The global financial crisis that shocked the world economy occurred in 2008-2009. This crisis is referred to as the great recession and it happens to be the most recent crisis in the financial world. This crisis has been considered to be the worst since the 1930's great depression. The dilemma was tricky, and it took a massive toll on countries. The economy of the world was tremendously fragile, and all the financial markets were unsettled. The Eurozone crisis now requires urgent action and the most attention. For this to happen, policymakers need to create separate, policy tools to handle the banking crises and the sovereign debt. This is to happen regardless of the fact that the two are intertwined. The same action was taken by different governmental and private organizations during the crisis. For instance, the US government responded by inserting more money into the markets and other forms of liquidity, increasing the expenditure of the government, minimizing the rates of interest, supporting most critical financial institutions adversely and any additional step deemed significant to assist the markets financially. These and many other policies and actions were taken by different governments of the world. However, the dynamics of the financial imbalance are still not fully comprehended.
From this, my main arguments stems, which are policies and proposals that resolved banking debts and regulated the banking system during the recession to save the collapse of most behemoths of the banking system. All governments should be cautious enough to develop fault-free mechanisms which will help economies adjust to financial shocks. The pace at which the organizations and governments respond to fiscal crises is essential. Failure to paced response could lead to a myopic, haphazard, retrospect and merely effective response. The Japanese had a similar case when their macroeconomic policymakers underwent a learning process, then adjusted, experimented before discovering the effective policies to put in place. In this paper, however, the main point of focus shall be the minimization of risks; the nations should put in place early mechanisms to improve the frameworks of debt resolution as well as supervising banks and the capacity of regulation.
This paper shall base its information on documentary analysis. Analyzing prior documents gives a better understanding of the policies put in place, their effectiveness, their weaknesses and the opinions of different macroeconomic policymakers. Several published reports on the state of the world economy and the responsiveness of the governments and organizations of the world towards the 2008 crisis proved to be beneficial to this research. Some of the significant documents shall include the publications by the International Monetary Fund (IMF). The seventy-seventh analysis of the Chinese Government concerning the crises shall also be a vital tool in this research.
The paper seeks to answer the arguments on the primary mechanisms that are to be put in place, have been put in or should be put in place to tackle the financial instabilities that may face the world economic environment in the future. Secondly, the IMF document shall provide answers to the weaknesses of the proposals put in place and the pace at which they got implemented and an analysis to determine the efficient manner of effective policymaking. From this research, the expectation is to establish the advantages of the proposals that were put in place by different countries and financial organizations in response to the significant regression, the tremendous fiscal shock of 2008. The paper shall establish the extent to which, these results could have been useful in preventing the prior crisis as well as prevent the occurrence of another similar financial turmoil. It got presumed that the results might indicate short-term positivity. The measures are expected to have avoided the presence of the crisis, but this could not guarantee the immunity of the world economy from such a regression in the future. If that happens to be correct, then the paper shall try to find out more long-term measures to prevent or reduce the severity of such a c crisis in the future.
The signs of approaching financial shock got observed in the United States in 2007. The prices in the real estate sector began to collapse, and worth of the sub-prime mortgages which were recently underwritten started to spike. By September and around October the following year, 2008, the situation had culminated into a massive fiscal crisis (Sweet, & Law, 2010). Within no time this situation had escalated to the Eurozone, and every government was scratching for a resolution. The United States pumped more money and other liquidities into the market. Central banks around the world employed extraordinary pecuniary policies to bring stability into the financial markets to sustain the activities within the economy. The Chinese monetary authorities counteracted with fiscal stimuli to prompt overall demand before the situation turned to severe levels. The government had to take strict measures to contain the public deficits that kept growing each day (Schmidt, & Heilmann, 2010). The OECD (Organisation for Economic Co-operation and Development) countries, however, established that stimulus and bailout were not mechanisms competent enough to handle the economic instability for a long-term. Either way, this would demand a second regulation of the commercial sector and rationalize governments' mix and content of their programmes as well as carry out a fundamental reform on the budget systems (Lindquist, de Vries, & Wanna, 2015).
Sweet, W., & Law, D. F. A. B. The Harvard Law School Forum on Corporate Governance and Financial Regulation. July 21, 2010.
Schmidt, D., & Heilmann, S. (2010). Dealing with economic crisis in 2008-09: The Chinese Government's crisis management in comparative perspective. China Analysis, 77, 1-24.
Lindquist, E. A., de Vries, J., & Wanna, J. (2015). 1. Meeting the challenge of the global financial crisis in OECD nations: fiscal responses and future challenges. The Global Financial Crisis and its Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges, 1.
The crisis of 2008 brought to focus authoritative new disparities to the concept of a bank run. Economies of many countries got threatened. Governments have benefited from massive economic fallouts of crises like the 1930's crisis that lead to the great depression. These crises are analyzed bearing in mind the overtly extreme risk-taking and self-centred conduct. Commenter agitated over bailouts by a vast number of financial institutions. Employment was lost, and outputs decreased causing the community's worth to rock and suffer horribly. The 2008 crisis saw the gross domestic product of the US and the value of the euro fall by 4% (Tucker, 2014). Japan faced severer effects than before. A second wave hit the Euro, facilitated by the exposure of the already crumbling banking sector to the crisis and extremely feeble state debts. China managed to escape the full-blown effects of the disasters, but their imports and exports were much impacted. All around the world, the legislature and finance dockets tried to mitigate the loss and to rehabilitate the financial system on a large scale by empowering the financial sector.
Before the 2008 economic crisis, the most substantial causal cradle of risk to the financial system was improperly watched and undue residential financing and frail fringe European sovereign debts. However, macro-prudential regulation is concerned with the liability of the financial system to shocks coming from nearly any direction (Tucker, 2014). Governments have set out on the course of ending the possibility of future bailouts. Financial regulators are on a path of significant reduction on a class to significantly reduce the prospect and ruthlessness of future crises. This paper shall analyze the measures taken by one of the most affected economies, the United States and one of the nations that managed to evade the full effects of the crisis, China. It shall then seek to establish how well both countries led to mitigate the crisis by applying different methods. The United States made the bank bailout program whereas China went with the stimulus project. The question seeking to answers is; how well did the two major governments of the world handle the situation? The paper proposes reforms on the banking system; a stimulus proposal that would enable the banking system stabilizes and is able to bail out themselves in the future which in return would avoid cases of moral hazards.
The United States Bank Bailout
The significant regression in 2008 was the enormous economic shock to the economies of the world since the great depression in 1930's. The onset of the crisis was in the United States when the prices in the real estate sector collapsed. The rates of the sub-prime underwritten mortgages spiked. The situation was already out of hand by September in the year 2008. The administration of the former president of the United States, George W Bush, proposed a deal to save the economy from the debt crisis that was escalating fast. The crisis in the subprime mortgages was developing. So many people buying homes had dubious credit. Banks were letting them take credit that was either equal to or sometimes even more extensive than the value of the mortgage. The individuals would fail to repay back their mortgage bills, and the banks would take back the mortgage and resell it to other customers. This is one of the situations that led to the escalation of the financial crisis. The federal government used the reserves to add more money to the market and raise liquidity. In the same effort, they reduced the interest rates. However, this policy was not enough to correct the economic confidence of the nation. January 2008, the Congress passes the tax rebates to the president. The loan rebates were a package of $168 billion was sent to families and recipients in the social security in the form of cheques. This too did not stabilize the situation. Instead, the limit of the loans for the mortgage also rose for agencies like Fannie Mae and Freddie Mac. This situation kept worsening with the cases of Bear Sterns investment bank almost sinking and the federal government taking over some of the most significant mortgage creditors in the market, Fannie Mae and Freddie Mac. The collapse of the Lehman Brothers sent shockwaves in the economy of the nation. The president now had to get the Congress to approve the bank bailout bill which was worth $700 billion (Bordo & Haubrich, 2017).
The bill would be expected to have several real significances. First, it was supposed to reinstate the liquidity of the credit crisis. Banks were hoarding their money from the owners of the homes to large enterprises. Their borrowers could not get into contact with the money because all the credits they had were expensive. The$700 billion policy would, therefore, be of significant advantage to the improvement of liquidity. This improvement was not only going to be felt in the United States economy but also in all other economies of the world. The increased cash would allow banks to borrow and lend from one another and in turn, they would be able to give credit to customers.
The proposal was advantageous in the sense that it could prevent another collapse in the banking sector. In the period of the great financial crisis, banks like Bear Sterns, Freddie Mac, and Fannie Mac had to be taken under the federal government when they came to the verge of collapsing. Others like the Lehman Brothers were not lucky enough, they collapsed. Other examples like AIG and Mer...
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