Money Banking and Financial Markets Article Review

Excerpt from Article Review :

economic crisis in Europe and the increasing costs for European countries to borrow money and bail out other Euro countries in financial distress. The EU nations that use the Euro have experienced a crisis among certain countries with high debt requiring bailouts for Greece and Ireland and the likelihood that Portugal and Spain may also need a bailout. Postponing the restructuring of high interest debts has led to further crisis rather than resolving any of the problems faced by insolvent countries. Huge transfer payments from the more powerful Euro countries, like Germany, to the failed economies of Greece and Ireland have made investors nervous and led to less investment at a crucial time. The author suggests that the debts of troubled countries need to be restructured now in order to create a sustainable payment to increase confidence and secure future payments.

Creditors will also have to shoulder some of the burden of bailing out Ireland and Greece to allow the troubled economies to recover and build sufficient cash levels to support their banking systems. Failing to restructure now has the possible consequence of pulling the Euro countries deeper into the financial crisis.

II. The Federal Reserve System and the Credit Crisis

The increase in available credit to home buyers has been a goal of the Federal government for many years which has been assisted by several Federal agencies and the creation of new laws. One of the goals of Fed is to increase the availability of mortgages to minority and low income home buyers by subsidizing loans and being a lender of last resort. In recent years the private industry created more available credit for subprime mortgages that resulted in a resistance by the Fed to regulate the subprime mortgage industry. The Fed's mission is to make monetary policies with the goal of attaining long-term growth in the economy and it is therefore not well suited to policing specific industry practices, such as the subprime mortgage industry.

The growth of privately held mortgages caused banks to extend credit to riskier buyers which reduced the amount of loans the government secured. The private mortgage industry was overly susceptible to housing prices and in 2008 when home values dropped it affected other asset backed securities, which was an unexpected consequence of the failure of the subprime mortgage market.

The failure of hedge funds caused by overinvestment in the collapsed subprime market called for better risk management, but since it was not mandated by the Fed it did not occur. Hedge funds are designed to allow risky investments and the Fed was challenged by the greater amount of private investing because this was done outside of the banks and lending institutions that the Fed was used to dealing with and regulating. The proliferation of investment instruments outside of the normal banking channels has led to a whole new network of influences on the Fed. The Fed has become a source of credit for specific companies rather than making broad policy decisions on interest rates to influence risk taking of organizations. This has created a situation where companies are taking huge risks for their own profit knowing they can get a bailout from the Fed at the taxpayers' expense if things go south.

The increasing role of private industry in lending activities has created a gray area for the Fed and brought the possibility of more regulations from political leaders. The Fed will need to take on a broader role in regulating the non-banking industries in order to make effective policies that will have the desired effect on the risk taking activities of organizations.

III. China's Leadership Role during the Global Financial Crisis

The Chinese economy began its slow and methodical reform to a market economy in the late 1970's. The government has continued to be in control of economic policy, especially in times of crisis, but allowed market forces to help grow the economy. Opening its doors to foreign investment and joining the international financial markets in recent years has allowed continued growth in the economy, but also tied China's economy to the world market, thus opening it up to the fluctuations of other countries' economies. China's banks are still largely government owned and the policies and structure of the economy have been carefully controlled by the government while allowing markets to operate under a market system.

The Chinese people are savers and do not rely heavily on credit, which has affected the economy by giving banks more money and less debt. The exchange rate has remained stable for many years, which has been argued to be artificially lower and therefore it may reflect an undervalued currency.

China's economy is growing and the country has been focused on controlling its growth to keep its economy in check. China experienced a downturn in its economy just the same as the rest world during the economic crisis which overtook the U.S. In 2008-2009. Decreased demand for China's exports was the major outcome of the financial downturn and it caused lost jobs and factory closures in many areas of the country. Despite this, the economy continued to grow despite the economic downturn, thanks in large part to the planning done by Chinese leaders at the onset of financial trouble in the United States. When the U.S. economy collapsed, China implemented tighter regulations and policies affecting its real economy, such as the creation of employment through stimulus projects funded by the government, because its real economy influences its financial economy.

A stimulus package was implemented in China for 2009-2010 that increased government spending on infrastructure in several areas to create jobs and stabilize its economy. China has typically held tight control on the supply of money because of concerns about inflation, but during the financial crisis interest rates were cut and required reserves lowered to increase the money supply.

China has been criticized for undervaluing it's currency to gain favorable advantages in its exports which it has denied. At the same time China has criticized the U.S. For not controlling the value of the dollar, a concern that is justified in light of the fact that China is the U.S.'s largest creditor. Despite the tension between the U.S. And China, the two countries are becoming more dependent on one another as the dominate economies in the world.

IV. Technologies of Compliance: Risk and Regulation in a Digital Age

In the information age, the availability of information is staggering, especially in the financial world. In order to deal with the problem of analyzing massive amounts of data to manage risk and remain complaint, financial institutions have turned to sophisticated computer systems to assist them. Software companies have responded to the needs of financial companies to adhere to stricter regulations by offering a suite of software designed to help financial institutions manage and analyze data.

The heavy reliance on technology however has its pitfalls. People are still involved in the creation of formulas and assumptions that measure the risk and determine the outcomes of the information. The leadership of organizations remains responsible for the overall performance of the organization and its processes, including any inherent bias or influence that creeps into the system, but this hasn't prevented this from happening.

Government regulation of financial institutions is designed to mitigate risk, but because risk stems from many factors, it's difficult to create appropriate regulations that are broad enough or specific enough to cover all aspects of risk. Regulation is necessary, however, because after the damage has been done there is often no entity remaining to be sued and no way to compensate the people who were wronged by bad actors.

The current regulatory schemes in place mandate that companies set up certain controls for privacy, accuracy and accountability, but give management broad scope of how to implement the necessary processes. The banking industry is heavily regulated and required to implement internal controls to manage risk, protect the privacy of customer information, detect money laundering, and hold financial advisors to high standards of accountability. In the wake of the recent economic crisis there has been a call for more regulation of both financial and non-financial industries.

The laws enacted by Congress are necessarily broad and the details of implementing the laws are left for administrative agencies to fill in with regulations. To an extent businesses are given wide discretion in complying with regulations by developing their own systems and processes to provide the necessary information for effective oversight. The increasing complexity in financial instruments and regulatory compliance has required the extensive use of computer technology.

Computer programs are ideal for large data projects because they can organize and analyze large amounts of data to recognize trends and patterns given certain parameters. This can lead to an automated process of collecting, analyzing and decision making without a great deal of intervention from people.

Third party vendors make software for organizations to manage risks and to maintain compliance, but the software still requires the end user to identify the inputs that…

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