The Effects Of Deregulation On Global Economy
Length: 1636 words (4.7 double-spaced pages)
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Thesis: Deregulation has more negative effects on global economy than positive.
Deregulation, this word is heard on the news, economists use this word quite often, and government officials are somewhat terrified of this word. What does deregulation mean?
Deregulation is the process in which a government may remove or reduce certain restrictions in matters of business to have a more efficient operation of markets. By observing the effects that deregulation can cause on an economy, can help later generations not commit the same mistakes that the past or the current generations have done.
In today's global economy being regulated by the government is in the norm. Businesses that deal with a very competitive field are limited as to how much they can grow and how low they can make their prices. For example back in the 1800s Andrew Carnegie created a monopoly that was not regulated. By lowering his prices he caused others unable to compete with him. By doing this Andrew Carnegie drove others out of the steel-producing business. When one person not only has control over a specific area but is the only supplier of this item, this is called a monopoly. These days the government regulates actions such as the ones mentioned above.
What can happen if the government's let go of some of these regulation? Will businesses flourish while hurting the common people? Will deregulation help to push another depression? Will the environment be harmed while people benefit from their selfish desires? These questions will be discussed later in the paper.
Throughout the world governments are giving large corporations a lot of leeway or deregulation. In Russia for example, the government have deregulated their laws concerning in the electricity sector. Railroads and communal utilities are also something that was recently deregulated by the government. Both of these called for the development of better technologies, better and more efficient ways of using energy. Better ways of transporting people. At the same time this may have caused disturbances in the business sector. Control by one major company may cause somewhat of a monopoly. The cost and prices of transportation and electricity may be controlled by one major company. Can this be positive or negative? Deregulation in the Natural Gas Sector is being imposed from the EU (European Union) and the United States. Indeed this is a global economy in which one action may affect the whole world.
Consider the United States in the trends of S&Ls (Savings and Loans).
The United States has had many forms of deregulation during the past Century but was often late on pulling them out at the right time. The article, "The Bubble Economy" will discuss more about this subject.
Since 1938 the CAB (Civil Aeronautics Board) regulated all the fares and schedules in the domestic airlines. This was considered a public utility. It was not appreciated by most economists and obviously the airline companies. Later in 1978 the ADA (Airline Deregulation Act) was passed and signed by President Jimmy Carter. This caused the airline prices and fares be controlled by the market forces. (Supply and Demand Forces) This caused people to pay more and thus caused some friction between the airlines and the government. In time it was regulated to a certain degree.
In Asia, deregulation puts banks into a tight competition. With this global economy not only do Asian banks compete with each other but, they must compete with the rest of the world. More details are discussed in the article, "Bank Fund Management Challenges and Opportunities".
In Europe the Gas Market deregulation causes the development of better technologies and equipment to transfer Gas. The company that took advantage of this, "Gaz de France" is now replacing the pipelines in order to be more efficient in its use of resources to produce gas. More of this will be discussed in the article, "European Gas Market Deregulation Demands Financial Muscle".
Summary of Article #1
The Bubble Economy by Robert Kuttner written in "The American Prospect" on September 24, 2007 describes what has caused the " Big Bubble" after the turn of the century. "The Federal Reserve is struggling to contain what is already the most severe credit contraction since the Great Depression". This is the consequence of a series of financial deregulations. This caused the American economy to depend on asset bubbles. Asset bubbles are overvalued stock, overvalued real estate, and dubious financial instruments.
What have caused this bubble to grow even larger? Speculative borrowing have caused this bubble to pump itself up. Just like in the 1920s the borrowing feeds on itself. This causes inflation of assets and these bubbles are caused by interconnected hedge-fund profits that are reliant on high-yield sub-prime mortgages. Basically this means that people infest in stocks or funds by borrowing money. When people borrow this money they are buying from each other which causes the prices to grow or a better word to use is inflate. That is why the stock market bids could soar by risky private equity deals. So what would happen if they prices fall?
If the air comes out of this bubble so does the air of others. Prices fall which means people can't sell their real estate, stocks or funds at the prices they bought it our higher. When this happens then they would not be able to finish paying their mortgage. So the investors that have borrowed money from the bank lose money, and the bank loses money. This crisis is hard to manage for the Federal Reserve.
This crisis was caused by the "sub-prime mortgage panic" and the hedge-fund collapse. The deregulation from the government which caused people to have an easier access to credit caused this Bubble Economy. Due to deregulation they have made all these assets connected, assets such as hedge funds, real estate, the bond market and private equity. This is because they feed on each other. When real estate was rolling down the hill and mortgages went bad the investors panicked and left. This caused the stocks of the mortgage companies to fall. The banks that lent money to these companies had it hard too. The hedge funds that invested in their bonds lost money. So people stop investing. This is the current problem right now. If the government regulated this in a way this might not have happened. This is only one effect of deregulation.
Summary of Article #2
"Bank Fund Management Challenges and Oppurtunites" by Tng Cheong Sing from the University Malaysia wrote about the influence financial deregulation has on the competition between local and foreign banks, insurance companies, and investment firms. From this article it is obvious that the competition that is made by foreign banks( Banks that are not from Asia) has made it hard for local banks to continue growing. This especially influences the fund management industry. The United States is relatively new to this because fund management was prohibited by the Glass-Steagal Act before the Federal Reserve deregulated that. From 1996 on fund management grew tremendously. This caused even more competition for the Asian banks.
In conclusion the author states that, "financial deregulation does not make it impossible for domestic backs to earn economic profits". If they gain competitive advantage in their local and foreign institutions they might stand to the competition. Thanks to financial deregulation this reduced barriers to entry for foreign institutions. Local banks should work toward differentiating their financial products by showing that they are not underperformers. The Local banks have to get the trust of the people and show they are just as great as the rest of the banks.
Deregulation in this case causes competition, which causes the betterment of services to the common people and people who have bank accounts in the domestic banks.
Summary of Article #3
Jeff Share who wrote in the August 2005 issue of the "Pipeline and Gas Journal" in the article, "European Gas Market Deregulation Demands Financial Muscle" explains the recent progress made due to this deregulation. It seems the author is bias toward the development of these pipes and lines. He says that there are positive outcomes from this development. This article is an interview with Chief-Operating officer Jean-Marie Dauger of "Gaz de France". He points out many of the great aspects of deregulating this sector. This would help integration of gas lines within Europe. This would help in efficiency and also keeps the pipelines safe. The recent developments in pipeline technology would help them not only save money but also provide a stability in this area. The expansion of Gaz de France in Europe will promote better economy. So in this way deregulation may be helpful.
How the Articles Relate to the Textbook
Deregulation is probably more closely related to Classical Economics rather than Keynesian Economics. Deregulation is another fancy term for "Laize Faire". If the government laid-off of and let the market work its "magic" then it would be a financial playground for the big investors and a sand pit for the rest. In this case it is impossible to be completely for one side, Supply-side, Classical, or Keynesian.
When the government gets to involved it might not promote economy to its full potential. But in other cases if the government will not be involved this will cause a lack of regulation and therefore will be an uncivilized society. People wouldn't be controlled to were they would not only drive prices high on things that are not worth that, but people with more money would choke out those with less money by making a monopoly. The solution to this will never be found because times change and no government can ever supply the right answer to the needs of humans. But regulation is definitely needed to a certain degree in certain aspects of business.