Financial Liberation Advantages And Disadvantages

Introduction

Financial liberation refers to a situation when the restrictions on the financial markets and the financial institution are eliminated or when there is a situation when financial innovations such as the subprime mortgage loans are usually introduced to the financial markets. The financial innovations and liberations are in most cases beneficial to the economy of the country in the long run since they lead to more efficient financial market hence promoting lending and growth As the restrictions are removed and the financial liberations and the innovations are mismanaged, the freedom can make the different financial institutions take some risks which are unnecessary that is going on lending sprees which can, as a result, lead to

In the markets that are emerging, there are always saving resources which are in most cases badly managed. The emerging economies usually are fragmented in a manner that there is a greater possibility of having investments which are less productive. Capital accumulation is usually discouraged because for a high rate of inflation, the nominal interests are rates are set very low and subsequently, the interest rates could be negative.

As the capital supply of the banking sector remains very limited, and the banks only have the specialized credit, activities, people have also to finance their investment projects by themselves, or they have to go to the informal sector where the interest rates are usually not serious. For the McKinnon, the financial liberation lead to the unified financial markets and the best strategy is let the rates of the interests fluctuate freely. In this case, the rates of interest would reflect the scarcity of the capital and the information costs about the borrower quality. High rates of interest would subsequently lower the yields of the investments. The authorities should hence limit their role so that they ensure the rate of inflation is low and also to promote the development of the financial sector. According to the financial liberalization theory, there is centralization of the of the funds

This is attributed to the optimal allocation of the resources with the saving price that reflects much its scarcity and the unification of the domestic financial system. It has also led to reduced unemployment as the price of the capital increases, and there is substitution of the capital by the labor. That is a better financial credit offer with longer maturity and the entry of the foreign capital.

Disadvantages of financial liberation

Financial liberation limits the role of the government in managing the economy with the intervention of the financial sector significantly. However, the vulnerability of the economy usually tends to increase and subsequently, the financial crisis are liable to follow the financial liberation program in most countries. The process may, in turn, encourage the banking system to turn to the market-based system. Governments in countries such as Asia usually open their market after the financial crisis. This is usually forced by the international organizations and the American government and the international capital. The consequence of financial liberation can be the speculation