Housing and Banking Crises, Research Paper Example

Marc Faber

Dr Marc Faber believes that the shift in economic power from the west to the east is as a result of long-held economic ideologies by American economists. He believes that by virtue of the United States concentrating on consumption and building a consumption-driven economy, it drove all the production to the east, specifically China. This has led to the continual increase of demand of raw materials by China, boosting its spending and purchasing power. He also believes that the Middle East will burn as a result of constant wars, a view I do not agree with. The wars in the Middle East will stagnate growth and development but will not cause the whole region’s economy to collapse.

Moral Hazard

The rescue of a financial institution should only protect the institution’s creditors from losses but not protect its owners. This reduces the moral hazard created by the rescuers in two ways. The creditors are, by law, entitled to receive financial compensation for good and/or services delivered or offered. When a financial institution goes down, business ethics dictates that all the institution’s creditors be fully compensated first. This protects the innocent party within the business failure. This adheres to the widely accepted ethical standards in finance.

However, in a scenario where the business owners are also compensated, it would create an environment where business fraud would be a common occurring. By protecting the owners of the business, it encourages individuals to indulge in unscrupulous dealings under the institution’s name, using the institutions financial resources, as in the end they will receive compensation at the event of solvency. This creates a moral hazard where an unfair and unjust business environment would lead to loss of the tax payers money lost in compensating both the creditors and the business owners.

This approach does not completely eliminate the moral hazard. This is because at times, the business owners are cohorts with the creditors in executing unscrupulous business deals or embezzle funds from the financial institution.

The London Whale and other Deadly Financial Blunders

Arguments supporting the ban

Banks tend to conduct their derivatives business by employing cheap deposits in subsidizing derivative business that is highly risky. This is meant to create an environment where a “no bailout” rule prevails, discouraging banks from conducting risky derivatives business using their clients’ deposits.

Arguments against the Ban

By denying banks the right to trade in derivatives, the market would become less safe by causing a in trading to foreign banks that are not clamped down by strict restrictions imposed by federal oversight. This would reduce the income generated in the trading of derivative, reducing the profitability of the banks and their financial capacity.

Economic Growth

A Subsidy to Physical Capital Investments May Have a Level Effect

Physical capital is an essential factor of economic growth. The level of growth within an economy is directly related to the amount of physical capital that business can access to enhance trade. Physical capital determines the amount of raw materials that an economy has access to. When physical capital is available, the level of output realized by an economy is high.

While a subsidy may affect the rate at which growth is realised, the effect is minimized to level effects if there are insufficiencies and/or redundancies within the production processes employed within the economy. When production processes are not optimized to realize maximum utility, then the growth rate cannot be affected.

Technology is the widely accepted determining factor of the rate at which growth is realized within an economy. However, this is directly affected by the amount of physical capital available for investment. A subsidy will provide a level effect.

A Tax on Labour May Have a Level Effect

Labour is an important element of the production process within the economy. It is a vital factor of production that has a direct bearing on the level of production within an economy. Labour is compensated on different levels, either according to the amount of time spent in production or the amount of effort put in. when government introduces a tax on labour, it lowers the amount of compensation that every unit of labour receives owing to the reduced amount of net income received. This creates unfavourable conditions for units of labour that may opt to either reduce the level of output or shift away from the jurisdiction of the labour tax so as to realize maximum utility.

A Subsidy to R&D and Education ay Have a Growth Effect

Education is essential for an effective and efficient workforce. This is because a well-educated workforce is highly skilled. The skills gained through education help ensure efficiency in the production processes employed across all industries by minimizing wastage and maximizing output. This means that the developing country in question would growth faster within a relatively short period of time if it has an educated and skilled labour force.

Innovation and invention are crucial for any developing nation. This is because through innovation and invention, the nation can alter, upgrade or invent new and existing production processes in a manner that suits its economy, relative to the resources (natural, human and capital) at its disposal. This can only be achieved with a highly skilled and educated workforce. Through an in-depth knowledge of the production process, the labour force can come up with better, faster and cheaper ways of production by using the resources available.