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Financial Liberalization and Intervention

A New Analysis of Credit Rationing

Santonu Basu

This book seeks to provide a coherent explanation as to why the policies of financial liberalization and financial intervention have been unable to achieve the goal of improving the access of borrowers to the loan market, irrespective of size. This is one of the prime criteria for achieving efficiency in the operation of the loan market and its failure has resulted in increased uncertainty and financial fragility.
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Chapter 1: General Introduction

Santonu Basu


The main objective of this book is to examine why the policy of financial liberalization and, for that matter, the policy of financial intervention, were unable to achieve the respective goals sought by each policy. An important question is why execution of the policy of financial liberalization led to financial crisis, while intervention either adversely affected the performance of the financial sector or brought fragility into the system (without their respective objectives necessarily being fulfilled). Policy prescribers by their nature always take a defensive role. There is a saying in India that if you do not know how to dance then blame the floor. Without exception policy prescribers did just that, i.e. they blamed the macroeconomic environment or corruption and nepotism when either policy failed to live up to its promises. There is no doubt, despite this colloquial Indian saying, that the uneven or rough surface of the floor can adversely affect the performance of the dancer, but when there remains a possibility that the floor can be adversely affected by the dance performance, then it is necessary to examine the floor in order to decide whether such a performance can be carried out on it. The failure of economic policies in relation to the financial system perhaps arose from the fact that the policy makers did not give adequate attention to understanding how the system operates and why it operates the way it does. This problem perhaps arises from our overriding objective of studying economics with a view as...

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