As we have experienced the modern global financial crisis, many challenges have emerged, particularly for those in the capital markets. These challenges alter major rules formulated by policy makers. According to Linn, the crisis has spread like plaque and has sparked confusion about personal finance (2008). Regulatory boards strive to find solutions to this predicament. According to Herz “While accounting did not cause the crisis and accounting will not end it; it did reveal a number of areas requiring improvement in standards and overall transparency” (2009, p. 3). This has been a major issue arising in the current world.
The financial accounting standard board (FASB) is concerned with the communication of clear and impartial fiscal information based on company performance and financial conditions. They do this to the investors and the financial markets. This is designed to facilitate informed venture decisions and the allotment of capital resources across nations. However, they do not control the capital. The government trust reserves funds while major investors and banks control the capital. So the blame of the global financial crisis cannot be put to rest entirely on to the standard regulators. The debate about financial recession in nations has been brought forward by many scholars. The question is how to solve it, so as to achieve economic growth that is geared towards improvement of individuals’ lifestyle.
Triggered the Financial Crisis
“The immediate trigger of the crisis was as a result of the burst of the United States housing bubble which peaked in 2005-2006” (Justin 2007 p. 12).This made major investors to borrow from banks for the purposes of building houses. However, this practice was considered to be very dangerous. Both the government and individual interest groups have played a major role in the increase in subprime lending. According to Steven this is because they enhance higher risky lending.
Thus, government sponsored corporations may run into problems of economic deterioration prompting government rescue, similar to that of the savings and loan industry in the 1980s in the United States ( 1999 p. 2). Deregulation by some government bodies contributed to the financial crisis. According to Robert, in 2004 the security and exchange commission relaxed the net capital rule which made investment banks to increase levels of debt which fuelled mortgage backed securities (2008). Paul asserted that monetary institutions in shadow banking system are not bond by these rules; this allows them additional debt obligation relative to the capital base (2009).
Moreover, there is lack of basic supporting infrastructure. This reduces the flow of information to investors thus enhancing economic catastrophe. Some countries lack clear economic techniques and visible price discovery system. This has made major decision makers to slug behind in the development of the economic markets. Furthermore, other countries have complicated regulatory systems; they have complex accounting and financial reporting standards which gives investors a hard time to interpret the standards formulated by the board. Consequently, this contributes to the recession of the economy.
Accumulation of wealth by some of the western nations has made the overall economy to decline. This can be attributed to the fact that, the capital collected was not in circulation and thus it did not result into profitable investments. In the United States for example, there has been a rise in the cost of healthcare, fuel and other essential necessities. This increases the cost of living for the citizens.
Solutions to the Financial Crisis
Herz asserted that there is need to improve and fortify certain accounting and reporting standards. Very vital information ought to be secured. Moreover, it is convenient to assure the financial investors and to enforce credit evasion swaps and derivatives. There are only a few loop holes that the board needs to fill so as to improve transparency. What is more, proper infrastructures supporting financial markets in timely flow of important information, informed decision making and effective techniques should be implemented. Transparency by the peripheral financial reports also contributes to development of the country. Since government bodies and banks regulate the flow of capital, they should play a key role to ensure that it is distributed equitably (2009 p. 6)
As the investing community, members expect impartiality and transparency that is not geared towards favouring particular interest groups; the standard setting board should ensure precision to sound financial markets that are relevant, honourable and gives information in time. These standards should be redesigned to create a foundation for stable economic growth that provides confidence to its citizens and thus, this will foster the economic growth of a nation.
According to Linn, the government ought to steer at providing sustainable public support. This will create a bright future for the nation. They need to promote a close working bond among citizens. They should ensure that there is effective administration of public trust in their economic system. The treasury department should step in to provide security to the money market funds. They can do this using a depression-era fund to back them (2008 p. 1). This is because the money market is not completely secure, since there could be fluctuations in the capital market.
The regulatory board ought to address the issue of operating successively on the global market. They should do this by settling differences in policy; hence they ought to formulate common goals and objectives. They can even resort to coordination. This way, many countries will have access to the markets which will enable them to enjoy a competitive advantage. The reforms of our financial and regulatory system must be geared towards the public as a whole.
This is necessary in making the public to derive better and beneficial services. According to Herz, in some cases, a single accounting or reporting action may not appropriately achieve the objectives of both the regulators, reporting to investors and the capital markets. In such cases, transparency on the different treatments is important. Moreover, it is not appropriate to lower or undermine external treatment to investors to the desires of the regulators (2009 p. 12).
There ought to be proper guidelines to the institutions, financial commodities and market participants. This is done in order to spot and successfully adjust risks and proceeds from financial assets and obligations. These regulations should not be geared towards a lapse overview and enforcement. It should ensure association of different policies for better and accountable formulation. Furthermore, the regulatory board ought to consider that there is fair value measurement and credit revelation. They should give precise information to potential investors so as to plan of how to acquire favourable credit terms.
“Topics in development financial crisis” according to the World Bank, the global economy is showing signs of recuperation. However, poor countries are still in the economic slump. Thus they need additional help to boost their economy. The poor countries are capable of boosting overall demand but they require access to finance. The World Bank is calling for a crisis response facility so as to ensure speedy and most effective assistance to these countries.
In 2009 the bank provided 60 billion to support countries hit by financial crisis. It engaged on safety net programs to protect the most affected. They did this by providing global food crisis program (GFRP) which distributed relief food to the hunger stricken nations. They also provided rapid social response programs which ensured that basic social necessities were distributed evenly. In addition, they helped in the maintaining of infrastructures.
This ensured the flow of trade, boosting of distraught banking system and the support of microfinance. What’s more, it has enabled liquidity in the financial markets by providing guarantee to African investment, leveraging quicker and better insurance capability. It has fostered support in the agricultural financing; this was done in rural areas so as to expand finance in those places through the Bill and Melinda Gates foundation announced in June 2009. The World Bank has partnered with other countries so as to support the poorer nations (2009).
The subprime solution: This formula helps protect us from repeating such financial disasters. According to Shiller, the subprime solution involves the information and innovation at the counter of group sense (2008). What united the mistakes by the Federal Reserve, bankers, mortgage brokers and house buyers together brought the existing financial crisis. Therefore we need to deploy logical solutions so as to scramble out of the dilemma.
Leadership and assurance are important in times of crisis. They need to reinforce the confidence of the citizens (This financial crisis needs a global solution 2008). The government also needs to ensure transparency to its people. It has become apparent that, action by one government alone is not enough to mark any striking difference.
Accounting did not cause the global financial and neither will it end it. The only thing regulators should do is to repair small loop holes so as to ensure transparency. According to Herz the crisis educates us that it is not just the United States economy and their challenges at home, but several other nations have also undergone similar experiences. Over the last two years, we have witnessed the emergence of a global economic crisis which has painfully established that the national markets and economies are now inevitably related (2009 p. 5).
Some of the complex accounting and reporting issues emerging from the financial crisis originate from lack of proper regulation and risk management, unsafe lending and unsecured practices. Moreover, there has been absence of proper market infrastructures around the market for structured credit products and derivatives. Under such pathetic conditions, accounting and evaluation are considerably affected and thus, the entire blame cannot be put on them.
A nation big enough to give its citizens everything they want, is big enough to take them away. Thus, the government needs to step in and foster corporation and motivation among citizens. It should not concentrate on personal gain but rather accountability to the public. The treasury also needs to effectively control the nations’ trust refunds most effectively. A successful nation is the one that can lay a firm foundation with the bricks others have thrown at them. Indeed, for the purpose of success, the government should employ flaming enthusiasm, backed up by horse sense and persistence so as to achieve sound economic growth.
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