Government Intervention which is based in financial markets, has been aimed at channeling credit at concessional terms to various government defined and based priority sectors, and as such, it has long been a significant policy tool.
Despite the good intentions however, such government intervention has generally halted the financial markets’ development while failing to promote the development and growth of the priority sectors at the same time.
Furthermore, given its very strange and mixed nature, government intervention and government intervention programs very often lead to abuse and can contribute to fiscal deficits.
Such government intervention programs also distort the incentives that regular programs or those businesses in the finance system would have had at other times.
In fact, many of the activities of the Inter-American Development Bank are aimed at repairing all the damage which has been done via the severe and very worrisome repression that has been caused by many government intervention programs in the financial and economic markets.
Many South Asian countries on the other hand, have taken the smarter route and have opted for a form of mild financial repression that is referred to as policy based finance and clearly involves government based programs for when there are certain markets or economies which cannot attract private investments or sectors that have severe information problems.
Necessary and Sufficient Conditions for Government Intervention
Government intervention in financial markets can however only be justified in certain situations or circumstances.
Examples of such failure include markets that are unable to immediately invest funds due to information symmetries, markets that lack long term financial options and financial sectors which are also too small for the economy.
Government intervention can also then be justified when major externalities are associated with the creation of certain markets for instance pilot programs in both science and technology.
To be seen as successful on the other hand, such government intervention programs must be able to demonstrate that they are able to correct for the perceived market failures.
Intervention programs must on the other hand, be clearly able to demonstrate that they can address the underlying causes of a specific externality as opposed to simply dealing with a market failure as a means of elbowing in and interfering.
Two other conditions, amongst a variety of others that also apply in order for a government to be able to interfere in the financial or economic market of a certain area or country would also be:
The firms of activities that are selected by the government must be both solvent as well as competitive in their own right and way both before and after they first allocate credit and start to work within a financial market.
However a government or government programs may not simply interfere in a certain market just because one firm or a set of firms are unable to get credit; this is not an excuse for the government to elbow in and attempt to impose regulations on firms which may or may not gain credit.
Property Functioning Judicial Systems
This is another requirement for governments to be able to interfere in certain markets; financial markets need effective and efficient and reliable judicial systems that will be able to enforce certain rules and obligations. The government in this case should understand that it does not and should not enforce credit to markets that are unable to repay the credit that has been lent.
To conclude however, governments should only actually be allowed to interfere in financial or economic markets if the need arises, if there has been a market failure overall or if there is proper reason for the government to come and impose credit in markets that have crashed or are unable to gain credit.