¶ … 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...
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