What is the role of government in preventing or solving financial crises?
Answer (1)
Governments play a very important role in both preventing and solving financial crises. They do this by making laws, regulating banks, supporting the economy during hard times, and protecting ordinary people.First, governments prevent crises by setting rules for banks and other financial institutions. These rules make sure that banks don’t take too many risks with people’s money. For example, banks are required to keep a certain amount of money in reserve and avoid giving loans that are too risky. In the U.S., after the Great Depression, the Glass-Steagall Act was created to separate commercial and investment banking.Second, governments respond to crises using fiscal policy. This includes increasing government spending or lowering taxes to help the economy recover. For example, during the 2008 financial crisis, the U.S. passed the Recovery Act, which gave money to rebuild infrastructure, support schools, and assist unemployed workers.Third, central banks (like the Federal Reserve in the U.S. or the Bangko Sentral ng Pilipinas in the Philippines) use monetary policy to control the money supply and interest rates. They may lower interest rates or use quantitative easing to make borrowing easier and encourage spending and investment.Fourth, governments provide safety nets for people, like unemployment benefits, social welfare programs, and food assistance. These help families survive even when they lose jobs during a crisis.In the Philippines, during the COVID-19 pandemic, the government created emergency programs like the Bayanihan Act to give financial aid to poor families and support businesses.However, the government must also be careful. If they spend too much or bail out too many companies without fixing the problems, it could lead to moral hazard, where companies keep making bad decisions expecting help again.In short, government plays a central role in managing crises—but it must balance protecting the people while making sure the economy becomes stronger and more responsible in the long term.
