As the headlines in today’s newspapers all around the world show, there is a global economic slowdown. Economies all over the world are being plunged into what is tentatively being called “Recession. ” While there are those who believe that this is simply an expected trend given the rapid growth of the global economy, it still does not detract from the fact that it is an urgent and pressing problem. In order to address this problem, several governments have issued massive bail-outs and laws designed to manage the system.
In line with the principles of Keynesian Economics, it seems that the government is the only player capable of solving this problem. It is this government intervention through the Federal Reserve, led by Ben Bernanke, that is touted as the solution to the country’s, if not the world’s, economic problems. According to most economists, the current bailout scenarios that have been presented are nothing more than prime examples of throwing good money after bad.
Instead of tackling the problem head on by implementing sound fiscal and monetary policies, the United States government is bent on revitalizing the economy by allowing massive losers such as the AIG group to continue accumulating losses and patronizing its already proven bad habits. The main strategy here, as employed by Chairman Bernanke, is to pump prime the economy through a mixed strategy of monetary and fiscal policies. It is posited that increasing funding to these “black hole institutions” will be the key to ending this financial crisis.
One of these policies is the voluntary capital purchase program. It is aimed at selling preferred shares of stock to the United States Government on favorable terms that afford the maximum amount of protection to the taxpayer. Another policy that has been implemented is the systematic risk exception under the FDIC Act which grants the FDIC the power to guarantee, on a temporary basis, the senior debt of all FDIC insured institutions. The third policy that has been announced is the increased access to funding for all of the businesses in various sectors of the American economy.
The goal of this is to stimulate economic growth on a micro level in order to develop solid economic fundamentals that can help resuscitate the economy. Other steps that the Federal Reserve has taken include the strengthening of capital position and funding ability of American Financial Institutions. These are to be achieved through multilateral agreements such as the reciprocal currency arrangement (Swap Lines) with International Central Banks.
Finally, the heralded US $700 billion bailout plan that was recently enacted into law has also been designed to infuse much needed capital into the market and to protect the exposure of several multinational and local financial institutions. While there are indeed real benefits for pump-priming the economy, the more pragmatic approach is to control spending. One of the options available to control this problem is to adjust interest rates in order to prevent capital flight and also encourage more investors to bring in foreign currency. By increasing interest rates the demand for local currency is increased.
The reason for this is that only the local currency can be used in transacting business in the country. This means that investors have to convert their foreign currencies into local currency in order to be able to do business transaction in the market. If foreign investors come into the country then there will now be a marked increase in the demand for the local currency thus stabilizing the exchange rate once more. While there is certain economic and political sense in the policies of Bernanke, the herculean task of rehabilitating one of the world’s largest economies cannot be done through the efforts of the Federal Reserve alone.
Even employing one or a mix of the strategies would only be preliminary to finding the real solution to the problem. So while current theories show that monetary and fiscal policies may indeed impact inflation and unemployment thus alleviating the economic situation, such is not always the case in certain situations as shown in the example provided. The basics such as solid economic fundamentals must always be considered when looking at the impact of such changes to see if they can really attain the desired effect.
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