Evaluate the view that strict rules and regulations are essential to create a more stable economy

Analysis

• Details of 2008. How it happened, market failure -> needs regulation to stop
• Systemic Risk - Banks are interconnected because they loan money to eachother. If one fails they could all fail and cause a collapse of the financial system.
• Stress Test - Can the banking sector survive for 30 days of shock -> Capital Ratio
• FPC is proactive rather than reactive. This makes the economy more stable as crisis are less likely and less severe. Less opportunity cost and less damage to consumer confidence

Evaluation

• Government Failure - Regulatory Capture
  • The FPC gets money from the firms it regulates which means there is a conflict of interest
• Countries with less regulation get boosted AD as banks move to them.
• Free market means more innovation and growth, which means they could recover from economic shocks better
• Other factors have a greater effect on stability, such as government spending, competence of Central Bank.

Judgement

• To be effective, the regulations need to be international
  • Otherwise, banks will move to countries with less regulation
  • Banks are still interdependent across countries
• Trade off / Opportunity cost
  • Little regulation -> higher AD and faster growth, higher risk of financial crash
  • Strict regulations -> low risk of financial crash, lower AD