留學生金融危機dissertation

金融危機后果的修復
 

盡管一段時間內全球金融危機可以預兆,但是它開始證實在2007年中期到2008年金融危機的影響。這場危機的特點是使得全球股市的下跌,不是崩潰就是收購了大型金融機構,甚至最富裕國家的政府通過建立救助計劃來救助他們的貨幣系統。文章的文獻綜述討論了在當前的金融危機的新興文學,詳細討論其發生的原因,它對世界經濟的影響或結果以及其修復。它解釋了當前的世界金融危機是如何從2008年開始肆虐全世界的范圍,侵蝕了貿易以及對經濟造成了損害。嚴重的影響之后,世界經濟前景變得不可預知，嚴重威脅著全球的經濟秩序。更重要的是,這場危機對未來跨國社會的可持續發展構成嚴重的挑戰。

引言
 

金融危機是這樣一種狀況，即貨幣需求取代貨幣供應量——從銀行蒸發的流動性中快速撤出資金以及限制銀行倒閉或其他, 以出售其他投資來盡力償還赤字。

 

Financial Crises The Causes Consequences Cure Economics Essay

 

Although for a while the global financial crisis had been ominous, it began to attest its effects at some point in the mid 2007 and into the year 2008. Fall of world stock markets, either collapsing or buying out of great financial organizations and even the wealthiest countries' governments bailing out their monetary systems by establishing rescue packages characterized the crisis. This paper reviews the emerging literature on the current financial crisis, discussing in details its causes, impacts or consequences on the world's economies and its cure. It explains how the current financial crisis has clutched the world extensively from 2008, undermining its trade along with its economies. Following its severe effects, the world's economic outlook has become unpredictable alongside threatening global economic order severely. What is more is that the crisis poses a serious challenge to the future transnational community's sustainable development.

 

INTRODUCTION

 

Financial crisis is a scenario in which the demand for money supersedes money supply - there is rapid withdrawal of available money from banks evaporating liquidity as well as constraining banks to either collapse or else, to vend other investments in endeavouring to reimburse the deficit. One can as well define financial crisis as an acute decline of a set of financial indicators including asset prices plus short-term interest rates among others, which come with financial institutions' collapses. Financial markets suffer disruptions following a financial crisis, which leads them ineffective in directing finances to those with most prolific investment opportunities. A financial crisis as a result shifts the economy to equilibrium, with a harsh output fall from one with elevated output in which there is a great financial markets' performance (businessdictionary.com, 2010).#p#分頁標題#e#

 

Over the past three decades, finance defined the transition in the United States from an industrial society to a post-industrial one - from a society of organizations where corporations were vital building blocks that shaped their members' daily lives, developing into a portfolio society characterized by increasing ties of household welfare to financial markets' vagaries. These ties amplified the economic downturn as consumers who had depended on rising portfolio and home values suffered setbacks, which contracted consumer spending and hence economic growth. The consequences reverberated globally, from investors that had purchased American mortgage-backed securities to producers who depended on American consumers for their sales (Davis, 2009).

 

CAUSES AND CONCEQUENCES OF THE CURRENT FINANCIAL CRISIS

 

Post Industrialism

 

In 1973, the vast majority of economies of many countries other than the United States were still dependent principally on agriculture and extraction of natural resource. However, at that time, the only post-industrial society was the United States, with about sixty percent of its labour force in services. Defined most simply, post industrialism is a situation in which "the majority of the labour force is no longer engaged in agriculture or manufacturing but in services" (Bell, 1973, p. 15). In other words, post industrialism is more about the inevitable effects of improvements on productivity in a capitalist economy than about moving jobs around the world (Kollmeyer, 2009).

 

Today, the transition to post industrialism in the United States is virtually complete as manufacturing and agriculture account for less than ten percent of the total labour force, a percentage that progressively falls. There has been an intense disappearance of manufacturing employment over the past two decades in the United States, corresponding to large corporations losing their position as the American social structure's central pillars. Davis (2009) records that this trend has accelerated in the 21st century and the U.S lost more than thirty percent manufacturing jobs in the period flanked by December 2000 and May 2009.

 

Shift from Manufacturing to Service

 

Job loss in manufacturing before the recession was often attributable to off shoring, which is utilizing foreign contractors for production. The close to disappearance of industries such as textiles is a clear demonstration of a great deal of off shoring. Nevertheless, expanded productivity is a more basic source of lost manufacturing employment whereby the productivity in the sector requires relatively few employees. The shift to service from manufacturing has resulted into employment disaggregation in which workers' attachments to particular firms is more tenuous, expected tenures are shorter and often, workplaces themselves are on a smaller scale. Great mobility of employee goes together with lower firm-specific investments, which the traditional underlying principle for preserving long-term employment relations was partially for encouraging the development of investments in skills that are firm specific (Davis, 2009).#p#分頁標題#e#

 

Davis (2009) argues that in the United States, finance decisively shaped the shift from an industrial economy to a post-industrial one, and that finance's ascendance efficiently ended the society of organizations' reign although they still exist outside the U. S., mainly in East Asia. He explains that in the United States, events unfolded in favour of finance at organizations' expense. A changed occurred in the nature of the employment relation as manufacturing employment gave way to services as well as the largest employers shifting from firms like GM to those akin to Wal-Mart - expectations of more impermanent attachments replaced the long-term mutual obligations of old. The advent of defined-contribution pensions that were relatively portable and that provided an enormous source of new mutual funds investment facilitated changing employment ties.

 

Securitization and Ownership

 

Pension investment growth helped concentrate ownership in institutional investors' hands, which assisted a prevailing corporate focus on shareholder value as the eventual managerial and corporate performance's measure. This inclination toward share price made corporations to restructure to a lithe original equipment manufacturer commonly known as OEM or corporate organization's network model that further encouraged additional uncertain employment ties. Simultaneously, securitization, which involves turning loans plus other assets into tradable bonds, altered banking and finance' nature thereby allowing more asset forms to be traded on markets in addition to opening new avenues for households' participation in financial markets.

 

Patalon (2009) refers to households as a non-traded asset owing to the fact that it is hard to trade and that in case it trades, it does so in an extremely inefficient market. However, through retail mutual funds and pension plans, households progressively more became investors, and through securitized home mortgages, insurance payoffs, credit card debt and student loans, they became issuers. Ties to financial markets waxed following the waning of ties to particular corporate employers. In addition, a model of the investor trading in assorted capital species including financial, human and social increasingly replaced the old model of the organization man (Davis, 2009).

 

Another less obvious effect of the employment disaggregation that accompanied post industrialism is the promotion of greater aggregation in financial intermediaries' corporate ownership. This took place via a change in pension financing, which channelled a large fraction of household savings into very few mutual fund complexes that eventually culminated with holding concentrated positions of ownership in hundreds of corporations in the United States.

 

Davis (2009) explains that before the early 1980s, majority of companies that provided pensions did so through defined-benefit plans, which paid retirees benefits in accordance with their tenure with the company. In these plans, the employer is accountable for creating an investment pool adequate to finance the stream of pension revenue promised to its employees on retirement. These plans provided employees with strong incentives to expend their careers with specific employers.#p#分頁標題#e#

 

In the early 1980s however, with the arrival of the 401(k), majority of employers who still provided pensions started to shift towards funding plans that were relatively portable and in which employees along with firms contribute to an autonomously owned pension that case the employee changes jobs, can be rolled over. These defined-contribution plans successfully shifted risk from employers to workers, putting on them the responsibility of making themselves sensible investment choices from among the options that their employer offered. The defined-contribution pension plans' growth aided in fuelling the mutual fund industry's growth since the 401(k) plans mostly invests in mutual funds. During the 1980s and 1990s, the mutual fund industry therefore had an enormous growth through retail investment and 401(k) s, since compared to other savings vehicles, households found mutual funds to present better returns (Cobb, 2008 & Hacker, 2006).

 

Investment by households and the bull market were mutually reinforcing during the subsequent decade because retail investors are characteristically momentum investors - putting money into the stock market following increases in price. According to the Federal Reserve, 52% of households owned stock by the year 2001, the uppermost proportion in U.S. history, and most of them did so either directly or indirectly via mutual funds. The wide stock ownership spread among the American populace left some of the commentators ecstatic about the new democratization of ownership as well as its potential benefits (Duca, 2001 & Hall, 2000).

 

Among the American populace, stock ownership was wide but not deep. In 2007, less than one in five households possessed shares directly in companies - this is almost the same rate as thirty years earlier. Additionally, the value of the average portfolio of family in 2009 was under twenty-three thousand dollars (Bucks et al., 2009).

 

The Changing Nature of Banking

 

Davis (2009) asserts that finance itself has been vulnerable to the allure of the OEM model. In this case, traditional banking has undergone transformation through securitization practice. Unlike in the transformed model, the traditional banking model is moderately simple as banks gather deposits from savers, to whom they pay interest, and loan it to borrowers who pay it back at a higher interest rate. The best-known securitization form is mortgage-backed bonds, which involves pooling together numerous mortgage loans and then dividing them into bonds that have more predictable and less-risky returns by the large numbers law. This practice not only permits banks to free up funds for additional lending but also generally reduces the cost of taking out a mortgage. Instead of relying on a local bank plus its depositors to fund their purchase for home, buyers can access funds via mortgage-backed securities from dispersed investors globally.#p#分頁標題#e#

 

The incidence of securitization for business along with other loans meant that investment banking and traditional commercial banking had become progressively more difficult to differentiate from each other. The conversion of Morgan Stanley and Goldman Sachs to commercial banks, the two major investment banks that remained after the disappearance of Merrill Lynch, Lehman Brothers, and Bear Stearns in 2008, ratified this development. Many of the largest banks by this point had become fundamentally doorways to financial markets, similar to OEM corporations. through securitization, in which global institutional investors came to hold thin slices of American mortgages including Norwegian pension funds, mortgage ownership was becoming more dispersed, just as corporate ownership was becoming more concentrated, thanks to institutional investors.

 

The global financial connections' tangled web meant that economic ties of individuals with their colleagues became more and more intricate. Through personal pension plan, one may own part of his or her neighbour's auto loan, credit card debt and home mortgage and become his or her life insurance's beneficiary - social capital took on a more than metaphorical meaning. As banks together with other monetary institutions consolidated and amalgamated across industry boundaries, finance developed into a huge meta-industry, which included real estate services, student loans, commercial banking, insurance and investment banking among others. For instance by the year 2000, approximately forty percent of the S&P500's profits emanated from financing, and diverse companies such as Enron and GE were effectively hedge funds or banks with some irregular industrial operations (Ip, 2002).

 

Davis (2009) asserts that traditional commercial banks in the interim became far more concentrated while a few of national titans (in particular JP Morgan Chase, Citigroup and Bank of America) came to control an enormous proportion of the industry's deposits and assets, changing a traditionally local business into an global one. In effect, local as well as regional players were acquisitive banks' attractive targets. He suggests that following the progressive fraying of ties that bound employees to firms, new ties connecting households' well-being to financial markets developed.

 

Households, as both issuers and investors through securitized mortgages and mutual funds, progressively more came to depend on financial markets for their security and prosperity but was just for a while. Consumers were borrowing and spending more while saving less thereby increasing household debt (Articlesbase.com, 2009). Accordingly, the fiscal crisis has done far more harm than it would have otherwise and "it therefore compels a rethinking of our model of social organization". Unlike in the 20th century when social organizations orbited around the large corporation, corporations in the United States are no longer the organizing principle of her present society. Consequently, citizens have no choice but to pick up the broken pieces of an economic crisis burden with institutions together with a conceptual model of society appropriate for a passed era (Davis, 2009, p38).#p#分頁標題#e#

 

The US Housing Market Bubble and Globalization

 

Shah (2008) holds the assertion that the financial crises of 2008 began in the United States due to the country's housing bubble-burst negatively affecting her economic development. Its aftermath was a severe financial crisis, which rapidly spread around the world. Likewise, Almendarez (2009) is for the view that the bursting of the housing bubble of the U.S. is the immediate cause of the current financial crisis, which the UA and the entire globe alike have been experiencing.

 

As d'Orville (2009) asserts, the global monetary crisis has spread akin to wildfire across the globe due to one single model of globalization, which involves pursuing liberalizing market economy devoid of regard to diversity, diverse developmental stages, needs among others. He argues that the on purpose pushing aside of substitute approaches and models points to an ethical and moral deficiency, which policy-makers ought to account for. Globalization has led to close inter-connection of trade, housing, stock and financial markets, goods and services worldwide with the outcome being greater global interdependence.

 

Bartlett & Ghoshal (2002) holds the view that the globalization growth-bubble rupture is one of the major backlashes against globalization. They argue that it arose during the transition period to trans-nationality 1990s and 2000s whereby novel competition bases came into view with the emergence of competitors with assorted strengths. The fact that the United States is the largest economy in the world will make any slowdown in her economy inevitably spread to other countries. This crisis' nature has made many people measure it up to the 1929 great depression. Other people argue that it may be worse as almost the whole world felt its strong effects.

 

Currently, there is a relatively large literature on the global financial crisis. Majority of scholars of the financial crisis argue that this crisis' epicentre is the United States. Apparently, some specialists censured the proliferation of poor loaning practices that culminated into sub-prime loans plus related risks' wholesale global dispersal by means of complicated toxic waste-derived monetary tools for instigating the existing worldwide monetary crisis. Others blamed the absence of political intervention or regulatory controls arguing that they encouraged low-interest rates that prompted otherwise faltering economic atmosphere that a chain of minor market-cycle corrections would have better served (Kritayanavaj, 2008).

 

Some scholars argue that the current financial crisis may be a consequence of the inescapable fiscal bubble and housing-burst that usually arises when markets become excessively optimistic. In his argument, he adds that principally, the mental roots of human behaviour are the major contributors of boom as well as bust market cycles. These include over optimism and over confidence in the perception of the markets, lending and borrowing recklessly during the upturn, short-term speculation, misconceptions on price appreciation easy profit making, excessive greed in addition to unwarranted distress, depression, fears and panic in the event of any slump, which yields great crises (Kritayanavaj, 2008).#p#分頁標題#e#

 

Spiegel and Rose (2009) argue that the current global financial crisis has its roots deep into the historically enormous housing and credit bubble. It involved several parties and players among them being mortgage lenders and brokers, dealers and issuers, investors, borrowers, investment banks, credit rating and securities agencies, financial innovators, regulators and financial insurers. For a long time, housing has been a chief contributor to United States' and other nations' growth of the economy. Formerly, the growth of housing at all times has had positive contributions towards the overall consumption, society's well-being as well as employment. In their view, an intricate and lengthy string of causes and upshots culminated to the current financial crisis.

 

Davis (2009) points out that obscure financial institutions traded arcane securities, which developed problems that rapidly spun unmanageable, potentially jeopardizing global capitalism itself. He argues that the mortgage crisis, like a loose thread that enweaves an entire sweater, evolved into a credit crunch and eventually into an economic crisis, which to him competes with the 1930s Great Depression.

 

For over a decade, there was succeeding rise in the rates of housing prices tantalizing housing speculators that elongated a flourishing market. Most of mortgage lenders started pursuing irresponsible lending practices including giving loans to sub-prime borrowers. Yardney (2007) explains that these borrowers with little or no income, little or no equity and a poor credit history received variable interest rate mortgages, which they could never have paid for. They later traded these loans in the secondary mortgage market for securitization. Being hopeful of higher yields, they also sold to investors many securities backed by mortgage payments together with other sophisticated and innovative debt products backed by sub-prime loans (Patrick, 2008). Agencies for rating, by use of high credit ratings, strengthened confidence in these characteristically elaborate mortgage securities as well as those who issued them. For the reason that the demand for these complex investments was high, lending standards slackened and in so doing encouraged more loans. This augmented house prices thereby fuelling an outsized housing market bubble (Cannon, p1, 2009).

 

White (2009) attributes the chief causes of the downturn and fiscal crisis to misguided monetary as well as housing policies, which were a serious blow to the U.S economy. Mangun (2008) asserts that by cooperating with Government policy of increasing homeownership, lenders were making a fortune and for them to allure more borrowers, they reduced the credit standards to obtain loans. Horwitz (2009) adds that the extension in risky mortgages to borrowers whose own credentials under qualified was imprudence, which the federal government nurtured. Liebowitz (2008) likewise argues that probably, the greatest mortgage crisis scandal is that it directly culminated from a loosening of underwriting standards on purpose. The motive behind it was ending discrimination in housing, regardless of warnings that it could generate extensive defaults. As for Miripol (2008), he censures unscrupulous lending practices, relaxed underwriting criteria, under-supported homebuyer education and portfolios containing exotic mortgage products.#p#分頁標題#e#

 

Mortgages securitization as well as the ease of refinancing attuned a homeowners' generation to once-obscure numbers such as the London Interbank Offered Rate (LIBOR) and riveted attention on the Federal Reserve's decisions that now had instantaneous pocket book upshots. Records show that during the recent housing bubble's boom years, homeowners extracted approximately eight-hundred billion dollars annually in equity (Greenspan & Kennedy, 2008). Serial refinancers together with those who drew on home equity credit lines depended on unremitting increases in the prices of homes as well as favourable rates of interest from the Fed to recompense stagnant wages.

 

Davis (2009) points out that through sites like zillow.com, the Web permitted individuals minute-by-minute access to numbers, for instance the purported value of their house and their credit rating. They were presented with progressively more new means of accessing finances from the capital markets, for example, by selling to vendors their future life insurance payoffs - these vendors afterward securitized them after packaging them with other insurance contracts. Just as it had remade the banking industry, securitization reformatted the household budget.

 

Kritayanavaj (2008) asserts that the 2008 United States' housing market bubble-burst is a corollary of over ten years of housing boom that has culminated into a complete worldwide economic meltdown. In the period of the boom, many banks raised their leverage by promulgating and in the long run holding more of the composite mortgage securities. Under the motivated of quick profits, they set out on high-risk as well as unsound risk-management practices. As the boom approached its end, lenders were giving dubious sub-prime loans to purchasers without qualifications at first, which extended the bubble and eventually set off the recent global monetary crisis (Kritayanavaj, 2008).

 

Three crucial dimensions of the current financial crisis according to Kilmister, (2008) include the build-up of both household and corporate debt - especially household debt. The other crucial dimension is the possibility of the rest of the world' refusal to fund trade deficits of the United States and United Kingdom and of a come back to international monetary instability and lastly, the ecological crisis' effect on the world economy, accompanied by the likelihood of an end to two decades of low prices of commodities.

 

The worldwide supply chain in finance produced a condition in which in the foreign investors' portfolios, American mortgages were as lethal as melamine was in the American pet owners' dog chow (Davis, 2009, p36). Ivashina (2008) documents that in the year 2008, the months of August, September and October marked the peak period of the economic slump, characterized by a drastic fall in the prices of shares, a considerable rise in the cost of bank and corporate borrowing as well as the volatility of financial market being at levels never experienced before.#p#分頁標題#e#

 

Also in the period of financial crisis' peak was the decline in new loans to large corporations, which really hastened - compared to the preceding three months, during this period, new loans were thirty-six percent less, with October experiencing a predominantly great fall. Lending for leveraged buyouts, for productive investment in addition to acquisitions and mergers fell. While investment grade lending fell by 19 percent, non-investment grade lending underwent a 50 percent drop. Revolving credit facilities correspondingly dropped by 39 percent, which was more compared to term loans that had a drop of 26 percent. In the month of September of the same year, the wellbeing of the banking sector mounted much concern that ensued into banking panic and in the initial half of October, intervention of the world governments was not only vital but also inescapable and so they intervened (Ivashina, 2008).

 

A dramatic worsening of the financial crisis based on debt accumulation characterized the second half of 2008 the main cause being growing recognition that the system's bad debt quantity was much greater than thought previously. This in turn confused the United States' ruling class regarding how to respond to the growing number of loan defaults. Largely due to pressure from Japanese and Chinese investors in Freddie Mac and Fannie Mae mortgage companies, they reluctantly nationalized these companies and then switched suddenly to allowing Lehman Brothers, a leading investment bank, to fold (Gramm, 2009). This step threw the banking system into a more severe crisis in three ways the first one being threatening of banks' solvency owing to the rising tide of bad debt. Secondly, the apparent change in policy of the Federal Reserve from the previous rescue of Bear Sterns generated a dread within the inter-bank lending market. Banks declined to lend to anyone by any means in this market because of uncertainty of which banks would survive causing the system all together to stop working. Lastly, bank shares underwent a freefall owing to stock market investors' panic (Kilmister, 2008).

 

Kilmister, (2008) points out that while these problems were first perceptible in the United States and United Kingdom where bank deregulation and housing booms had been particularly strong, it speedily became apparent that banks, especially from Continental Europe and many other nations, had also made loans in these markets. As a result, the major industrialized countries entirely experienced the effects of the banking crisis.

 

As Bartlett & Ghoshal (2002) elucidate, contradictory sets of external demands (that is forces for worldwide innovation and learning, national differentiations and responsiveness as well as global coordination and integration) may have contributed largely to the widespread of these risky instruments around the world by simultaneous responses to the diverse forces. Devoid of the forces of globalization, at least globalized capital, monetary institutions would have been incapable of borrowing, lending and collateralizing, then borrowing, lending and collateralizing over again (Karam, para4, 2008).#p#分頁標題#e#

 

Open international markets are the result of major nation states' on purpose action, principally the United States. An example of these actions is the exaggeration of global integration benefits - currency integration like dollarization is a good example (Hirst & Thompson, 2002). Czinkot & Ronkainen, (2005) asserts that across the world, there may be conflicting ecological standards more so because of the United States' action of declining to agree to the global standards. This can result into interregional tensions among the major economic power blocs. In effect, for globalization to flourish and for nations to reap an expansive gain from it, there is a great necessity to value and implement the rules of the World Trade Organization.

 

Occurrence and Effects of the Crisis

 

Chari (2008) argues that the financial crisis is evident in the United States and other countries in that there has been a dramatic fall of a variety of stock markets. Additionally, several key financial institutions have failed. There has also been dramatic widening of spreads in the United States and other countries on a variety of assorted kinds of loans over similar treasury securities. Policymakers as well as the financial press hold several views regarding the crisis' nature. For example, they hold the argument that in the nonfinancial corporations' issuance of commercial paper, there has been a sharp decline while there has been an increase in rates to unrivalled levels with a sharp reduction in banks' lending to individuals and nonfinancial corporations. They also argue that in essence, interbank lending does not exist. Homes and index funds ownership ceased to appear like a credible source of economic prosperity and security and instead home ownership left millions financially incapable of moving to pursue new careers, had any been available (Davis, 2009).

 

There is a possibility that the effects of the current global crisis are more intricate, deeper and harder to predict unlike the past ones. It is apparent that the medium as well as long-term effects of a global recession are probable to be gruelling for majority of poor people along with the institutions that serve them (Rolnik, 2009). Subjective evidence from diverse markets proposes that as the effects of the crisis reverberate around the world characterized by credit crunch, job losses, falling demand and currency dislocations, its impact is felt on microfinance institutions (MFIs) in very diverse ways depending on factors like the structure of the liabilities of an institution, its financial status plus its clients' economic health. While policy makers mostly maintained their focus on macro-level measures in many regions, in some regions such as Latin America, they took a cautious wait-and-see approach for the first semester of the year 2009, intending to have more clarity on their steps later this year (Littlefield & Kneiding, 2009).#p#分頁標題#e#

 

Thus far, economic and financial situations in majority of countries present critical dangers, particularly the risks of systemic financial recession. Many of the developed economies including Germany, France, Japan, Italy, United States of America as well as the United Kingdom are now in economic downturn and probable broken cycles. As Kritayanavaj (2008) documents, the International Monetary Fund's report specified that in the year 2009, there would be a fall of these developed economies' Gross Domestic Product growth, contracting from negative 0.3% to negative 1.3%, which would mark the first fall from the time of the Second World War. This is in addition to the International Monetary Fund's forecast that the world Gross Domestic Product would increase just by 2.2 percent compared to the year 2006 and 2007 when the world's GDP was 5.0 percent and 3.7 percent respectively. Further, the projections of the World Bank were that the 2009's global economic growth would merely be one percent (Kritayanavaj, 2008).

 

This global fiscal crisis is the worst to occur since the 1930s Great Depression - it weakened the overall financial and banking markets universally as well as the entire economy of not only the United States but the upcoming markets as well. The countries that this crisis impinged on most severely were those with elaborate capital and financial markets for the reason that the world has evolved into a single economy interlinked by a chain of financial markets, stock markets and international investment trade. In spite of the world having previously endured several crises, those crises did not entail intricate and innovative sub-prime securities backed by mortgage payments, which the global investment banks, big hedge funds, huge mortgage creditors among other huge global financial institutions in the long run dispersed in every part of the world. In other words, the severity of the current crisis when compared to the previous ones is in the fact that it engages more countries, persons as well as financial institutions (Kritayanavaj, 2008).

 

Long and deep global economic downturn is apparent in all countries, with high unemployment, lower trade and exports, shrinking tax receipts, gyration in currencies' value, reduced levels of consumption, decreasing tourism income together with the spectre of deflation being the defining features. Oil and other commodity prices have had a steep fall upsetting many developing plus oil-producing countries' income. All these pressures in developing countries and industrialized ones alike reduce the Governments' capability of steering their economies, with budget deficits rising, for instance in the European Union where the rise in deficits in 2009 was likely higher than the three percent Maastricht mark (d'Orville, 2009).

 

Mwega (2008) documents that the housing bubble burst of the of the United State led to a shutdown of the credit markets as well as failure of main financial institutions, for example Merrill Lynch, Lehman Brothers, AIG among others. Governments, especially if they want International Monetary Fund standby credits, are obliged to prune their budgets in order to achieve as balanced a budget as possible. There is also the return of the deficit spending virtue, accompanied by the need for additional equity in policy-making plus allocation of public funds, which is a moral hazard.#p#分頁標題#e#

 

Its Effects With Regard To Developing and Developed Countries

 

d'Orville (2009) asserts that developing countries, being the most vulnerable and usually innocent bystanders, face a perfect storm. For them, this financial crisis may translate into discretionary funds for various activities such as education, reduced government budget allocations to productive and social sectors, rising poverty levels with indeed over a hundred million people staggering back into poverty since the crisis' onset. Additionally, he asserts that the crisis may translate into more demand for foreign direct investment flows, official development assistance as well as multilateral and Non-Governmental Organization funds.

 

For industrialized countries, this financial crisis may translate into generally more pronounced tendency towards lower Official Development Assistance, Less Official Development Assistance for select sectors as well as reduced Official Development Assistance earmarking and allocations thereby abandoning the recently made commitments, for instance the commitment by the 2005 G-8 Gleneagles to double relieve to Africa by the year 2010. The crisis may in addition translate into less accessibility of discretionary funds and thus stagnant or lower levels of additional budgetary contributions to multilateral associations as well as the lack of willingness to subscribe to novel multilateral proposals (d'Orville, 2009).

 

With regard to the private sector, d'Orville (2009) holds the view that this financial crisis may translate into reduced economic growth and Foreign Direct Investment flow levels, reduced trade with developing countries - trade barriers and custom levels notwithstanding, reduced investment and trade loans in developing countries and disinterest in new private-public partnerships that necessitate private sector funding. Moreover, he adds that the crisis may translate into overall reduction of confidence in market forces as well as reduced foundations-earmarked program funds and donation volume to charities and Non-Governmental Organizations.

 

In response to the current monetary crisis, countries have embarked on the procurement of policy actions as well as initiatives like bailout plans and liquidity injections to revive financial institutions that have suffered insolvency and collapse. A good example is the worldwide central banks' announcement of distressed assets-purchase programs, state-backed personal bank deposits' guarantees and synchronized policy cuts on interest rates. Many countries in addition solicited rescue packages plus liquidity shore up from IMF (International Monetary Fund). On first of October 2008, Congress passed the Economic Stabilization Act in efforts to facilitate the prevention of financial crisis as well as a credit freeze. Other countries, Ireland for example, introduced the Credit Institutions/Protection Act 2008 in response to the crisis (Shah, 2008).#p#分頁標題#e#

 

CURES

 

Using the ASEAN-4 countries (Philippines, Malaysia, Thailand and Indonesia), Goldstein and Institute for International Economics (1998) have discussed several ways of fixing the crisis including restructuring and reforming financial sectors as well as Prudential oversight in countries' economies. Arguing that neglect of financial sector reform was the major cause of trouble, they assert that such reform must be the focus of the recovery package. They add that each country, aided by the World Bank and the International Monetary Fund, should assess the extent to which its financial sector was subject to excess capacity before the crisis. If this excess capacity is larger, the case for the promotion of the exit firms as part of the reforming of the economic sector is stronger. They advocate the closure of clearly insolvent finance companies and banks and recapitalization of those finance companies and banks that are under-capitalized to suit international capital standards.

 

Phelps (2009) who also supports this idea of restructuring of the financial sector points out that the United States' government should assist with the founding of a new class of banks that acquire or possess the proficiency to serve the business sector through lending to companies for innovation and for long-term investment. He adds that this government's help may take either the shape of a subsidy to decrease the cost of capital of the new banks or the shape of an initial endowment that the government contributes to each bank. Trachtman (2009) also emphasizes that people must understand financial regulation as a special rejoinder to the particular of financial institutions' incentive incompatibilities.

 

Additionally, there should be the liberalization limits for foreign ownership in order that foreign financial-service companies can aid in funding this recapitalization as well as contributing to improved diversification of risks and the fortification of overall risk and credit management systems. In a 1998 Claessens' study of World Bank, it was found that the emerging-market banking systems that display rather high foreign participation levels also exhibit lower intermediation costs and lower banking fragility levels. There should also be the promotion of the taking over of weaker domestic firms by stronger ones on condition that such unifications agree with the need of eliminating congestion in the system. Failed banks' small retail investors should be paid off. As a quid pro quo for public funds injection, failed banks or finance companies' management should be sacked and indicted if they participated in fraudulent habits. Their equity holders should also lose their stakes. Moreover, closed institutions' foreign and domestic creditors should be at the back of the line and paying them off should be only as far as there is anything extra subsequent to the closed institutions' assets sale is used to pay back the deposit insurance treasury or fund (Goldstein and Institute for International Economics, 1998).#p#分頁標題#e#

 

The governments affected countries should also commit themselves to considerably improving their financial-sector regulation and supervision systems. They should stress on making stricter practices of loan provisioning and classification and setting up better control and monitoring of foreign-exchange exposure of banks- this includes banks' customers' large currency mismatching. They should also emphasize on the adoption of international standards of accounting, placing tighter controls on connecting lending and on the privatization of banks owned by the state and curtailing policy-directed lending (Mirkovic, 2009). Trachtman (2009) however warns that we must understand that often, regulatory reforms have pro-cyclical motivations, which heighten dangerous phenomena.

 

Goldstein and Institute for International Economics (1998) recommend the countries' signing on to Core Principles of Effective Banking Supervision by the Basel Committee on Banking Supervision (BCBS) and assigning the World Bank and International monetary Fund the duty of supervising whether they comply to these principles as the most efficient way of encouraging this prudential standards' upgrading. They also advise the countries hit by the financial crisis stick to manageable floating exchange rates, not to attempt a return to fixed exchange rates. Active interest-rate policy use during speculative attacks to squeeze short sellers is required while defending a fixed exchange rate. However, high rates of interest are not plausible in countries that are restructuring their weak financial sectors and where growth rates are below pre-crisis levels. They note that under floating exchange rates regimes, real exchange rates' volatility is typically higher as compared to under fixed exchange rates regimes and that high exp[orts shares in GDP and weak domestic demand place much pressure on countries under crisis to export their way out of recession.

 

Goldstein and Institute for International Economics (1998) encourage countries, particularly from Asia together with the G-7 countries, to more closely consult as well as cooperate on exchange rate policies. They emphasize on the usefulness of cooperation groups together with the International Monetary Fund in providing an exchange-rates dialogue and supporting policies as well as counteracting incipient tensions.

 

Another cure that Trachtman (2009) mentions is the fact that macroeconomic management must be capable of recognizing asset bubbles and mustering the political will to respond.

 

Catanach (2010) outlines several recommendations, which he classifies as Regulatory Recommendations, Financial Innovation Recommendations, International Regulation Recommendations and Financial Institution Recommendations. Regulatory Recommendations include shunning regulatory arbitrage, ensuring effective enforcement with an enforcement that is consistent across national boundaries and not regulating borrowers with regulators focusing on the source of credit and using capital requirements to limit excessive power among borrowers. There is also rebuilding responsibility with the financial-services industry exhibiting cultural leadership and encouraging responsible behaviour by every practitioner as well as ensuring high quality regulators who have deep knowledge of the institutions and industries they supervise. He argues that regulator compensation should be competitive with reparation in regulated industries.#p#分頁標題#e#

 

Financial Innovation Recommendations include overhauling rating agencies by restoring the confidence of investors confidence in rating agencies through the elimination of conflicts of interest between issuers and agencies, returning to a model of 'investor-pays', differentiating between corporate debt ratings and structured financial products as well as promoting new applicants to the credit-rating business. There is also improving products' price and structural transparency using stress and modelling testing to make sure that downside scenarios are as apparent as upside scenarios, resisting over-regulation and balancing the cost of regulation against the benefits, promoting risk management, and elevating risk managers to at least the same level as product makers giving them sufficient representation at board level. For risk managers, there should be the creation of globally recognized qualifications and the implementation of standard certification through a risk-driving test. Both at the market and firm level, financial infrastructure should match with the innovation that it supports (Catanach, 2010).

 

International Regulation Recommendations include empowering the Financial Stability Board, Focusing on global economic imbalances and incorporating this process with financial stability discussions, countries following the Financial Stability Board, clarifying the role of IMF whose focus should be on global imbalances and deferring financial-stability principles to the Financial Stability Board examining responsibilities. There should be a revision of IMF quotas to reflect global economic realities (Catanach, 2010).

 

Financial Institution Recommendations include holding to higher standards of governance systemically important institutions and achieving greater transparency and creation of a market structure to aid in orderly unwinding of failed financial institutions. There is also higher capital requirements including raising risk weightings, liability/asset limits founded on the business model instead of on simple capital ratios, plus dynamic provisioning and contingent capital for financial institutions whose systemic significance needs national authorities' underwriting. Another financial institution recommendation is ensuring that systemically important banks present regulators with living wills indicating how they would unwind business in case of unsustainable losses and regulatory mandate whereby regulators should have a strong and clear control of financial stability and should collaborate across borders maintaining a level playing field (Catanach, 2010).

 

CONCLUSION

 

The current systemic monetary crisis is really a global problem, which the global community must resolve. There is no single country with adequate resources and power to tackle it effectively. Any resolution would consequently demand the synchronized transnational efforts in order to yield a basic reformation of the financial atmosphere all over the world. This may require the intervention of a strong world organization, for instance a global central bank, to engage in the management of regional and/or global economic crises that may possibly manifest themselves incessantly.#p#分頁標題#e#

 

It therefore calls for harmonized and intensive efforts of central banks along with wealthy governments primarily from economic super-powers of the globe. In fact, they must draw essential lessons from the crisis, which they would employ to either avert its recurrence or competently manage it the next time it comes about. The crisis also offers an opportunity to the global society to reform and streamline the international system of monetary regulation with apposite structures for the modern political, financial and economic environment.

 

It is also imperative that all recognized international organizations including the World Bank, United Nations as well as International Monetary Funds among others undertake a review and reformation on their current roles in order to be in a better position to provide long-term financial stability in addition to dealing with any global fiscal crisis in future. Additionally, creating other new and more influential organizations, for example a new global central bank, would also effectively manage the current fiscal crisis plus others that may crop up in the future. Such organizations would take up the responsibility of overseeing the stability of the world's monetary system in addition to supervising and regulating financial institutions across borders, formulating stimulus or rescue plans in case of global fiscal crises as well as coordinating with respective nations' central banks.

 

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