The fictitious company chosen for this exercise is a medium-sized investment bank called Armor Bank, which has a footprint in states in Southern United States. The bank has plans for penetrating markets in the rest of the country and is mulling options for a merger.
- Explain why government regulation is needed, citing the major reasons for government involvement in a market economy.
Government regulation is a concept that is seen out-dated in capitalist economies. The faith in unfettered free trade is thought to be a panacea for all economic problems. But empirical evidence points to the fallacy of this theory. As it is, government intervention is only sought when there is a major economic crisis, like during the 2008 Wall Street crash. It is a bit unfair for the general population that tax-payer money is doled out to greedy corporations when they are in trouble. At the same time, during the boom their behavior is not regulated in the name of Laissez-faire. The activities of the financial services industry being the cause for the current economic slowdown, it would be prudent to call for greater government regulation in this area. The prospects and possibilities of Armor Bank for further expansion will have to be weighed in the broader context of the stability and long-term sustainability of the economy.
- Justify the rationale for the intervention of government in the market process in the U.S.
The American economy had always seen cycles of boom and bust. It is fair to say that the domestic and economic policies framework of various American Presidents of past have been generally business friendly and thereby been lax on regulation. The most recent economic crisis witnessed across the world was precipitated by financial institutions in the United States. The collapse of the Lehman Brothers in 2008 brought to light the reckless and greedy decision making of top executives in this industry, leading to the inevitable collapse. In this context, the idea of regulation as a legislative means to “encourage the things society as a whole likes (such as economic development) and discourage the things it doesn’t (thus, the sin tax)” (Rosenzweig, 2007) is the way to go. As globalization and technology advance,
“financial institutions become the focus of additional regulation; new regulations might be seen as a way of thwarting money laundering, achieving community development goals, or channelling credit to needy borrowers, for example. Such uses are legitimate reasons that lead regulation toward its true mission – to help establish the boundaries within which an industry can operate.” (Jordan, 2001)
In the prevailing regulatory environment in the United States, there are only limited hurdles for corporate consolidation. This means that there is a constant flux of merger & acquisition activities in corporate America. But such a free reign had not helped strengthen the general economy, beyond the private sector. Hence, there is credence to the view that greater control should be exerted over M&A activities. This is especially true with respect to the financial services sector that bears major culpability for the current decline of the economy.