Reliance on Free Market Rating Options

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"As a result of the current global financial crisis, the international financial system can no longer rely primarily on the free market. To avoid future financial crises, governments and multilateral agencies will have to assume greater regulatory control over international flows of capital." Do you agree or disagree with this statement?

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The question I have to ask myself when posed with the question above is; how is the current international financial system structured? The answer is that there is no unilateral structure of regulatory control that is universally accepted across international waters. Our readings describe the situation as anarchical. Basically, to place the health of global financial markets into the hands of a number of sovereign states will not prevent another crisis of similar proportion or greater from happening in the future. This is in part due to the fact that different forms of government with different cultures have different perspectives on how multinational organizations and international flows of capital should regulated and managed.

In the UK for example, the government does not take an active, direct role is the supervision of investments or flows of capital from from companies abroad and domestic. London's financial center is privately owned where banks and are free to invest in other countries however they see fit in comparison to China whose banks are mostly state owned. In China, the government takes a direct role in banking and investments where the international flow of capital is concerned both inbound and out.

Regulation to Wall Street means restriction. In hindsight of the current financial crisis. How was the government supposed to regulate these banks in regards to whom they were extending credit to? What allowed banks to become too highly leveraged was the relaxed standards or "deregulation" on the capital banks had to keep in reserves to cover their deposits and other obligations. You give banks the ability to leverage their money by five to ten times over and what you end up with is lots of loans made to people who couldn't handle the payments and investments made in those bundled securities on the secondary market. How did China and the UK know that Fannie Mae and Freddie Mac were buying loads of poorly written mortgages? That wouldn't be something that international investment capital would be privy to.

Deregulation of the domestic US financial markets allowed for the creation of exotic securities and derivatives that fueled the flame of quick profits in the banking sector. With regulation comes restriction and with restriction comes the constriction of growth. If governments and multilateral agencies are willing to limit growth due to regulation and oversight of the international flow of capital then the risk of another crisis is avoidable. However as history has shown us time and time again, financial crisis are inevitable and this will not be the last because the self-serving interests of sovereign states will always prevail in the global financial market.