The United States along with United Kingdom’s ruling authorities had to formulate various regulations to bring the arising global financial crisis under control. The Federal Reserve of the United States just like the other central banks within the globe had to implement regulations aimed at expanding the money supplies to overcome the emergence of the deflationary spiral risk. In the course of the financial crisis, the high unemployment rates along with lower wages contributed towards the significant drop in international consumption. As a result, the U.S government formulated very ambitious fiscal stimulation packages.
These packages were developed through borrowing along with spending to offset the considerable drop in demand which was being experienced within the private sector after the emergence of the financial crisis[1]. The U.S implemented two distinctive stimulus packages within the years of 20008 and 2009, which were worth approximately one trillion United States Dollars. In the course of the financial crisis, the United States financial system was on the verge of collapsing.
Nevertheless, the response which was undertaken by the United States Federal Reserve was immediate, as well as, dramatic. During the 2008 final quarter, the U.S central banks purchased the government debt, which had reached the margin of 2.5 trillion United States Dollars. In addition, it purchased the assets of the private banks, which were experiencing various financial troubles. It has been established that such liquidity injection within the credit market is one of the largest ones historically. Besides, within world history, it remains to be the biggest monetary policy action.
While still attempting to salvage the country from the financial crisis, the US government increased the national banking systems’ capital by 1.5 trillion[2]. The government made this accomplishment by purchasing the preferred stock, which had been newly issued by the principal banks. In October 2010, under the Joseph Stiglitz (a renowned Nobel laureate) sediments, the United States Federal Reserve had also formulated another monetary policy.
In this policy, the Federal Reserve had resolved to create currency to combat the emerging liquidity trap. By coming up with about 600 trillion Dollars and placing the money directly to the bank, the Federal Reserve’s idea was to attract the financing of more loans domestically and also finance mortgages by the banks. However, it was established that the banks ended up using the money to make investments within the emerging international markets[3]. Besides the banks were also making investments within foreign currencies. Stiglitz along with other critics points out that these steps taken by the bank may bring about currency wars as China diverts its currency holdings from the U.S.
The government is also putting into consideration bailing out the various firms, which are experiencing financial obligations. It is a fact that, presently, quite a few agencies from the government in the United States have either exhausted or dedicated great sums of money in loans, asset purchases, direct spending, and also guarantees. However, it emerges that the bailout is been accompanied by significant controversy. In that regard, various “decision-making frameworks” have been formulated to balance the competing policy interests in the course of the financial crisis.
In June 2009 Barack Obama, who is the U.S President along with other key advisers brought up several other regulatory proposals[4]. The proposals look at things like the protection of the consumer, the requirements of capital by banks, executive pay, “expanded shadow banking system regulation and derivative” together with improved Federal Reserve authority to recover important organizations in a way that is secure and systematic.
In early 2010, Obama put up more regulations that restricted the banks from taking part in proprietary trading. The proposals were nicknamed “The Volcker Rule” in the honor of Paul Volcker, due to his great advocacy for the introduced changes publicly. Moreover, during May 2010, the regulatory reform bill was passed by the United States Senate[5]. There are also various Acts, which were introduced by the Senate to resolve the emerging financial crisis.
The 2008 Housing and Economic Recovery Act was one of the Acts, which were introduced in order to combat the financial crisis phenomenon. This specific Act comprises of six different major Acts formulated with the intention of restoring confidence within the country’s mortgage industry. There are various specifications, which were outlined within the Act. In the first place, around 3000 billion USD would be provided as mortgages’ insurance so as to assist approximately 4000,000 homeowners. Secondly, the Act led to the establishment of a new regulator.
The already existing two authorities, that is, OFHEO (Office of Federal Housing Enterprise Oversight) along with the FHFB (Federal Housing Finance Board) would be merged to have only one authority, which would be termed as the Federal Housing Finance Agency. The newly formed body was endowed with extra powers, as well as, authority, which were greater than those of its two predecessors were[6]. The new agency was given the mandate to supervise the GSEs, which stands for, Government Sponsored enterprises, which were fourteen housing projects. The supervision of the Feral Home Loan banks which are around twelve in number.
In relation to the Act, the dollar limit within which the GSEs could purchase mortgages was raised. In addition, the mortgage disclosures were enhanced after the implementation of the Act. A 8000 billion USD increase within the ceiling of the national debt was introduced so as to enable the Treasury to assist what are considered as secondary housing market along with the earlier mentioned 14 GSEs, in the event that the need arises. To add to this, referring to the Act, the assistance by the communinity wuld be used so as to help the local government in buying, and also, repairing foreclosed properties. In addition, owner-occupants would be given laid in form of loans so as to finance their mortgages again at foreclosure risk.
The other Act, which was introduced by the Obama administration with the aim of combating the financial crisis, was the Dood-Fran Wall Street Reform and Consumer Protection Act[7]. This Act is basically concerned with bringing about reforms within the financial sector. It wads actually implemented within the July of 2010 after garnering a lot of support from the democrats. The Act is considered to have brought about effective financial regulation within the U.S.
On top of bring about various regard the banks’ along with insurance companies’ capital investment; the Act also introduces novel regulation regarding hedge funds along with private equity funds. Moreover, the Act altered the accredited investor’s definition. It also requires all public companies to produce reports illustrating the CEO to junior employee salary ratios along with any other relevant compensation data. Besides, the Act enforces regulations encouraging the equitable credit access by all consumers. It also offers incentives so as to encourage banking among citizens who are either low or medium income earners.
There are other objectives, which led to the enactment of this legislation. One of the objectives was to improve the accountability along with transparency of the United States’ financial system so as to ensure that the country was financially stable[8]. The Act was also aimed at protecting the taxpayers by bring to an end bailouts. Furthermore, upon its successful implementation, the Act would offer consumers protection from abusive financial practices, which aggravate the emergence of financial crisis. Through the Act, an effective warning system was established which could aid in determining the country’s economic stability.
In addition, corporate governance along with executive compensation rules is also featured within the Act[9]. In fact, the Act has effectively sealed most of the major loopholes, which are thought to have brought about the economic recession experienced in the course of 2008.
On the other side, the United Kingdom responded to the financial crisis by developing a bank rescue package. The rescue package was valued at 500 billion Great Britain Pounds. The package was actually announced by the government in the month of October 2008[10]. The reason behind the implementation of the rescue package was the major falls, which had been experienced within the country’s stock market. In addition, the British banks stability had become questionable.
The plan was targeted at restoring confidence within the market and assist in the stabilization of the country’s banking system. This bailout was actually similar to the 2008 Emergency Economic Stabilization Act introduced within the United States at around the same period. The plan provided for the establishment of various funding sources. In accordance to the plan, the Special Liquidity Scheme would offer short-term loans of approximately 200 billion Great Britain Pounds.
In the second place, the rescue plan outlined the manner in which the United Kingdom government would offer assistance to British banks in accomplishing their objective of increasing their market capitalization by establishing the Bank Recapitalization Fund[11]. Every bank would receive at least 25 billion Great Britain Pounds and have the right to request for additional 25 billion Greta Britain Pounds if the need arises. The third point is that, the government in Britain would provide a temporary underwriting of all qualified lending amongst the banks; this would give a 250 Great Britain Pounds loan guarantee approximately. “Following the Exchequer Chancellor, Alistair Darling’s statement on October 8 2008, to the House of Commons the plan was designed with an objective of restoring confidence to the banking system” [12].
The Exchequer Chancellor further explained that in the event that the proposal was successfully implemented, the British banks would get a stronger funding footing. Similarly, to the other central banks of the countries who are OECD members, the Bank of England was set to decrease the interest rates by at least 0.5%. Actually, after making the move, the European stock exchanges started to show indications of recovering from the earlier losses incurred in the course of the financial crisis.
The United Kingdom’s government also decided to undertake capital investment to combat the emerging 2008 financial crisis. The Bank Recapitalization Fund was used by the government on the affected banks by buying some of their shares. The percentage of the stake to be acquired in any bank would be agreed on with the management of the specific bank. Banks, which obtain the proposed rescue packages, would have to adhere to the executive pay along with existing shareholders’ dividends restrictions. In addition, such banks would be compelled to provide reasonable credit to both small businesses, as well as, homeowners. The main objective of the government in this plan was to pay for the cost of the program through share acquisition. Later on, other participating banks were given the opportunity to underwrite new shares. The plan can be considered to have been characterized by partial nationalization.
However, the banks were given the authority to take part in the plan with regard to their needs. It is essential to note that the rescue plan implemented within the United Kingdom was quite different from the United States’ bailout program, which was termed as the Troubled Asset Relief Program (TARP)[13]. It is different in the fact that while the United Kingdom government was focused in purchasing bank shares, which could be quite beneficial to the taxpayer in the near future; the U.S government was focused on acquiring mortgages backed by the American bank’s securities, which are not available within the mortgage securities’ secondary market. Even though the U.K package resolves issues related to solvency, the U.S program was structured to resolve the current funding shortfall.
Reference List
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Great Britain, & Great Britain. Themes and trends in regulatory reform: Ninth report of session 2008-09. London: Stationery Office, 2009, p. 73.
Impavido, G., & Tower, I. How the financial crisis affects pensions and insurance and why the impacts matter. Washington, DC: Internet Monetary Fund, 2009, p. 98.
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