THE FUNCTION OF GOVERNMENT IN TIMES OF FINANCIAL CRISIS

ABSTRACT

This paper is a critical summary of the function of government during the on-going financial crisis that began with the so-called ‘credit crunch’ in 2007. It considers whether traditional macro-management of a country’s economy is no longer possible, given the global interconnectedness of economic activity and business and that a government’s role is now to regulate financial markets.

Sustained reliance on the assumption that the value of houses would continue to rise, fuelled unprecedented levels of debt and resulted in a speculative bubble that inevitably burst. The background, to how this was allowed to happen and indeed, forecast, is explained. Recent data and analysis is used throughout as well as links to business cycles throughout economic history, including the Preston Banking Crisis of 1866. The difference is that never before has the global effect been felt so suddenly and governments left in disarray as to how to use their macroeconomic tools of monetary and fiscal policy to steer the economy. It is argued that the lessons are clear: the actions of an individual government are not necessarily enough. The global economy needs reliable, accurate and timely statistics, analysed by those with an understanding of them, and supported by strict regulation of the markets.

Keywords: Credit Crunch, Financial Crisis, Economic Policy, Financial Regulation, Minsky Moment.

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89-222-1-SM


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