Global banking system in 2007/08

 

 

Global banking system in 2007/08

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Global banking system in 2007/08

Introduction

The global financial crisis of 2007-08 (figure 1) caused a serious debate regarding the government’s management and avoidance of such crises. At its early stages, it was difficult to tell how the crisis was to end. A better framework was necessary in understanding and predicting the government’s actions in responding to such events. The financial crisis affected the right functioning of monetary institutions within America.  It was necessary that the government creates the necessary procedures in dealing with the fundamental issues in minimising its effects.[1] The right administrative policies related to a number of procedures in creating a better system of banking to realize the most advanced procedures in returning the situation back to the original position. The objective of this paper is to make an analysis of how the American government adjusted its interest rates, open market operations, reserve ratio, government spending and taxation in responding to the economic downfall.

Figure 1: decreased global growth during 2007-08[2]

 

MONETARY POLICY

Interest rates

The American government tightened its interest policies in handling the currency crisis. Currency crises originate from immediate withdrawals of foreign investments that explain the tightening of monetary policy. In 2007/08 the government adopted interest rates policies to induce capital inflow. The situation also dealt with capital flights and stabilized exchange rates and consumer prices in dealing with exports. By lowering the interest rates, the government made it possible for the investors to initiate different projects for the better of the economy. Investors were able to borrow money from the bank as the initial capital for the start of different investment projects. New investment plans created a system where the subject of money making could be carried out at the capacity to address the low money levels within America.[3] According to Figure 2, the interest rates started declining in 2007 to the current time 2015. This has been the effect of the monetary policy in dealing with effects of the financial crisis in 2007/08. As the interest rates started going below 6.5 % in 2007, investors were encouraged to borrow more.

Figure 2: interest rates since 1963 to 2015

Figure 3: interest rates vs. GDP[4]

 

Though low interest rate lead to decreased GDP at first, the GDP eventually grew positively (Figure 3) paving way for increased the rate of employment within America. With the increased investment projects, the business owners were capable of employing more people to their businesses. More employments advanced to the people were necessary in dealing with the rate of disposable income creation. Though the year this was not felt immediately as jobs opportunity decreased significantly immediately after the crisis, the stability was evident in early 2010 that resulted from the ability of the banking system to understand the low money levels within the economy (Figure 4).[5] The disposable incomes by the different American employees increased the spending patterns of the entire population. Expenditure patterns within the population facilitated a more income generation system that worked for the better functioning of the entire economic sector. From the same concept, disposable incomes within the economy maintained a steady rate of dealing with the increased dependency levels by the different Americans. The resulting incomes also dealt with the rate of increased low standards of living.

To increase money flow within the economy, the government decided to increase interest rates. This was aimed at increasing the burden to loan borrowers. The situation made it difficult for the loonies to repay back the money. The escalating banking crisis worsened the position of the loonies in repaying the loans. The continued default system worsened the ability of the financial sector to realize the desirable targets in maintaining a steady money flow within the economy. Therefore the American government found it right for create bailout plans that could facilitate the rate at which the banks had enough monies in loaning to different account holders.[6] The increased interest rates were a procedure in dealing with the ‘bad loans’ to different account holders.  It however did not realize the desired targets because the situation kept on worsening and lead to a more financial crisis.

Figure 4: employment before, during and after recession[7].

 

Open Market Operations

The American government also bought the government securities that had been sold to the Americans. This was a move aimed at pumping more money into the economy to be used by different investors in the execution of the right investment plans. The security purchased enabled the sellers have the adequate funds in the execution of a number of investment plans that are necessary in creating more wealth. Hence, the funds created enabled a fast recovery of the dead investment plans due to the financial crisis in 2007/08.[8] The different economic apparatus were in a position of facilitating a speedy recovery of the varying creative procedures making the economy realize the desirable targets. Those benefiting from such government plans found it valuable to initiate a number of investment projects in improving the economic projects.

The need to buy the bonds had resulted from the increasing sales of government bonds to the public. Prior to the 2007/08, the government had withdrawn money from the market through the different sales of the bonds. Many investors are interested in such bonds due to their stability in maintaining the initial agreement status. Such purchases contributed to a great deal of cash injections in addressing the different challenges that are part of a quality government functioning. The government planers did not have an idea of the consequences that such sales would have in controlling the rate of money flow within the economy. It was its plan to address the existing fundamentals in minimising the amount of money within the economy. All the related measures were undertaken to reverse the situation back to its original position by buying the same shares.[9]

Reserve ratio

The reserve requirement for all banks determines the amount that banks should hold as minimum within their accounts. Such an amount is maintained within the bank and it is not let out to the account holders. The amount is maintained in such a way that loans are advanced with a consideration of the minimum amounts to be maintained within the account deposits for the bank. During the global crisis in 2007/08, the American government decided to lower the reserve requirements for all the banks. The monetary policy made it possible for the banks to let more money flow into the economy. A lowering of this reserve ratio made a great advancement in determining the ability of the banks to enhance a better positioning of all individuals in improving the money position within the economy.

Before the 2007/08 economic crisis, the reserve ratios were high and did not allow for the right flow of money within the economy. It was so restrictive that it did not allow for great money borrowing in dealing with money requirements within the economy. The move dealt with a number of policies that facilitate the ability of banks to deal with the different money requirements within the economy.[10] Therefore it had worsened the right money flow within the economy for a better functioning of the money flow. The American government had restricted the reserve ratios in an attempt to address the key issues in dealing with ability of the desirable money amounts to be maintained within the economic status. The situation however worsened the right fundamentals in making the economic parameters work for the better of the necessary money flow.  According to figure 5, once the reserve ratio is lowered, investors are able to carry out more investments from the money borrowed from banks. More investments increase creates more employment with high disposable incomes. High disposable incomes improve the level of demand among consumers and that is why AD shifts to AD2.

Figure 5:[11]

 

FISCAL POLICY

Government spending

Government expenditures within the economic parameters determine the amounts available within the business sector. The more a government spends the more its economy receives additional funds to be applied by the different investors within the economy. Government spending is therefore a fiscal tool applied in making the realization of funds within the economy possible. For this reason, the government changes its spending fundamentals in dealing with the rate of money flow within the economy. The government planers come up with the right dimensions in dealing with the amount of money flow within the economy.[12] Hence, American government expenditures had to be increased after the 2007/08 crisis started worsening. Such increased government expenditure improved the amount of money flow within the economy. It facilitated the rate at which government spending could change the complication resulting from the economic crisis.

The economic crisis had resulted from the inability of the government to carry out adequate expenditures in pumping more money into the different economic functioning. The government had found it necessary to limit the money flow within the economy through restrictive spending procedures. This lowered the rate of money generation within the economy causing a great damage to the rate of money flow within the economy. Reduced government expenditures had also tampered with the rate of money creation within the economy.[13] It had advanced to great heights by making it impossible for the creative procedures to be facilitated in improving the right spending dimensions. Therefore the worsening 2007/08 crisis required a better approach in reducing the inability of the American government advancements in realizing fruitful economic system.

Taxation

Taxation by any government determines the profits after tax by any given economic system. If the corporation tax is increased, business owners are not capable of retained a good amount of their profits for executing different investment projects. Their more cash generation capacity in tied to the existing fundamentals in making the government more financed. Corporation taxes set by the government are a mandatory. Therefore they should be paid at the right legal dates. After the onset of the 2007/08 crisis, the American government had to change their corporate tax rate.[14] The tax was lowered to ensure that business owners are in a position to retain more of their earnings for a number of investment projects. This facilitated a more enhanced methodology in making the entrepreneurs continue with their process of money generation. It enhanced a more focused system of changes in realizing the right money flow within the economy.

The economic crisis had resulted from the high taxation levels that worsen the required money levels within the economy. It had impacted the different capacities in dealing with a focused improvement of the money procedures within the economy.[15] The American government had to create a different system in improving the entire economic perspectives for the entire economy.

Conclusion

The 2007/08 economic crisis had resulted from the money flow within the economy. It worsened the ability of the different economic systems to work for quality wealth creation in America. The different methodologies affected the ability of the government initiatives to serve all the financial needs of the entire American population. A qualitative application of both fiscal and monetary policies had to be applied in reversing the economic crisis through the country’s banking system

 

 

 

 

 

 

Bibliography

Evanoff, D. & Kaufman, G. Systemic Financial Crises: Resolving Large Bank Insolvencies. (Singapore: World Scientific Publishing, 2005)

Goodfriend, M. “How the World Achieved Consensus on Monetary Policy.” Journal of Economic Perspectives 21 (4) (2007):47-68.

Dreher, A. “IMF Conditionality: Theory and Evidence.” Public Choice 141(1) (2009): 233-267.

Gilson, D. Overworked America: 12 Charts That Will Make Your Blood Boil. 2011. http://www.motherjones.com/politics/2011/06/speedup-americans-working-harder-charts

 

 

 

[1] Dreher, A. “IMF Conditionality: Theory and Evidence.” Public Choice 141(1) (2009): 234

[2] Gilson, D. Overworked America: 12 Charts That Will Make Your Blood Boil. 2011. http://www.motherjones.com/politics/2011/06/speedup-americans-working-harder-charts

 

[3] Goodfriend, M.  “How the World Achieved Consensus on Monetary Policy.” Journal of Economic Perspectives 21(2007) (4):48.

[4] Evanoff, D. & Kaufman, G. Systemic Financial Crises: Resolving Large Bank Insolvencies. (Singapore: World Scientific Publishing, 2005)

[5] Dreher, 240

[6] Dreher, 250.

[7] Goodman, C. J.  And Mance, S. M. Employment loss and the 2007–09 recessions: an overview. Monthly Labour Review. 2011.  Retrieved 4th December 2015 from <http://www.bls.gov/mlr/2011/04/art1full.pdf&gt;

 

[8] Evanoff, D. & Kaufman, G. Systemic Financial Crises: Resolving Large Bank Insolvencies. (Singapore: World Scientific Publishing, 2005), 11

[9] Ibid

[10] Goodfriend 50

[11] Dreher, A. “IMF Conditionality: Theory and Evidence.” Public Choice 141(1) (2009): 233-267.

[12] Dreher, 251.

[13] Goodfriend 53

[14] Goodfriend 56.

[15] Evanoff & Kaufman

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