Theories concerned

4.4.1. Efficient Market hypothesis and Financial Instability Hypothesis

Efficient market hypothesis (EMH), developed by Fama at the University of Chicago in the 1960s, alleges that markets incorporate the information relevant to prices, while the price of a given asset represents the value of that asset, reflecting all available information (Fama et al 1969). The basis of EMH is thus Rational Expectations concept which states that agent’s predictions of the future value of economically relevant variables are not

systematically wrong and errors are random. The EMH additionally claims that prices reflect even "insider" information. Investors and researchers have disputed the EMH both

empirically and theoretically, as the FC has led to criticism of the hypothesis. In its aftermath,

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An example of such gradual approach is the regulation of NBFIs in Mexico, with figures progressing from ordinary stock companies (SOFOM) to regulated deposit taking NBFIs (SOFOL) and then to acquisition of specific banking license (Banco De Nicho).

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this economic paradigm is considered by many to be in shambles (Stiglitz, 2010), some even blame the EMH for the crisis, claiming that belief in the hypothesis caused leaders to have chronically underestimated the asset bubbles (Nocera, 2009). According to Shiller (2012), the EMH belongs to the most serious errors in the history of economic thought. Critics have suggested that financial intermediaries reduce the accuracy of disclosures and efficiency of markets by creating private information asymmetries, while the prices of securities are influenced by speculators as well as by insiders and institutions that buy and sell stocks for reasons unrelated to their value, such as for diversification, liquidity and taxes. Financial Instability Hypothesis (FIH) created by Minsky proposes that crises arise out of stability itself, as stability leads to complacency and a search for higher returns, while players start taking more risk. Minsky argues that the vital mechanism that approximates an economy towards a crisis is the debt accumulation through financial innovation in which individual market participants balance their own accounts, yet face a constant threat that one or more of its borrowers or counter parties might default.

4.4.2. Financial Transaction Taxes

A Pigouvian tax is a tax applied to activities that generate negative externalities, intended to correct the market outcome. Due to negative externalities, the social cost of a business activity is not covered by the private cost. In such a case, the market outcome is inefficient and can cause over-consumption. A Pigovian tax is considered to correct the market outcome towards efficiency. When the social interest diverges from the private interest, the producers have no incentive to internalize the cost of the social cost. Similarly, if an industry produces a marginal social benefit, the individuals who receive the benefit have no incentive to purchase that service.

Securities transaction tax proposed by Keynes in 1936 was a tax levied on dealings on Wall Street in order to tame speculators who could become too dominant, where Keynes argued that excessive speculation by uninformed financial traders increased volatility.

A frequently discussed currency transaction tax are the Tobin and Spahn tax. In 1972 Tobin proposed a tax on all spot currency conversions, intended to penalize short-term

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it impossible to distinguish between liquidity and speculative trading and proposed a low tax with an exchange surcharge at prohibitive rates, only activated only in case of attacks of speculative nature50.

Soros in 2001 proposed special drawing rights (SDR) pledged by the rich countries for the purpose of finance international aid. In 1989, Feige proposed an extension of the

suggestion of Keynes and Tobin by proposing a flat tax on every financial transaction. Recently proposed DeFazio transaction tax suggests a mix of transactions fees for specific transactions, targeted to speculators and with no impact on the average investor and pension funds, who would get the tax refunded.

4.4.3. Social Cost Concept

Private cost in economics is distinguished from social cost, considered to be the private cost plus cost of externalities. Coase (1960) argued that social costs could be accounted for through negotiation of property rights according to a certain objective, assuming perfectly operating markets and equal bargaining power between those with property rights. Environmental pollution is a typical example of a social cost that is usually not borne completely by the polluter and so is creating a negative externality. Positive

externality thus means higher social benefits than private benefits, which can be considered a market failure since resources are to be allocated inefficiently. The ideas of externalities, social cost and market failure are used as an argument for government regulatory

interventions. Negative externalities lead to an over-production of those goods with high social cost.

4.4.4. Market Failure Theory

Market Failure is a central theorem of modern welfare theory describing the Pareto inefficiency of allocation of goods by a free market. The concept, traceable back to

Samuelson, Bator and Sidgwick in 1950’s who uncovered the imperfections of free market fundamentalism and followed by Akerlof’s and Stiglitz’s contribution in the 1980’s , is

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associated besides others with principal-agent problems, public economies, incomplete markets and externalities of public goods. Market failure analysis plays an important role in public policies and government policy interventions, such as taxes and regulatory impositions, including attempts to correct market failure. Neoclassical Keynesian economists believe that government may improve the inefficient market outcome. Market failures are often caused by externalities where gains or losses related with the product are borne by those who did not dispose or acquire product and where the price mechanism fails to properly account for the true social cost differing from the private cost.

4.4.5. Regulatory Capture of Financial Regulation

Economic theory offers two concepts for regulation of financial institutions, public- benefits theorie and agency-cost theories. Benefits theories, based on welfare economics of Pigou and Samuelson assign regulation to governments, empowering them to search for market failures and correct them, viewing them as well-intentioned bodies advancing common good (Kane, 1997). Regulatory capture developer by Stigler in 1971 occurs when a regulatory agency, considered as a self-interested agent compete to serve multiple principals whose goals diverge in part from societal goals instead of serving to public interest and representing concerns of interest groups that dominate the sector in regulation. Regulatory capture is on of the forms of government failure, in encouraging firms to produce negative externalities, with the agencies are called "captured agencies". For public choice theorists, regulatory capture occurs because groups or individuals with interest in the regulatory decisions can be expected to invest their resources in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture theory is critical of governmental motivation to protect public good.