The signs of approaching financial shock got observed in the United States in 2007. The prices in the real estate sector began to collapse, and worth of the sub-prime mortgages which were recently underwritten started to spike. By September and around October the following year, 2008, the situation had culminated into a massive fiscal crisis (Sweet, & Law, 2010). Within no time this situation had escalated to the Eurozone, and every government was scratching for a resolution. The United States pumped more money and other liquidities into the market. Central banks around the world employed extraordinary pecuniary policies to bring stability into the financial markets to sustain the activities within the economy. The Chinese monetary authorities counteracted with fiscal stimuli to prompt overall demand before the situation turned to severe levels. The government had to take strict measures to contain the public deficits that kept growing each day (Schmidt, & Heilmann, 2010). The OECD (Organisation for Economic Co-operation and Development) countries, however, established that stimulus and bailout were not mechanisms competent enough to handle the economic instability for a long-term. Either way, this would demand a second regulation of the commercial sector and rationalize governments' mix and content of their programmes as well as carry out a fundamental reform on the budget systems (Lindquist, de Vries, & Wanna, 2015).
The crisis of 2008 brought to focus authoritative new disparities to the concept of a bank run. Economies of many countries got threatened. Governments have benefited from massive economic fallouts of crises like the 1930's crisis that lead to the great depression. This fact is given the case bearing in mind the overtly extreme risk-taking and self-centered conduct. Commenter agitated over bailouts by a vast number of financial institutions. Employment was lost, and outputs decreased causing the community's worth to rock and suffer horribly. The 2008 crisis saw the gross domestic product of the US and the value of the euro fall by 4%. Japan faced severer effects than before. A second wave hit the euro facilitated by the exposure of the already crumbling banking structure to the crisis and too wobbly state debts. China managed to escape the full-blown effects of the disasters, but their imports and exports were much impacted. All around the world, the legislature and finance dockets tried to mitigate the loss and to rehabilitate the financial system on a large scale by empowering the financial sector.
Before the 2008 economic crisis, the most substantial causal cradle of risk to the financial system was improperly watched and undue residential financing and frail fringe European sovereign debts. However, macro-prudential regulation is concerned with the liability of the financial system to shocks coming from nearly any direction (Tucker 2014). Governments have set out on the course of ending the possibility of future bailouts. Financial regulators are on a path of significant reduction on a class to significantly reduce the prospect and ruthlessness of future crises. This paper shall analyze the measures taken by one of the most affected economies, the United States and one of the nations that managed to evade the full effects of the crisis, China. It shall then seek to establish how well both countries led to mitigate the crisis by applying different methods. The United States made the bank bailout program whereas China went with the stimulus project. The question we seek to answer is; how well did the two major governments of the world handle the situation and what were the negative impacts did the policies have on the entire economy.
The United States Bank Bailout.
The significant regression in 2008 was the enormous economic shock to the economies of the world since the great depression in 1930's. The onset of the crisis was in the United States when the prices in the real estate sector collapsed. The rates of the sub-prime underwritten mortgages spiked. The situation was already out of hand by September in the year 2008. The administration of the former president of the United States, George W Bush, proposed a deal to save the economy from the debt crisis that was escalating fast. The crisis in the subprime mortgages was developing. So many people buying homes had dubious credit. Banks were letting them take credit that was either equal to or sometimes even more extensive than the value of the mortgage. The individuals would fail to repay back their mortgage bills, and the banks would take back the mortgage and resell it to other customers. This is one of the situations that led to the escalation of the financial crisis. The federal government used the reserves to add more money to the market and raise liquidity. In the same effort, they reduced the interest rates. However, this policy was not enough to correct the economic confidence of the nation. January 2008, the Congress passes the tax rebates to the president. The loan rebates were a package of $168 billion was sent to families and recipients in the social security in the form of cheques. This too did not stabilize the situation. Instead, the limit of the loans for the mortgage also rose for agencies like Fannie Mae and Freddie Mac. This situation kept worsening with the cases of Bear Sterns investment bank almost sinking and the federal government taking over some of the most significant mortgage creditors in the market, Fannie Mae and Freddie Mac. The collapse of the Lehman Brothers sent shockwaves in the economy of the nation. The president now had to get the Congress to approve the bank bailout bill which was worth $700 billion (Bordo, & Haubrich, 2017).
The bill would be expected to have several real significances. First, it was supposed to reinstate the liquidity of the credit crisis. Banks were hoarding their money from the owners of the homes to large enterprises. Their borrowers could not get into contact with the money because all the credits they had were expensive. The$700 billion policy would, therefore, be of significant advantage to the improvement of liquidity. This improvement was not only going to be felt in the United States economy but also in all other economies of the world. The increased cash would allow banks to borrow and lend from one another and in turn, they would be able to give credit to customers.
The policy was advantageous in the sense that it could prevent another collapse in the banking sector. In the period of the great financial crisis, banks like Bear Sterns, Freddie Mac, and Fannie Mac had to be taken under the federal government when they came to the verge of collapsing. Others like the Lehman Brothers were not lucky enough, they collapsed. Other examples like AIG and Merrill Lynch were nationalized efficiently or taken over by the government (Bordo, & Haubrich, 2017). These were the behemoths of the United State's financial world. Their collapse was being felt not only in the country but also in the entire world. The policy would lead to the stripping off toxic assets from the balance sheets of other giants of the financial world which would, therefore, prevent them from falling. Saving these banks would secure tens of thousands of employees from losing their jobs both in America and in Europe. Basing in mind that unemployment was one of the adverse effects of the financial crisis, and then the policy was being of great help in the aversion of the financial crisis.
It was yet another advantage that no matter how the people feared it would be costly; the policy was not going to be that expensive. $700 billion which is equal to PS377 billion sounded enormous when considered against the about $5000 per taxpayer. However, on the brighter side, the treasury of the US was to make considerable profits when the situation was way better than it was. T...
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