Tuesday, January 7, 2020

Essay on Government Actions to Prevent Economic Crises

Introduction At least for a while, the bear seems to have buried the bull. Wall Street doesn’t seem as shiny as it used to. The global economy has just recently come out of a deep recession. At a time like this, it is particularly relevant to examine the role of the State in overcoming economic crises. Although government intervention in the matters of a fair free-market is not entirely consistent with the doctrine of economic liberalism which has been today vindicated as a necessity in a free society, in practical terms, it is impossible for the government to be not involved in something so intrinsic to the over-all well being of its subjects. But what can the government do to get the country out of an economic slump? What many†¦show more content†¦According to Jonung (2009), the bank support was of crucial importance because it guaranteed the durability of the banking system by restoring confidence in the Swedish institutions. The Riksbank (Swedish central bank) ensured unlimited liquidity by effectively acting as a lender of last resort. The Swedish ministry of finance attacked the crisis with a twofold approach. Firstly, ‘Banks in trouble were asked to obtain capital from their shareholders,’ on failure of which, the banks would have been confiscated and brought under public control. This was a crucial part of the recovery package which pushed banks to the edge in their efforts in the battle for survival, thus minimizing the moral hazard problems. This is in sharp contrast to the towering moral hazard problems which the U.S. faces with the corporate bailouts in the automobile and financial industry. Secondly, the finance ministry created the ‘Bank Support Authorityâ €™ which supervised the process of splitting the assets of the major Swedish banks into a bad bank and a good bank and managed them according to their prospects. 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