Thesis on "Economic Crisis"

Thesis 7 pages (2043 words) Sources: 7 Style: Harvard

[EXCERPT] . . . .

Economic Crisis

Introductory Remarks

The statement that the world is facing an economic crisis is becoming redundant. Despite its sometimes exaggerated mediatization, fact remains that the global economy is indeed facing severe challenges. In some countries, the negative effects of the crisis have already been felt by the population and the business community, whereas in the case of others, they will only reach the peak throughout 2009. The causes and implications of the crisis are multifaceted and however the aim of this paper is not to discuss them, a topic on the economic crisis cannot be reached without a short background on the situation.

Once the reader has become accustomed with the features surrounding the globalized economic crisis, the paper will move on to identifying the international regulatory institutions and the role they play in developing and implementing the policies in terms of the economic crisis. The syntax of a globalized economic crisis has not been incidental and its usage is based on the principles of globalization - just as the technological, political, economic, social and cultural values have transcended boundaries, so have the financial difficulties. And given that the forces of globalization have facilitated international operations across organizations and countries, the difficulties encountered in one instance soon generated chain reactions for the other parties involved.

Closing the parenthesis on the globalizing forces of the economic crisis, the paper will continue to discuss the policies developed and implemented by the international institutions. A conclusion part will follow, restating the most significant findings of the research.

2. The Economic Crisis

The current economic crisis is a relatively new issue, meaning then that the specialized literature on the matter is rather scarce. The reader can however retrieve the desired information by accessing the media and the journals literature. However, in this, one must be aware that the media can alter the shape of a situation by presenting it in a certain light. To ensure the formation of an objective opinion, various sources must be analyzed.

The financial blog Moolanomy (2008) gives a simple answer: it was greed that generated the economic crisis. And whereas the greed was obvious at most levels, the ones which are primarily responsible for the negative outcome are the real estate agents who continued to inflate prices, and the mortgage lenders, who eluded customers with special offers, but large and adjustable interest rates. Brent Budowsky (2008) looks at the issues from a different angle and finds that the primary cause was the failure of the Bush administration's political leadership.

Joe Miller and Brooks Jackson at the Annenberg Public Policy Center of the University of Pennsylvania conducted a through analysis of the U.S. economy and came to the conclusion that the crisis was generated by the following:

The U.S. Federal Reserve made credit cheap by massively reducing the interest rates in the dot-com bubble burst

The house buyers took advantage of the easily accessible credits and unnecessarily inflated real estate prices

The real estate agencies inflated the prices to earn high commissions

The U.S. Congress continued to implement the mortgage tax deduction, stimulating the U.S. citizens to go on purchasing high priced properties

The Clinton administration pressured for easy access to credits for the average income families

The mortgage brokers offered individuals with low credit rates subprime and adjustable rate loans, but used sky high interest rates

Alan Greenspan, former Chairman of the Federal Reserve, encouraged Americans to take out adjustable rate mortgages

The Wall Street organizations paid too little attention to the risky loans they were bundling into MBS (Mortgage Backed Securities)

The Bush administration failed to supervise the mortgage market

The usage of the mark-to-market accounting rule to make real estate properties be less valuable in paper than in reality, in times of panic and economic hardship, and finally

All parties involved presented a collective delusion, "or a belief [...] that home prices would keep rising forever, no matter how high or how fast they had already gone up" (Miller and Jackson)

Just as the case with the causes, the effects of the financial crisis are multifaceted and various sources emphasize on different implications. UNICEF for instance points out a massive reduction in the help given to women and children due to financial shortages, which could generate a social crisis. Andy Kilmister (2008) reveals that the crisis will materialize in reduced investment funds and lower organizational profits, to consequently lead to reduced federal budgets. He also points out a decrease in jobs, higher costs of life and reduced living standards. Kilmister takes one step further in assessing the effects of the economic crisis and relates them to the current model of economic stability. In this order of ideas, he argues that the model of economic growth and stability was promoted as one based on production, when in fact it was based on exchange. Consequently then, the model of economic development and financial sustainability might have to be changed.

3. Policies relative to the Economic Crisis

Given that the economic crisis was no longer just a rumor, the year 2008 saw the reaction of numerous national and international institutions. The policies implemented varied from one institution to the other and were diverse as they addressed diverse issues. Some policies were specific, whilst others were more generalist and had the purpose of aiding those affected by the crisis. Whichever the situation and the general or particular issues addressed, the large majority of the policies is aimed to increase the stability of the financial system. The British Government has stated its triple goal with the implementation of its policies - they strive to: "support stability and restore confidence in the financial system; protect depositors' money; and safeguard the interests of taxpayers." (2008 Pre-Budget Report). The following lines contain references to some of the most relevant policies implemented in response to the 2008 economic crisis.

The British Government was relatively tardy in assuming a critical position and this can be explained by the fact that they did not comprehend the magnitude by which the problems in the U.S. would affect England. However, once this became obvious and the English financial system became unstable, the U.K. government implemented three major policies:

They offered 200 billion GPB to the Bank of England in order to minimize the risks of reduced liquidities within the banking system

They granted 50 billion GBP to a Bank Recapitalization Fund in order to reduce the risks of insolvency, and third

They established a credit guarantee scheme in order resolve the funding concerns

Another measure, this time addressed to aid the population and with limited emphasis to the stability of the financial system, is that of reducing the VAT tax for the period of one year. This measure has been implemented by the U.K. As well as other countries and it is designed to reduce the costs of living for the population in the countries affected by the economic hardships. What is however open to debate is the real utility of such a tax in a context in which it implies reduced funds for the federal budgets.

The future policies to be developed and implemented by the U.K. government revolve around the following:

continuing to monitor the financial system to ensure it is able to support the wider economy, including through appropriate levels of lending to businesses and households;

strengthening the Banking Bill to enhance the Authorities ability to deal with • banking group holding companies and the insolvency of investment firms; and introducing measures to facilitate the raising of equity capital" (2008 Pre-Budget Report).

The United Kingdom has not however restricted its policies to its country alone. In this line of thoughts, they also set the basis to an international response to the crisis, which involved several parties. The aim of this partnership is to address the root causes of the contemporaneous financial crisis. Up to this point, the program has managed to restore some stability into the British financial system, with continuous efforts in reviving and stabilizing the real estate industry. The issue is however more complex at a global level and a successful outcome cannot be achieved without the full commitment of the countries. The European Union responded favorably to the agenda proposed by the U.K. government. The latter emphasized on the need to address the next issues:

prudential oversight of capital, liquidity and risk management transparency and valuation the role and uses of credit ratings the authorities responsiveness to risks, and arrangements for dealing with stress in the financial system" (2008 Pre-Budget Report)

The European Union has responded to the crisis with the development and implementation of several courses of action. First of all, they had to unify the efforts and attention of all of their 27 members. Once this was achieved, the institution began to work at stabilizing the European banking system. A first priority was that of resolving the liquidity shortage.

However the initial responses of the European Union were favorable, analysts estimate that its countries have yet to feel the devastating effects… READ MORE

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