Financial Markets and Regulation Essay

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Should financial markets (stock, bonds, etc.) be more heavily regulated to eliminate the problem of asymmetric information?

The film, Wall Street: Money Never Sleeps, Oliver Stone released in 2010, is a interesting view of wall street and capitalism. The movie uses the recent global financial meltdown as a backdrop to a story of insider trading, federal bailouts, and corporations too big to fail. A young stock market trader Jake Moore almost single handily brings down a major Wall Street investment firm to avenge the suicide of his mentor. It highlights some of the major issues with capitalism, a major one being the right balance of regulation in financial markets.

“Asymmetric information signifies a situation in which one party involved in transaction with another, has more or superior knowledge and information than the other.” (“economypedia.com,” 2008). This can cause the exploitation of the party lacking the knowledge. Like in the film, there were those betting against the market when the sub prime mortgage bubble finally burst and the markets started to tumble. The people betting against the market that had no inside knowledge of the upcoming collapse were extremely lucky and were able to profit from a disaster. However, those with inside knowledge of the upcoming meltdown that profited from the market failure had asymmetric information. Such transactions can be very bad for the financial markets. Regulations should be in place that prevent this type of unfair trading. A true free market is almost impossible to have. The rationality assumption is a key reason why regulation is needed. Since the assumption is that individuals do not intentionally make decision that would leave them worse off, it goes without saying that if an individual has knowledge that would make them better or, they would do so without concern for the market as a whole.

There is also unrestricted speculation that should be regulated. When investors make high risk investments for quick and high payoffs, the long term effects can be damaging to the market as a whole. There has to be a floor to every ceiling. “The global recession of 2008-2009 brought a great amount of attention to the risky investment strategies used by many large financial institutions, along with the truly global nature of the financial system” (investopedia.com) The global financial market of today is very intertwined. If markets are left without heavier regulation, there can be a repeat
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