1950s en 1960s, even when more and more circumvented in the steadily growing eurodollarmarket in that period.
Hope this is helpful.
Dear Colleagues and Friends from RG,
I suggest the following research question in this area:
Should the asymmetry of information on financial markets be reduced?
In the context of analyzing the issues of determinants of effective financial market development, I propose the following research topic: Determinants and possibilities of reducing information asymmetry increases the efficiency of financial markets. In my opinion, due to the progressing information globalization, deregulation of financial markets, the development of internationally functioning banks and investment funds and the increasing concentration of capital in financial systems, the issue of information asymmetry may change, increasing the efficiency of financial markets. On the other hand, the importance of individual determinants shaping the possibilities of reducing information asymmetry on financial markets will change. In connection with the above, I formulated the following research thesis, according to which the importance of reducing information asymmetry on financial markets is growing. Reducing information asymmetry on both sides of financial markets should increase the efficiency of these markets. Below are the arguments for my thesis.
The above discussion inspired me to formulate the following question:
Does the reduction of information asymmetry between the supply and demand side of financial markets increase the efficiency of these markets and the entire financial system?
On the basis of the above considerations and conclusions from the discussion on interesting issues discussed, I formulated the following thesis that the reduction of information asymmetry occurring between the demand and supply side of financial markets increases the efficiency of these markets and the entire financial system. In a situation where banks selling loans, securities and derivatives to customers do not fully inform about how these instruments work and what risks are associated with their use, then they use their dominant position in the markets and generate an increase in the scale of information asymmetry. The increasing asymmetry of information between the demand and supply sides of financial markets, i.e. money and capital markets, including credit, securities, derivatives and currency markets, contributes to restricting competition and reducing the efficiency of these markets. In this situation, more risks arise and the scale of operations and the likelihood of materialization of financial risks increases, including credit, investment, liquidity, debt, currency risk, as well as market risks and those that operate in the environment not only of banks and other financial institutions but also surrounded by their clients.
In a situation where banks and other financial institutions consciously use their market dominance, limit competitiveness and increase information asymmetry regarding the characteristics of the offer of financial products and services sold, then they act unethically, not in accordance with the principles of public trust institutions, not in accordance with the principles of corporate social responsibility. This type of unethical activity practiced mainly in investment banks and the rating agencies cooperating with them were one of the key factors in generating too much systemic credit risk in the financial system and led to the global financial crisis in 2008. Such unethical activities used in financial institutions, leading to an increase in information asymmetry and generation of too high levels of credit risk should be systematically limited. To this end, the effectiveness of supervisory institutions over the financial system and the control functions of central banking should be increased. It is also necessary to restructure credit procedures and the sale of securities in order to make real improvements and improve the efficiency of credit risk management processes at commercial banks, including primarily deposit and credit and investment banks.
Do you agree with me on the above matter?
I conduct research in this area. The conclusions of the research I published in scientific publications that are available on the Research Gate portal.
In view of the above, in order to more fully identify the above issues, it is necessary to conduct research that will facilitate the formulation of answers to the following questions:
- Should the asymmetry of information on financial markets be reduced?
- Does the reduction of information asymmetry between the supply and demand side of financial markets increase the efficiency of these markets and the entire financial system?
- How should the effectiveness of supervisory institutions over the financial system be increased and the control functions of central banking strengthened to reduce the possibility of banks intentionally creating information asymmetry harmful to the financial system?
- What instruments of credit risk management processes should be improved to reduce the likelihood of generating too much systemic credit risk in the financial system and reduce the likelihood of another global or international financial crisis?
- What institutional instruments should be improved to reduce information asymmetry in financial markets?
- Should financial supervision institutions reduce the scope of information asymmetry in financial markets?
- What do you think about this topic?
- What is your opinion on this topic?
Please reply
I invite you to discussion
thank you very much
Best wishes
Dariusz Prokopowicz
Surely we cannot blame everthing on liberalization and deregulation. We cannot have the cake and eat it as well. Libralization and deregulation comes with strengths and weaknesses that we are well aware of. We have enjoyed the positives and the negatives is the outcome of what we went through. A volatile market is better than a flat market. Risk management is key to long-term survival and sustainability of any institution.
Markets would operate according to its immutable rules that humans adhere to. When markets are over-regulated, participants would find ways to re-assert the economic incentives to operate. Hence, a shadow market (or "black market" arises). In this context, liberalization is simply a way of returning responsibilities to the participants, rather than rely on the regulator (or a "big government") to bail out investors from losses.
For this reason, liberalization of markets cannot be cited as the cause of excessive rise in valuation that is eventually corrected by a "collapse" in share prices. In fact, the very fact that this happens, indicates that a market is actually functioning according to the rules of economics.
Asymmetry in information is one reason, and how people react to the information they receive. In real life, call it greed or ignorance, investors do lose sight of basic valuation and act according to the herd. When this happens, it would only take an innocent child to restore good sense by shouting the truth: "The emperor has no clothes". With this, people operating in markets have the uncanny way of panicking and rush for the exit in droves, and create a market collapse in its wake.
Dear Colleagues and Friends from RG, Thank you very much for participating in this discussion and providing inspiring and informative answers to the above question: Are increasingly deep financial crises derived from the liberalization and deregulation of financial markets?
Thank you very much for the sent suggestions of interesting topics, research issues, etc. related to this issue. Thank you for the interesting information sent. In view of the above, in my opinion, in recent years the importance of the liberalization and deregulation of financial markets.
Thank you very much and best regards, Have a nice day,
Dariusz Prokopowicz
The significant factors that are included in the sources of the global financial crisis of 2008 include the processes of increasing the scale of liberalization and deregulation of the functioning of financial institutions operating in the Anglo-Saxon model of the financial system. Some elements of the processes of liberalization and deregulation of the functioning of financial institutions already start with the raw materials crisis in the 1970s. Then the US dollar lost the gold parity and ceased to be a key, main international currency, the era of international liquid exchange rates began, the importance of central banking in developed economies with their own currency began, and the importance of monetary policy used as a set of anti-crisis instruments and pro-development state interventionism began. Further processes of liberalization and deregulation of the functioning of financial institutions took place in the following decades. In the mid-1990s, the US abolished the prudential regulation introduced during the Great Depression of the 1930s, separating institutionally and economically classic commercial deposit and credit banking from investment banking. Then, at the beginning of the 21st century, an institutional system of government financial guarantees was created for the development of lending and granting mortgage loans by banks, which caused a speculative increase in real estate prices and credit derivatives offered by investment banks to subsequent investors and used to raise capital for granting subsequent mortgage loans. In this way, wrongly designed and implemented state intervention generated a huge speculative bubble on capital markets, which led to crashes on the real estate markets, commodity exchanges and stock exchanges and, consequently, to the global financial crisis of 2008. In the context of the above-mentioned issues, the question arises: Is it currently applying a soft monetary policy as an element of anti-crisis state intervention in order to accelerate the process of recovery from the economic recession in 2020, may it generate further speculative bubbles on the capital markets in the coming years?
Thank you, Regards,
Dariusz Prokopowicz