Literature Review The theory of financial liberalization is greatly explained by the works of MacKinnon (1973) and Shaw (1973). Financial liberalization refers to the removal of government ceilings on interest rates and of other controls on financial intermediaries. It is concerned with macroeconomic aggregates (interest rates, savings and investment) and conditions in formal financial markets (Baden, 1996). It refers to the removal of all constraints in the financial sector. In contrast, financial repression refers to distortions of financial prices such as interest rates. Financial liberalization as used here refers to the deliberate and systematic removal of regulatory controls, structures, and operational guidelines that may be considered …show more content…
The banking sub-sector in the opinion of the experts can assist in the break away from a depressed economic performance to an accelerated growth if and only if, the sector is not repressed and distorted with inappropriate and inflexible regulations (Oluyemi, 1995) Smith (1776) (Jhinghan, 2005) believed in the doctrine of natural law in economic affairs. He regarded every person as the best judge of his own interest who should be left to pursue it to his own advantage. Since every individual if left free, will maximized his own wealth, therefore all individuals if left free, maximized aggregate wealth. Smith was naturally opposed to any government intervention in industry and commerce. He believed in the doctrine of laissez faire (no government). Rose (1988) noted that bankers are entrepreneurs, who when freed from constraints of regulations, will readily pursue new opportunities for better services, stronger growth and improved earnings whenever these opportunities appear. Too much regulation, especially the inflexible and dogmatic ones deny banks of their innovation and incentive to take risk and invest in business enterprise. It could also result in problems such as loss of competitiveness and …show more content…
They observed that the stage of development of the financial sector of a group of countries in 1960 made it possible to foresee economic growth over the following thirty years. They find that higher levels of financial development are associated with faster economic growth and conclude that finance seems to lead to
In Smith’s The Wealth of Nations he defines liberty as freedom from constraint. From this he suggests to limit government involvement within the market. Instead, have the market determine the prices of goods and at what amount wages should be. Smith states, “To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry
Adam Smith was a philosopher whose political philosophies was based off of economics. He believed to some extent that there should be a redistribution of wealth, but at the same time there should be a limit to government interference in economy. He wanted the state to end politics that favor industry over agriculture or vice versa, and that business should be left to the business people. He also believed that the government cannot make people virtuous with laws, and that the state should not promote religion or
Adam Smith, a Scottish philosopher, is best known as the author of one of the most, well known books ever written. He is most commonly known as the “Father of Economics.” Smith contributed to the development of Modern Economics, creating the invisible hand theory, which is an invisible force that is used to guide the free market and capitalist system. Ultimately, this is aided by “saying that an individual's self-interest is ultimately economically beneficial to society as a whole” (ecocommerce101). Smith contributions have changed the old way of thinking that mercantilism that stated the only way to create wealth was to hoard gold and other commodities and place tariffs on other nations, in disregard for Smiths new free trade principle.
"Adam Smith." Adam Smith. Library of Economics and Liberty, 2008. Web. 4 Feb. 2011. .
Stewart, J. ‘The Changing Nature of Financial Regulation in Ireland’ , Journal of Financial Services Research , 1996.
Smith focuses on mercantilism and how man can benefit society without knowing. I'm Smith's book The Wealth of Nations, written in 1776, he states, “Every man… is left perfectly free to pursue his own interests in his own way…” Smith says that man are able to make their own choices and should. People don't need a ruler because rules are second nature for humans. People can create a society that doesn't have an overlord and they will still have rules. Smith goes on and adds, “By pursuing his own interest he frequently promotes that of the society more [effectively] than when he really intends to…” Man will work in order to be successful for themselves yet it also benefits society. People only care about their own personal gain and their gain helps society by providing services. Mankind can make their own decisions without a
In conjunction with their respective governments, central banks have been manipulating economies for decades. Central bankers have sought to control interest rates, inflation and credit through their policies. Their efforts have impacted the stock market, job creation, home construction and many more aspects of the economy. However, in recent years, central bankers have manipulated themselves into a corner and become trapped in the mess that they made.
Adam Smith was the first person to publish ideas about the markets. He suggested that a free market was the most viable and sturdy option for the economic system, as it meant that there could be no governmental regulation. This was an advantage as selfishness of the individual creates competition
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
The central thesis of The Wealth of Nations is that capital is best employed for the production and distribution of wealth under conditions of governmental noninterference, or laissez-faire, and free trade. In Smith’s view, the production and exchange of goods can be stimulated, and a consequent rise in the general standard of living attained, only through the efficient operations of private industrial and commercial entrepreneurs acting with a minimum of regulation and control by the governments. To explain this concept of government maintaining laissez-faire attitude toward the commercial endeavors, Smith proclaimed the principle of the “invisible hand”: Every individual in pursuing his or her own good is led, as if by an invisible hand, to achieve the best good for all. Therefore any interference with free competition by government is almost certain to be injurious.
As we are moving to the end of the course, we want to present you with the Federal Reserve System (Fed), which is the central bank of the USA. We are going to explore the roles of Fed in regularizing the economy, its function, and also the tools used in doing that. We will learn how central banks regulate the banking system and how they manage money supply in economies. We will also be presented to the financial crises lessons we can be able to understand the importance of the regulatory system; and then, we answering questions such as:
Velde,D.K (2008). The global financial crisis and developing countries. Available at: http://www.odi.org.uk/resources/download/2462.pdf (Accessed: 5th August 2010).
This is followed in section 5 by an analysis of the recent changes in the banking industry. With the development of the financial system, declining entry barriers and the deregulation of the banking industry make banks no longer the monopoly suppliers of banking services and reduce their comparative advantages which they usually hold in the past. Whether the reasons give rise to the existence of banks are still powerful will be examined here, while section 6 offers a way of considering whether banks are declining by looking at the value added by the banks. When the value added by banks is examined, banks are not a financial intermediation, which not only conduct the traditional services but also provide more diversified
The study is primarily designed to find out the continuous issue of the banking system in
Banks sector is playing an important role in economies. The banking industry, as the classic and the most influential of financial intermediaries, facilitates economic operations. Financial sector in the worldwide country has been changes over these years by looking the changes of financial structure environment and economic conditions. Thus, banks are a very important point to financial system and play an important role as control and contribute growth to the economic sector.