This document is a working paper series from the Institute for Policy Reform (IPR), which aims to enhance economic growth in developing countries through research, education, and policy reform. The paper, titled "The Role of the State in Financial Markets," by Joseph E. Stiglitz, re-examines the role of government intervention in financial markets, identifying ten market failures that arise in these markets, most of which are related to imperfect and costly information. The paper proposes two taxonomies of government intervention and develops principles for government regulation, emphasizing the limitations on government enforcement capacity and the need for indirect controls. The principles are applied to the analysis of prudential standards for banks, highlighting the importance of maintaining high net worth and capital requirements and restricting interest rates paid on insured deposits. The paper also discusses the pervasive nature of government interventions in financial markets, the costs associated with financial debacles, and the exaggerated importance of equity and bond markets. It questions the efficiency of financial innovations and argues that well-designed regulations must recognize the limitations of information and the need for indirect controls to ensure financial institutions behave prudently.This document is a working paper series from the Institute for Policy Reform (IPR), which aims to enhance economic growth in developing countries through research, education, and policy reform. The paper, titled "The Role of the State in Financial Markets," by Joseph E. Stiglitz, re-examines the role of government intervention in financial markets, identifying ten market failures that arise in these markets, most of which are related to imperfect and costly information. The paper proposes two taxonomies of government intervention and develops principles for government regulation, emphasizing the limitations on government enforcement capacity and the need for indirect controls. The principles are applied to the analysis of prudential standards for banks, highlighting the importance of maintaining high net worth and capital requirements and restricting interest rates paid on insured deposits. The paper also discusses the pervasive nature of government interventions in financial markets, the costs associated with financial debacles, and the exaggerated importance of equity and bond markets. It questions the efficiency of financial innovations and argues that well-designed regulations must recognize the limitations of information and the need for indirect controls to ensure financial institutions behave prudently.