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5) Most of the blame for the implosion of the financial sector in 2007-08 lies in the failure of regulation. Comment. Also discuss what are the core issues that still need to be resolved to prevent such crisis in the future.(250 words)

TopicEffects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

5) Most of the blame for the implosion of the financial sector in 2007-08 lies in the failure of regulation. Comment. Also discuss what are the core issues that still need to be resolved to prevent such crisis in the future.(250 words)

The hindu

Why this question

The 2008 subprime financial crisis had a devastating effect on global economy.It is important to understand how the crisis was largely a result of regulation failure, and what needs to be done to prevent such crisis in the future.

Directive word

Comment- here we have to express our knowledge and understanding of the issue and form an overall opinion thereupon.

Discuss- this is an all-encompassing directive which mandates us to write in detail about the key demand of the question.

Key demand of the question.

The question wants us to express our opinion as to whether the blame for the implosion of the financial sector in 2007-08 lies in the failure of regulation, or not. It also wants us to write in detail as to what are the still unresolved issues which need to be resolved in order to prevent any such incident in the future.

Structure of the answer

Introduction- write a few introductory lines about the 2008 financial crisis and mention the factors other than regulation failure, which have been implicated for the crisis. E.g Global macroeconomic imbalances, a loose monetary policy in the U.S., the housing bubble in the U.S. again and elsewhere, a bloated financial sector, a flawed belief in efficient markets, greedy bankers, incompetent rating agencies.

Body-

  • discuss how the regulation failure was the main cause behind the crisis. E.g One, banks were allowed extraordinarily high levels of debt in relation to equity capital. Two, banks in the advanced economies moved away from the business of making loans to investing their funds instead in complex assets called “securitised” assets. The securitised assets consisted of bundles of securities derived from subprime loans, that is, housing loans of relatively higher risk etc.
  • Discuss the unresolved issues. E.g First, the ‘too big to fail problem’ — some banks being so large that they cannot be allowed to fail.; rising debt to GDP ratio; Third, financial globalisation makes the world vulnerable to U.S. monetary and fiscal policy etc.

Conclusion– based on your discussion, form a fair and a balanced conclusion on the given issue.