Question

Assess how the Federal Reserve implements Bagehot’s dictum as a means of fostering economic growth in the current period.

Do you agree with the policy brief that, “in modern financial markets, the Bagehot principle of providing lender-of-last-resort support remains necessary but is no longer sufficient”? Evaluate the changing role of government regulation in mitigating systemic risk, providing evidence to support your view.

What do you believe is relevant to business practices in terms of planning for operational contingencies? Do you agree or disagree with government intervention? Defend your stance using supporting theory or evidence.

Answer 1

Bagehot's dictum advises central banks to lend more during credit crunch but at high interest rates to a good banking securities. This way businesses will be saved and loan defaults can also be controlled.

Q. Do you agree with the policy brief that, “in modern financial markets, the Bagehot principle of providing lender-of-last-resort support remains necessary but is no longer sufficient”? Evaluate the changing role of government regulation in mitigating systemic risk, providing evidence to support your view.

Ans:I agree to opinion expressed above.Modern business practices have changed. Especially in developing countries there is a problem of crony-capitalism in which businessmen borrow without adequate securities. Also all over the world product life cycles are changing and hence businesses may be short lived. to please people and get reelected bad economic policies are implemented and hence requires high amount of money. Hence a business rationality is required by banking sector and hence central bank should control more strictly. Hence even in credit crunch time central bank should not lend freely but analysis on case to case basis is important.

Q. What do you believe is relevant to business practices in terms of planning for operational contingencies? Do you agree or disagree with government intervention? Defend your stance using supporting theory or evidence.

It is not at all necessary for govt. to intervene unless any illegal activity is carried out. Firms can make effective planning for operational contingency. For example- Suzuki plan in India had an Human resource related issue, govt. intervention only made it worst. The laws should be made in such a way that things are clear to all stakeholders.

It is true that in a risky kinds of business (hazardous products), govt. intervention is necessary but that should be inspection based only .