Article by Pulitzer Prize-Winning Financial Writer Gretchen Morgenson
The most concerned world’s crisis is financial problems. There have been witnessed several financial problems in both developing and developed countries in the world. Many countries are trying their best to curb these financial crises which have brought various macroeconomic effects like: inflation, unemployment, poor economic growth, change supply of money in the economy and interest rates charged by banks. There are many articles written by Gretchen concerning these financial problems in the U.S.A and other parts of the world. She has been calling for government to reform regulations on Wall Street for several years. She has written many articles in New York Times.
On the article; banks could return a favor to government, the article gives an alternative way of paying old debts by refinancing themselves with new debts rather than entering in swaps. The new debts have low interest as compared with old ones. Banks have decided to charge long term variable interest rates to public borrowers who are paying with high interest and fixed ones to bond holders in case of a financial hit. These swap related debts have huge termination fees and the effects are in the hands of tax payers who lose this money to these Wall Street. Public borrowers have lost millions of money to these long-term rates and its only banks which can assist to handle this issue.
The government officials who are carrying this business are defending it reason being these swaps are charging low interest rates hence saving money for taxpayers and borrowers which is not true. Unless the relevant authorities keep fixed rates on interest, tax payers will continue to lose billions of money. According to last week report, there are more than one hundred government agencies involving in swaps costing the public approximately 2.5 U.S dollars. This money could have gone to public service but it is lost in swaps. The big problem is when one tries to escape these snares, termination fees are paid for with that new debt deals. This is the reason for why most of the people suffer due to penalty fear because the interest rate is added to termination fee.
In the real situation taxpayers are facing economic problems as they lose their money to Wall Street banks. Instead of improving their standards of living after securing a loan, they work to pay it. This has led to increase in the number of people living below poverty level because they are not able to pay their borrowed money. The big problem is that these banks are owned by some top government officials and to table a bill to withdraw this will face many challenges. The taxpayers are supposed to force the government to review this part because it was signed during the good times of economic stability. It was not revised even after world financial crisis that hit the whole world that why majority of the people are affected.
An example in the New York is that, metropolitan transportation authority is planning to give more than $2.2 billion debt and refinance with more than $6 billion in this year plan. It is the responsibility of the debt issuers to raise an alarm to the government to assist them to reduce the losses they are incurring due to these swaps. This can be done by pushing banks to reduce or cut these fees. The recovered money can be used by government to offer services to its citizens. Such possible services are; social amenities such schools, hospital materials and improving sewerage services, improving of infrastructure such as roads and railways and creating more job opportunities.
In her subsequence article based on the same issue, “big banks need more transparency” big banks are creating huge gaps between small banks which make them difficult to compete with them. Politicians wrote Dodd-Frank law without considering its dangers to other financial institutions because they own them. Their huge capital and their greater liquidity requirements are straining others banks highly. These banks are not serving the country’s economic progress but dragging it backwards according to Kevin Warsh a former Fred governor. He criticized the government support to those big banks. This Dodd Frank act doubles the regulators and outsources capital required by international standards. It is causing taxpayers who are not able to access big banks due to hard terms and conditions required.
They are not supposed to be shut down but their disclosures which are still lacking by regulators to be transparent to allow investors to differentiate them. Regulators need clear disclosures to enable them assess financial statements and the risks which are associated with big companies. This will enable investors have enough information about these big banks so that they can make a decision of selling their shares or getting debts. Through this method, managers will work hard and will be accountable to any loss. This is because they do not work because they know the government is going to give them support financially. So when managers are hold accountable, they will make sure they win more investors by lowing their terms of lending.
The U.S financial regulators should work closely with other regulators from other countries like Japan and Germany that do not give support to big institutions. These banks perform very well because all their activities are in their hands. Meaning they get no support from government and therefore, have to work hard to enable them compete with others. This will ensure market disciplines are followed clearly. In addition, capital levels will be under market control but not big banks.
There are many macroeconomic effects caused by these finance instability not only in the country but also in other countries all over the world. It has caused inflations which have been witnessed severally in the world especially in the developing countries. The prices of goods go up and the currency loses its value compared with other country’s currency. Developing countries especially in Africa are facing this problem. An example is Zimbabwe where the prices of good went up to a difficult level which is still there even today due to failure of the government to take control of finance. Market principals should play its role to control the prices of goods and services but not some monopolistic institutions.
The second effect is unemployment. The money lost by taxpayers to Wall Street banks could be used to offer job opportunities to the people. But it is under a small group of people. If that money is under government, it will create more job post either directly or indirectly. When government spends its income in offering services, many people get either temporary or permanent jobs hence improving their standards of living. The economy of the country also improves and domestic production goes up. It lowers the national poverty levels because everybody is able to cater to cater for her/his family. The next macroeconomic effect caused by finance crises is that people lose fate in banking system. This is because each bank will charge its preferable interest on borrowed loans. Borrowers will incur huge losses and stops borrowing money from financial institutions. The supply of money is also affected as because small bank will have little to lend when large banks impose high interest on them. Therefore, there will be insufficient money in the economy leading to poor and slow economic growth.
In conclusion, the government is supposed to take part in controlling finance systems especially by reforming and regulating Wall Street banks. Stop backing large finance institutions to create a room for small banks to expand themselves and compete with them. The government should try to amend Dodd Frank act to allow regulators access financial status of banks.
References
1. Robert Weissman & James Donahue. How Wall Street and Washington Betrayed America. Washington. 2009. Print
2. Gretchen Morgenson. Banks could return a favor to government. New York. New York Times. 2012. Print
