US &UK Regulatory Response to the Current Financial Crisis

General Overview

The United States’ along with United Kingdom is ruling authorities had to formulate various regulations in order 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 with the aim of the offsetting the considerable drop in demand which was being experienced within the private sector after the emergence of the financial crisis (Birdsall & Fukuyama, 2011). 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, United States financial system was at the verge of collapsing. Nevertheless, the respond which was undertaken by the United States’ Federal Reserve was actually 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 to the aforementioned counter actions, 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 the world history, it remains to be the biggest monetary policy action.

Discussion

While still attempting to salvage the country from the financial crisis, the US government increased the national banking systems’ capital by 1.5 trillion (Lannoo, 2008). The government made this accomplishment by purchasing the preferred stock, which had been newly issued by the principal banks. Joseph Stiglitz (the Nobel winner) states that other monetary policies had sprung within the final months of 2010. In these policies, the Federal Reserve had resolved to create currency with the aim of combating the emerging liquidity trap. The Federal Reserve thus realized huge sums of dollars (about six hundred billion USD) to the country’s banks. Their aim was to entice the banks to undertake more lending, as well as, mortgage refinancing. However, it was established that the banks ended up using the money to make investments within the emerging international markets (Pozen, 2010). Besides, the banks were also making investments within foreign currencies. Stiglitz along with other critics point out that these steps taken by the bank may bring about currency wars as China diverts its individual currency holdings from the U.S.

The Response

The government is also putting into consideration bailing out the various firms, which are experiencing financial obligations. In the factual sense, presently, different agencies within the country are diverting their cash towards asset purchasing, lending, in addition to offering guarantees in lump some amounts. However, it emerges that the bailout is been accompanied by a significant controversy. Consequently, effective counter action measures have been instituted in order to resolve any emerging contradictive policy specifications within the financial crisis period.

In the course of the month of June 2009 Barack Obama, who is the U.S President along with other key advisers brought up several other regulatory proposals (Savon, Kirton & Oldani, 2011). The proposals actually address issues such as consumer protection, bank capital requirements or financial cushions, executive pay, expanded shadow banking system regulation and derivatives along with enhanced Federal Reserve authority to wind-down vital institutions in a systematic and secure procedure. Banks’ activities within propriety trading were imposed with restrictions by the extra regulations brought up by the President. Moreover, during May 2010, the regulatory reform bill was passed by the United States’ Senate (Lannoo, 2008). There are also various Acts, which were introduced by the Senate in order 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 (Kolb & Wiley InterScience, 2010). 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. The mortgages purchasing rate value by the GSE’s would escalate in accordance to the freshly brought up Act. 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. On to p of this, the Act clearly specifies that the foreclosed properties would be refurbished and bought by the local governmental agencies in partnership with the business community. Either way, by making use of foreclosure risks, mortgages refinancing loans will be available to the genuine owners. 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 (Kokkoris & Olivares-Caminal, 2010). 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 to encourage banking among citizens who are either low or medium income earners.

Detailed actions taken

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 (Impavido & Tower, 2009). 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 (Savona, Kirton, & Oldani, 2011). 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 (Great Britain., & Great Britain, 2009). 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 of the Bank of England 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 (Goodhart, 2008). 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 banking corporations willing to take part in the government sponsored lending within UK would enjoy a bank rolling allowance of loan guarantees amounting to almost 250b GDP (GDP-Great Britain Pounds). Actually, the banking operations would regain confidence according to Alistair ideas. Alistair Darling was at the financial crisis time, the U.K‘s Exchequer Chancellor. 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% (Birdsall & Fukuyama, 2011). Upon implementing the aforementioned strategies, the U.K’s economy began to recover noticeably. The United Kingdom’s government also decided to undertake capital investment to combat the emerging 2008 financial crisis. The percentage of the stake to be acquired in any bank would be agreed on with the management of the specific bank. Banking corporations seeking to be considered for the alleged rescue packages are expected to observe stringently to the restrictions regarding executive remuneration along with dividends’ disbursement. Homeowners along with business enterprises were also supposed to enjoy on a fair ground, the credit facilities from the benefitting banks. The long-term motives of the ruling authorities’ suggestions could be appropriately focused on. For instance, it could easily established that all the expenses which could be incurred by the Obama administration in putting the aforementioned program in full operation would be compensated by the selling the shares in the event that the shares market becomes conducive. The benefitting banks had a high likelihood of having their novel shares hitches been underwritten. The plan can be considered to have been characterized by partial nationalization.

Conclusion

On the other hand, the banks would be permitted to participate in the plan in accordance 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) (Barth, 2009). 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

Barth, J. R. (2009). The rise and fall of the U.S. mortgage and credit markets: A comprehensive analysis of the market meltdown. Hoboken, NJ: J. Wiley & Sons.

Birdsall, N., & Fukuyama, F. (2011). New ideas on development after the financial crisis. Baltimore: Johns Hopkins University Press.

Goodhart, C. (2008). The regulatory response to the financial crisis. Munich: CESifo.

Great Britain., & Great Britain. (2009). Themes and trends in regulatory reform: Ninth report of session 2008-09. London: Stationery Office.

Impavido, G., & Tower, I. (2009). How the financial crisis affects pensions and insurance and why the impacts matter. Washington, DC: Internet Monetary Fund.

Kokkoris, I., & Olivares-Caminal, R. (2010). Antitrust law amidst financial crises. Cambridge: Cambridge University Press.

Kolb, R. W., & Wiley InterScience (Online service). (2010). Lessons from the financial crisis: Causes, consequences, and our economic future. Hoboken, N.J: Wiley.

Lannoo, K. (2008). Concrete steps towards more integrated financial oversight: The EU’s policy response to the crisis. Brussels: Centre for European Policy Studies.

Pozen, R. (2010). Too big to save: How to fix the U.S. financial system. Hoboken, NJ: Wiley & Sons.

Savona, P., Kirton, J., & Oldani, C. (2011). Global financial crisis: Global impact and solutions. Farnham, Surrey: Ashgate.