Credit Crunch: Business Analysis

Introduction: General View on Credit crunch

Any large business house, consumer expenditures or governmental schemes may borrow public money in the form of selling shares.¹ It is the function of large financial institutions, such as banks, to issue or generate credit transactions. A smooth inflow of credit between the borrower and the lender is what establishes ideal market conditions. A credit crunch occurs when there occurs a lack of obtainable credit in the market and the borrowers cannot find adequate finance. Usually such a phenomenon happens when the creditors are unwilling to invest more money or hike up their interest rates to such exorbitant levels that it becomes virtually impossible for the lender to borrow.²

The central question, then, is why do the creditors suddenly refuse to invest more money? Actually, far from being an isolated fact, it is a part of a complex chain reaction. The lenders reel under deficit money supply when they fail to realize the interest or even the actual capital they had invested on companies or institutions, which accrued a disastrous amount of losses. Such loss incurring companies cannot return the money they had borrowed from the creditors and have to default payment. However, when the prices begin to fall, even the bank has to sell out at considerably lower prices and suffer huge losses.

Consequently, their ability to lend money is severely crippled. In certain cases, the banks are required to raise the level of capital reserves and to comply with this have to restrict lending. Even when banks perceive a risky market, interest rates may shoot up to discourage lending to credit crunch.³

Credit Crunch: United States’ Economic Parameters

Capital Flows

An increase in the level of capital mobility has made it relatively easy for much bigger current account deficits to be financed. As a result, such deficits have definitely undergone a growth in the past few years. In fact not only have these deficits grown they have also grown at a rate which is far higher than the rate at which the global economy has been growing. On the whole, we find net capital from the developing countries have been flowing quite consistently to the industrial countries in the last few years. This is a significant change in the global economy since even a decade back the majority of the capital movement was from the industrial countries to the developing economies.

Now that we have got a good sense of the exact proportion of the capital flows that we have been talking about so far let us look a little closer and find out more about the gross figure that make up these net amounts. This is harder than it sounds because unlike information concerning current accounts the data regarding gross capital flows is neither consistent nor easy to unearth.

However, though it is difficult to find the exact estimates of the gross in and out flows of the developing economies during this particular year (2007) we may easily find the ‘reasonably complete’ information regarding the same during a previous year, such as the year 2005. In 2005, we find, all the developing economies taken together had a gross capital inflow of about $720 billion. It might be logical to point out that this amount was double the quantity of inflow recorded for the year 1996.⁴

Demographics and the Job Market

An adverse effect of the Credit Crunch Crisis could be that financial service division could contract thus becoming less significant in the world and national economies. Until and unless the financial institutions kick back creating newer value products for the customers, the people will have to suffer. Already thousands of people have lost their job, and not just the union jobs but also the executives have been sacked. The workers are in a stressful and fearful situation and have turned out to be the permanent victims of this economic system, which has rewarded the wealthiest, but left out the working people.⁵

In July this year, unemployment amplified more than in any other month for the last 16 years. This has heightened the fear of the people that the Credit Crunch Crisis and the associated slowdown in the housing market are going to have a serious impact on the labor market. The economic activities and failing business confidence has taken a toll on the labor market. The rise in the number of unemployed people is creating pressure on house prices due to which houses are being sold at a more low rates.⁶

Last year in the USA, the number of people who worked in the finance industry accounted for a little over one third of the total income earned by the whole city, which is almost double the amount which was there 30 years ago. Current records say that if USA’s economic problems persist, in the state of New York alone more than 40,000 people in the private sector will loose their job and the state will loose over $3bn in tax revenues in the next two years.

Experts believe that the banks and the other financial institutions all over the country need to lend money in order to make some. The value of property is being affected causing huge losses to the local property tax. The state, without the property tax, has to rely more on its income tax receipts. As the returns on the investments are being reduced for the employee pension funds, the employees will have to make a greater contribution towards it in the forthcoming years.

Heitfield pointed it out, “Financial regulators did not adequately distinguish between structured and unstructured credit exposures”. Alongside, “Investors, attracted to higher yields, relied on credit ratings, ignored exposure to systematic risk”. He also stated that “Originators, underwriters, and sponsors created increasingly complex structured products, but did not always supply investors with sufficient information on the assets backing them”.⁷ All these elements summed up to build up the current crisis.

Employment, Unemployment and rate of Unemployment for New York State, September

Following these assumptions, the study argues that in planning, the labor market must form an integral component of policies, given the role it plays in redistribution, increasing productivity, and raising national standards of living. It asserts that active labor market policies that set minimum conditions yield more superior outcomes than passive policies that leave everything to market forces. It argues for the protection of minimum conditions of employment and income security. It further states that the government is a potent player in the power dynamics of the nation, and any policies that may adversely affect its existence may be sacrificed.

Negative Balance of Payment

By the term trade deficits, it is obvious that US is consuming more than its gross output. Thus it could be mentioned that the country is investing more than saving. Thus, it is logical the US should be running a merchandise trade deficit year after year since the early 1980s. This is indeed a problem because this means that a country is not able to produce or market enough materials or services to export internationally. This also signifies that the total imports are higher than the total export amount. This means the country with a current account deficit is moving towards as state of economic structure where there would be more debts payable than receivable.

This creates an essence of negative market growth where the local currency is deemed to be devalued and thus investments in-house would loose cost advantage whereas overseas investments would gain. However, at the end measures the current account deficit would create as slowdown of economy as there would be more credit turnover in the international market structure. ⁹

It can be stated “The year-long credit crunch has made it harder to get construction loans as well as individual mortgages. In addition, dramatic changes have been made to the city’s 421-a tax abatement program for housing, and while the full impact remains to be seen, several developers of affordable housing have publicly expressed deep concerns over possible adverse effects.”¹⁰

It should be remembered that under these conditions, “Blackstone closed a record $21 billion fund just as the credit crunch began in August 2007, and has reportedly raised the first $9 billion of a new fund already this year. Though debt is scarce for most deals, meaning Blackstone must risk more of its equity, it has been preparing for a downturn, for example by buying a hedge fund with expertise in stressed debt.”¹¹

Reserve Bank Policies: Damage Control

Policies

For many months after August 2007, the financial market has been loosing, more than making, money. The consumers in USA have been living beyond their earnings. They have been constantly borrowing money to pay for their houses and sustain their everyday requirements. Most of the asset prices, like the cost of houses, have elevated rapidly, making it a huge burden on first time purchasers. The lenders have been practicing securitization, where they have clustered the poor-quality loans by mixing them with some good-quality mortgages, and selling the whole thing as a package of debt. They have also lessened the criteria for giving a loan.¹²

Since the Great Depression of the 1930’s, the US Federal Reserve has taken its boldest action by taking more than $200bn (£99bn) of housing debt as guarantee in order to prevent the mortgage finance industry from collapsing and head towards an economic crisis. People have the opinion that the Federal Reserves has taken the right action by absorbing all the mortgage debts, which others do not want.

This has a direct impact on the spread of Credit Crunch Crisis all over the world. It is a truly innovative move taken by them. According to Article 13 of the Federal Reserve Act, they are not allowed to buy mortgage bonds completely, but can roll over a loan indefinitely. “They have also created a new facility allowing the various banks to exchange their mortgage bonds in return of US Treasuries. This is a very well targeted and planned move to avoid increasing the inflation in the economy.”¹³

All these banks have injected billions of dollars into a number of money markets all over the world. This has not only cheered up all the investors, the USA stocks have soared up more than 3%. The money invested by them has somewhat eased the Credit Crunch Crisis and its impact on the world’s economy.¹⁴ But the pressures in the financial markets keep on increasing forever. The US Banks are working together to address the various liquidity issues taking steps towards their improvement.

The Federal Bank of USA is also using a swap line scheme in order to provide $6bn and $30bn through the Swiss National Bank and the European Central Bank respectively. The European Central Bank is also providing an extra $15bn, although they had earlier announced that the financial market problems, which had brought about the earlier auctions, are no longer there.¹⁵

In March, this year, the US Federal Reserve by announcing a 75 basic-point interest rate cut. This move was taken because, according to some economists, the condition of the market in recent times had been similar to those before the stock market crashed in the 1930’s. They further say that the US Federal Reserve is responsible for allowing the crisis to grow into a catastrophe, as it did not provide adequate reserves to those banks facing shortage of deposits. The root of the current Credit Crunch Crisis is the meltdown of USA’s sub-prime mortgage market. They were given extremely low introductory rates, which then soared high within a few years. Also the USA Federal Reserve had started to lower its primary rates down to almost 1% to help USA recover from the depression which occurred in 2001.

According to the economists, USA is facing its most spread out financial crisis witnessed in this generation because the Federal Reserve kept their interest rates very low for a very long period, destroying unaccountable amounts of wealth, both in financial and housing assets. It is very unique since this has never happened earlier. USA’s financial institutions, which have been exposed to all these bad mortgages, have had to write off billions of dollars in cash. The Credit Crunch Crisis has also led to the collapse of the Bear Stearns Investment Bank, which is the 5th largest bank in the USA, and had also been able to survive the great Depression of the 1930’s.

Since a Credit Crunch arises when the banks themselves are unable to get proper funds, if someone wanted to buy a simple house in the USA today or just a conventional mortgage, one may not be able to get it as the banks do not have enough funds in them. People are even facing problems renewing their mortgages nowadays. Almost one third of the banks in USA have lessened their real estate lending, as they are unable to get credit. Rate cuts in the interest amounts become irrelevant if the banks have no money to lend to the people. The Federal Reserve is lending money to other banks so that they do not say they don’t have money to lend. In such a case the term liquidity is being used.

The Federal Reserve helped finance J.P.Morgan take over Bear Stearns when it collapsed. The Federal Reserve has also devised means to fight off depression and is attempting to stop the various feedback loops, which could cause runs in the financial institutions, finally leading to their collapse. For instance, these financial institutions do not even have to run out to affect the country’s economy. If their capital is diminished enough to stop them from further lending, it will cause more economic weakness producing more stress for the financial institutions.

Most economists are under the impression that this depression in USA’s economy will sustain for quite a long period of time as it may continue till mid 2009. They are advising the retail investors not to panic and to reconsider their portfolios so that they do not have to sell out at rock bottom prices.¹⁶

Rising unemployment has prompted the Federal Reserve to cut down its lending rates. USA’s unemployment rate rose sharply around June this year. Just after this news was reported, the Federal Reserve immediately responded by lowering its interest rates so as to encourage the drooping economy. According to the analysts, the Federal Reserve had no other choice but to do so, even if it meant bowing down to the political considerations. The percent of jobless people in the nation rose from 7.5% in May to 7.8% in June this year. The discount rate of the Federal Reserve was 3.5% to 3%. This has been its lowest rate since 1963. They have also reduced the Federal Funds Rate, which is the rate the different banks charge each other for taking overnight loans, from 3.75% to 3.25%. This action was also followed by several other banks, which also cut down their prime interest rates.

These cuts in the interest rates helps the economic growth as it lets the people doing business borrow more money for their investments. It also makes it cheaper for the consumers to borrow while spending. The Federal Reserve said that the actions they had taken were due to the weakness in the money and credit growth, irregular progress of the economy’s recovery and for continuous progress towards price stability. As there was a slow growth in the money supply, there was not enough money available for giving loans in order to increase the nation’s economic growth. Analysts have further said that the Federal Reserve should lower their rates more as feeble money supply could cause the economic recovery to slow down, just as a slow monetary growth caused the economy to descend low last year.

It is also being said that these rate cuts may be too late to help as the time lag before the lowered rates seep into the economy to encourage growth, investment and spending, is about six months. Economists argue that the economy’s recovery has been held back due to the huge debts of the customers and business expenses.¹⁷

It would be relevant to mention that the current account is an extremely important tool that can determine the entire business cycle of a country as current account can be determined in according to trade balance as the difference of import and export of tangible goods and services like consulting and legal. Current account is also instrumental in determining the overseas factor incomes like dividend and income along with the net overseas Unilateral Transfers like gifts, grants, and aids.¹⁸

In US, five of the leading banks of the world, including the Federal Reserve Bank of USA came together to invest huge amounts of fresh money into the global market to combat international credit crunch failing economy with about one trillion dollars.¹⁹ This move is largely stimulated by the concern of leading economists who were predicting a recession in US markets as a slowing down or decline of US and British housing markets. In an emergency set of solution seeking procedures, the Federal Reserve Bank drastically diminished interest rates, splurged out innovative lending programs, sought to modify the poor condition of Bear Stearns and provide loans to boost the nearly crippled mortgage agencies of Fannie Mae and Freddie Mac.

The most innovative plan to diminish the credit crunch has been to increase lending with the motivation tom restore liquidity to troubled markets and look after the demands of the inter-bank loaning facilities.²⁰ The current crisis made the Federal Bank to decrease the interest rates on lent amounts and lengthen the time limit for the repayment of the loan. “Term Auction Facility” was adapted as a scheme for slow banks through which loans at a cheaper rate could be made available from discounts windows and the deals were guaranteed anonymity.²¹

Under such parameters the fundamental bailout plan “Hank Paulson’s $700 million no-strings-attached proposal” was disapproved by the US House of Representative.²² There is however, a second bailout plan. It is referred to as Plan B. The Federal Reserve endorses this plan after the failure of the Plan A. It has been reported, “tax credits for the production and use of renewable energy sources, like solar energy and wind power have been. Possible other inclusions originating in the House bill are an extension of the unemployment benefits, protection from foreclosure for individuals, and tax credits for low and medium income households.”²³ Under such parameters, it can be stated that the this plan was initially supposed to be workable but a Plan C was initiated to be effected as a proper bailout method.

Plan C includes an additional input of US$800 billion by the Federal Reserve. The amount of US$800 billion would be instrumental in buying the debts related to mortgage and the credits of the consumers in order to instrument a lending free up. At this point of time it appears that there are two major problems related to this Plan C. The first one is the fact that there is not enough retail economy spending in relation to consumers. Secondly, there is a lack of consumer credit and there is no presence of a sound economy to sustain this amount. It is reported that “the Federal Reserve and US Treasury are pumping a jaw-dropping $800 billion directly into the credit markets, buying up $600 billion worth of mortgage debts”.²⁴

Under such parameters, if the plan B is taken into consideration, it can be stated that this plan appears to be a very slow process. This could be a very dangerous ploy and the result could be devastating for the economy. It should be noted that a very fast and effective measure is needed and Plan B lacks that speed of operations that is required in this case. As per implecation of Plan B is concerned it can be mentioned, “Pressure is also mounting from constituents for Congress to take action to stop the extreme volatility in the markets as their investments have plummeted. While stiff opposition to a bailout of Wall Street is apparent, direct damage to the net worth of individuals has prompted a call for action”²⁵ Thus, it appears that Plan B is not workable at all.

On the other hand, Plan C has its own faults. Henry Paulson, Treasury secretary, indicates, “This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy“.²⁶ Thus, it is difficult to implement this plan on a large scale. The market appears frozen and the credit system is crippled as investors pulled out $240 billion out of the market particularly from the field of auto loans and credit card market.

The Federal Reserve bailout plan of $180 billion could be instrumental in luring investors into the market. In a way, this could prove to be the ideal stage to implement Plan C though there are enough risk involved. Nevertheless, Plan C is quite complicated in nature and it the Federal Reserve is reluctant to use it right now and hold it until February 2009.²⁷

However, serious situation demands serious risks. As it is, it looks like the Plan B would not be effectively instrumental without a long termed result and this is a situation that needs quick response. Thus, the best measure is to wait until February 2009 and implement the Plan C. During this time the drawbacks of the plan would be well sorted out and thus the implementation would be more error free and sustainable. That way, it would be faster and effective than Plan B. Thus, Plan C is the most favorable plan under these circumstances and the government should be instrumental in implementing this plan.

However, very recently, the Federal Reserve announced a very effective rescue policy. Under this policy the Fed would be instrumental in creating a fund for financial companies like Goldman Sachs, Morgan Stanley and Merrill Lynch. This would enable these companies to withdraw funds in accordance to the necessity of the individual management to sustain the organization on a long termed basis.²⁸

In fact, the surety of its success has led the Federal Reserve to “extended the life of key programs aimed at busting through credit clogs and restoring stability to financial markets.”²⁹ The basic idea is to formulate a lending facility that would enable investment firms to greater financial liquidity. It is reported, “This category was recently broadened to include any loans that were made to the American and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Merrill Lynch.”³⁰ This is a rescue policy that would help the firms to “temporarily swap risky investments, like shunned mortgage-backed securities, for supersafe Treasury securities also is covered.”³¹

Past Financial Crisis

Incidents

There are multi strata perspectives of history and history without these layers becomes meaningless academic foliage. These layers of history could be defined as perspective and perceptions related to politics, economic, sociology, cultural and religious. Without the intervention or analysis of these subjects and subsequent incorporation and investigation in accordance to these subjects history would be wrongly incepted. Therefore, to understand whether the present crisis has a purpose or not it is important to analyze these subjects within the perspective of economic history as a whole.

The present crisis originating in America is similar to the 1980’s savings crisis. The sub prime crisis grew from the saving and loan (S & L) balance sheets under the Carter Administration when funds in this account took a battering from high interest rates during the period… This made Congress loosen regulatory standards in order to divert S&L funds into more profitable real estate stocks. Commercial real estate investments were riskier. To buffer this initiative, federally backed amounts up to $100,000 were deposited into insurance funds. This instantly had the effect of attracting yet more funds and what is more, encourage risk taking.³²

All this made regulatory standards lax. S&L funds were free to choose between state or federal regulations. Predictably, states relaxed fiduciary regulations in order to attract these funds, because they stood to earn large fees by registering these funds. In the ensuing race to financial destruction, states lowered regulatory barriers even more. The brunt was taken by American taxpayers. Consumers took the rap on other fronts as well.

The nation has seen such crisis in the past and incorporated different methods as bailout plans. The 1932-53 crises called for reconstruction of Finance Corporation and the trigger was Great depression. The 1989-95 crises needed Resolution Trust Corporation and the trigger was savings and loan crisis. Here 747 small companies were affected and the cost was $300 billion where the initial cost estimation was $50 billion. In other countries too, like Sweden (1992-96) and Japan (1996), the resolution was in form of Bank Support Authority in Sweden and Resolution and Collection Corporation in Japan and in both the cases, the trigger was fallout from a real estate bubble.³³

However, there is a good similarity between this credit crisis and that of 1929. All signs pointed to a booming American economy in the 1920s. Between the years of 1925 and 1929, the number of factories, shops, and other establishments of production rose from 183,900 to 206,700, better than a ten percent increase; the value of the products coming out of those establishments rose similarly, from $60.8 billion to $68 billion.

In addition, the number of new cars rolling off the assembly line rose from 4,301,000 in 1926 to 5,358,000 in 1929.³⁴ The power of the American dollar was such that it was in constant circulation; Americans were making money at a faster rate than ever, and they were spending it at a faster rate as well. In addition to the unprecedented growth in the production factor, the question for many middle-class Americans came to be what they should do with their newfound surplus.

Measures

In the aftermath of the stock market crash, it became apparent quite quickly that the country was not ready for an economic disaster of this magnitude. This unprepared ness was two-fold, with practical and ideological causes: On one hand, the government infrastructure for unemployment relief was simply not there; on the other hand, the Hoover administration, in following the conservative brand of social thinking, considered economic relief to be a task of the populace at large rather than a charge of the government.

As Milton Meltzer writes in Brother, Can You Spare a Dime. “…in the early thirties there was no planned relief, and poverty was considered a disgrace you had only your own shiftlessness to blame for. When the crash of 1929 came, fewer than 200,000 workingmen were able to look to organized unemployment funds for help”³⁵. The executive branch of the government had convened the President’s Organization on Unemployment relief, whose purpose it was—in theory—to provide food, services, and money to the unemployed.

The National Industrial Conference Board, however, would later gather that data. In 1930, those 200,000 workers on relief pay represented roughly ten percent of the nation’s 1.9 million unemployed. By 1931, unemployment had more than doubled to 3.9 million, and relief had risen accordingly, though only now extending to 540,000 out-of-work individuals, a modest increase to 14%. Slowly, relief gained through New Deal initiatives, rising to 26% at the peak of Depression-era unemployment—in 1933, aid was available to 1,580,000 of the 6.1 million unemployed—but the disastrous effects of poverty had already been felt.³⁶

Results

The primary reason that the government infrastructure for relief did not exist in the first place was an ideological one. President Hoover’s initial reaction to the severe problems of the Depression followed a typically conservative line of thinking. Rather than hand out huge amounts of money from the government’s savings, Hoover said, “a voluntary deed by a man impressed with the sense of responsibility and brotherhood of man is infinitely more precious to our national spirit than a thousand fold poured from the treasure of government”.³⁷

Of course, this was the same hands-off approach to government that had served Coolidge well earlier in the ‘20s, and it was the same approach to government that had fostered the unprecedented boom of the decade; but while local and regional charities did have some effect on easing the burden of unemployment, hunger, and poverty, the country as a whole was simply too overwhelmed by the crisis—and furthermore, it was too fractured—to bear the whole weight of recovery. Ultimately, the country would vote with this sentiment in mind when it elected Roosevelt in 1932.

Comparison with Present Crisis

Thus it can be mentioned that though it is often said that “history repeats itself” but the fact is the nations take no lessons from the history at all and committees the same mistake over and over again. Thus, practically there is no purpose of history at all. It is commonly said that the fundamental teaching of history is that it teaches nothing at all. It is a great pity that a subject that could have contributed in the betterment of the future of the world by so much and by so many means is regarded as just another academic discussion with no practical implementation at all.

But the main concern of this discussion could be referred to as a virtual stalemate because though there are multiple examples of failure of history as a teacher it could also be mentioned that smaller credit crisis of 1960’s and 1980’s compels us to believe in the teachings of economic history and we are induced to believe in the goodness of affairs that is learnt from the education of economic history and this is the purpose of history.

It has been mentioned with high notes that there are failures or the argument is basically undecided but at the end point it would only be logical to state that we are living in a positive world and therefore it is evident that we should only look at the positive side of the affairs and believe in history as an able teacher and that should be considered as the purpose of learning economic history. It is clear that there is a clear similarity between the present crisis and the crisis of 1929.

The link between the pre-Depression atmospheres of optimism is clear, but perhaps it was also unavoidable; the same conservative ideals that led to such ineffective disaster-response efforts after the stock market crash were the same conservative ideals that had bolstered the economy and led to the boom in the first place. In that regard, it is hard to say there is much that could have been done to prevent the catastrophe.

The American populace tends to correct itself, however; the conscience of the country shifted after 1929, and as a consequence, they elected a Roosevelt to the presidency at their next opportunity. To be sure, also, they learned from their mistake, and have since been more skeptical of rampant economic optimism, well aware of the tragedy and unprepared ness it can provoke.

The Twenties provided no shortage of opportunities in this regard. Marketers were busy trumping up the tourist value of Florida, the chic off-season destination of the decade for the vacationing affluent. Indeed the potential for making money was so great in Florida that speculation ran rampant; properties, often swamp land and nowhere near the ocean, could be purchased for a mere 10% down payment, and by 1925, empty lots were trading for many thousands of dollars, based exclusively on the assumption that they would some day be worth a great deal to developers.

The stock market was another popular investment opportunity. The average price for those stocks rose steadily and dramatically throughout the Twenties, from $106 in May of 1924 to $245 at the end of 1927, and they continued rising. The culmination of these factors lulled Americans into a sense of false security. Somehow, it seems, the prevailing opinion was that success and prosperity would continue; it was seen as the ultimate fulfillment of the American dream.

Only the markets could not support the growth; investment and speculation had overvalued stocks, commodities, and real estate. Production would wane, layoffs would occur, and America, precisely because of its blind adherence to this dogma of optimism, would find itself stricken and unprepared to deal with the consequences. It has been reported very reported that “With current economic conditions and mortgage rates tightening, a number of buy-to-let landlords have found themselves with no tenants but have retained the usual maintenance costs, insurances, etc – so they are making a loss”³⁸

The decade leading up to the stock market crash of 1929 and the following Great Depression is typically remembered as one of great prosperity; everybody, it seemed, was getting wealthier. While the rich added to their riches, even the working class was beginning to earn a little bit of money to put away. The middle class was inching closer to luxury with the money it had made in investment markets. All signs were pointing up. It was precisely this shared spirit of unbridled optimism, however, that led to the crash and the subsequent depression; the Thirties were particularly horrific specifically because few, in their boom-era delirium, had foreseen that the wave, so long cresting, must eventually break.

When, on that Black Monday, the stock market did actually crash, and when bankruptcies and layoffs followed on its heels, the country was unprepared—due to ideology as well as limited governmental infrastructure—to deal with the economic repercussions. All indications are clear that this crisis was the same as todays; however, a similar measure of bailout plan may be suitable if planned on a long term.

Recommendation

According to Heitfield, “To a large degree, the potential for dramatic falls in ratings and valuations was “baked in” to the securitization process” where “Credit rating and valuation models depended on limited data – could not accurately assess the likelihood of future losses“³⁹

Thus, these situations should be taken into account for future prospects.

Although banks have been the most popular method of economic growth, they are quickly becoming one of the least reliable sources. Private enterprise is taking a new face in the modern world and is helping to facilitate strong economic growth, even during a time of recession. In this modern day and age, businesses are becoming more personal, which most people enjoy. This gives people a larger sense of trust with companies and allows them to get more loans. When people have more money, the spend more and put more back into the economy. It is plain to see why market based financial systems are the superior method of economic growth.

Whenever you de-regulate how business is run, people tend to show the good side of them more and help each other out more. Laissez faire is an important cornerstone in today’s free world market, and it should stay that way. Banks are still regulated by the government, and obviously have been failing to keep up to par. The choice is obvious and hopefully the government begins to support private financial groups more in the future.

Conclusion: Bailout plans

As a bailout plan, the article “In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans” by Stephen Labaton and Edmund L. Andrews published in New York times on September 7, 2008 can be very useful for its logical reasoning. This article is a take on the recent credit crunch of US. Huge amount of capital inflow is needed in this case and even if the bailout plan succeeds, it is evident that there would be difficult times. However, in the event of magnifying unemployment and inflation, the Federal Bank cannot afford to sit still. It has to fight for a stable equilibrium in prices and combat unemployment.

The most innovative plan to diminish the credit crunch has been to increase lending with the motivation tom restore liquidity to troubled markets and look after the demands of the inter-bank loaning facilities. The current crisis made the Federal Bank to decrease the interest rates on lent amounts and lengthen the time limit for the repayment of the loan. “Term Auction Facility” was adapted as a scheme for slow banks through which loans at a cheaper rate could be made available from discounts windows and the deals were guaranteed anonymity.⁴⁰

However, even in this situation there is a hint of positive aspect. “The economic cycle has clearly shifted into a dramatic downturn, and so a different planning approach is called for. But by knowing where you can take advantage of the situation, it is possible to make the downturn much less painful financially, and in some cases, it may even be possible to take advantage of it.”⁴¹

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Footnotes

1. Whybrow, Martin. International Banking Systems Market Report 2007. IBS Publishing Ltd, 2007. pp 64.
2. Lamb, Davis; Cult to Culture: The Development of Civilization on the Strategic Strata. (Wellington: National Book Trust. 2004) pp. 243-245.
3. Dollard, John; Modern Fiscal Policies: A look into Tomorrow. (New Haven and London: Yale University Press. 2006) pp. 89-92.
4. Fletcher, R; Credit Industry: Beliefs and Knowledge; Believing and Knowing. (Mangalore: Howard & Price. 2008) pp. 188.
5. Kellermann, Carol; Economic Fallout; Gothamgazette. 2008. Web.
6. WILLIAMSON, MARK; Soaring unemployment raises fears of credit crunch fall-out; The Herald; Newsquest (Herald & Times) Limited; 2008. Web.
7. Heitfield, Erik; Resecuritization: a Post Mortem; National Association of Business Economics Annual Meeting; Federal Reserve Board; 2008.
8. LSNU; EMPLOYED, UNEMPLOYED, AND RATE OF UNEMPLOYMENT BY PLACE OF RESIDENCE FOR NEW YORK STATE AND MAJOR LABOR AREAS, SEPTEMBER 2008; Labor State New York US. Web.
9. Border, A; Which parts of GB are vulnerable to the credit crunch?; Economic Outlook; 32: 3; 16-25; London Business School; 2008.
10. Scanlon, Rosemary and Hope Cohen; Cutting the High Cost of Housing; Gotham Gazette; Citizens Union Foundation; 2008. Web.
11. Schwarzman, Steve; Raging bull; The Economist; 2008. Web.
12. Elliott, Larry; Credit crisis – how it all began; guardian. 2008. Web.
13. Evans-Pritchard, Ambrose; Fed takes boldest action since the Depression to rescue US mortgage industry; telegraph. 2008. Web.
14. BBC; Central banks fight credit crisis; news.bbc. Web.
15. BBC; Central banks fight credit crisis; news.bbc. Web.
16. Doskoch, Bill; Breaking down the U.S. credit crunch crisis; CTV.ca News 2008. Web.
17. Greenhouse, Steven; Unemployment Up Sharply, Prompting Federal Reserve To Cut Its Key Lending Rate; NYTimes. 2008. Web.
18. GORTON, G. B. PING HE; Bank Credit Cycles; Review of Economic Studies; 75: 4; 1181-1214; The Wharton School University of Pennsylvania and NBER; School of Economics & Management, Tsinghua University; 2008.
19. Grynbaum, Michael M. Persistent Anxiety Over Tight Credit Sends Stocks Plunging. NYTimes. 2008. Web.
20. Cecchetti, Stephen. Federal Reserve Policy Actions in August 2007: Answers to More Questions. Brandeis University; Eurointelligence Advisers Limited. 2007. Web.
21. King, H; Fiscal Fitness Today (Dunedin: HBT & Brooks Ltd. 2005) pp. 126.
22. Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008. Web.
23. Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008. Web.
24. 3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008. Web.
25. Rankin, Kyle; Plan B: Go to Congress, Make a Right; Black and White Program; 2008. Web.
26. 3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008. Web.
27. 3news; US to try bailout ‘plan C’ to solve credit crisis; 3 News / CBS; 2008. Web.
28. ASSOCIATED PRESS; Fed Extends Some Credit Programs Through; New york Times; 2008. Web.
29. ASSOCIATED PRESS; Fed Extends Some Credit Programs Through; New york Times; 2008. Web.
30. ASSOCIATED PRESS; Fed Extends Some Credit Programs Through; New york Times; 2008. Web.
31. ASSOCIATED PRESS; Fed Extends Some Credit Programs Through; New york Times; 2008. Web.
32. Wolfson, Martin H; Financial Crises: Understanding the Postwar U.S. Experience; M.E. Sharpe; 2007.
33. FT Research; The New York Times; 2008.
34. Galbraith, John Kenneth. The Great Crash. New York: Houghton Mifflin, 1954.
35. Meltzer, Allen H; Congressional Budget office (Spending); Office of Management and Budget; 2008; pp 63.
36. Singleton, Jeff. The American Dole: Unemployment Relief and the Welfare State in the Great Depression. Westport: Greenwood Press, 2000.
37. Singleton, Jeff. The American Dole: Unemployment Relief and the Welfare State in the Great Depression. Westport: Greenwood Press, 2000. pp. 57.
38. Ludwig, Ronnie; A silver lining for the credit crunch?; BBC NEWS; 2008. Web.
39. Heitfield, Erik; Resecuritization: a Post Mortem; National Association of Business Economics Annual Meeting; Federal Reserve Board; 2008.
40. Labaton, Stephen & Andrews, Edmund L; In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans; NY Times; 2008. Web.
41. Ludwig, Ronnie; A silver lining for the credit crunch?; BBC NEWS; 2008. Web.