THE ROLE OF GOVERNMENT IN REGULATING FINANCIAL MARKETS: LESSON FROM THE FINANCIAL CRISIS

Abstract

The housing price bubbles, the subprime mortgage lending boom and skewed financial sector incentives were the main causes of the collapse of the US financial system in 2008 - 2009. The crisis has shown many aspects in the financial markets: (i) moral hazard in the banking system; (ii) investors' opacity and overconfidence in new financial instruments, risk of abuse of leverage; and (iii) regulators did not promptly regulate deviations in the financial sector. Financial crisis harms the country and spreads to countries around the world, prompting the government to react quickly to policies when a crisis occurs and find solutions to prevent future crises.