to the 2008 financial crisis was perverse incentives ending up having a
negative effects, opposite of what was intended. Like, mortgages brokers got
bonuses for lending out more money, that encourages them to make riskier loans,
which hurt profits in the end, leading us to moral hazard. Banks and lenders
were wiling to lend to sub-prime borrowers because they planned to sell
mortgages to someone else. Everyone though they could pass the risk up the
line. “Too big to fail” is a perfect example of moral hazard.
fail to regulate and supervise the financial system. To quote the bi-paryisan
blamed on the years of deregulation in the financial industry and regulators for
not doing more.
government enacted a program called TARP, the trouble assets relief program,
and which the rest of us call the bank bailout. This initially earmarked 7000
billion to shore up the banks. It actually ended up spending $250 billion
bailing out the banks, and was later expanded to help auto makers, AIG and
congress passed a financial reform, called the Dodd-Francj law. It took steps
to increase transparency and prevent banks from taking on so much risk.
Dodd-Franck set up a consumer protection bureau to reduce predatory lending. It
required that financial derivatives be trated in exhanges that all market
participants can observe. And it put mechanisms in place for large banks to
fail in a controlled predictable manor. But theres no consensus on whetehr this
regulatin is enough to prevent future crises.
with lending by the Fed, this helped stop the panic in the financial system.
Treasury also conducted stress tests on the largest wall banks. Government accountantS
alarmed over bank balance sheets and bublicly announced which ones were sound
and which ones needed to raise more money this eliminates some of the
uncertainties that had paralysed lending among institutions. Congress also
passed a huge stimulus package in January 2009. This pumped over $800 billion
into the economy, through new spending and tax cuts. This helped slo the free
fall of spending, output and employment.
In the end, the
states tightened the agreements of global finance. The capital ratios required
in the banking community have been increased, as have the resources allocated
to the supervisory authorities. Another target of these new rules, known as
Basel 3, is to reduce the banks “too big to fail”, which states were
forced to save during the crisis. “The solution is to make the banks all
the less profitable as they are large,” Charles Wyplosz, (IHEID) in
Geneva, in the figaro.
different views on how the financial structure affects economic growth exactly
(Levine, 2000). The financial services sector has experienced stresses due to
lenders action repercussion in creating unnecessary moral hazard. The legal
system shapes the quality of financial services (for example La Porta et al.,
1998) in agreement with this statement, in my opinion I believe the government
had its part of responsibility to regulate banks by separating private to
public institutions to protect depositors.
unfair advantage to competitors who has less efficiency due to nationalized
bank. The nationalization “option” shows how any medium or big company such as
Northern Rock could fail and the result of this failure would be to be saved by
the government with tighter restrictions and regulations in the future.
A crucial reason
why I think the nationalization of Northern Rock was a good decision is because
it ensured economic survival and efficiency in face of crises and post crises
reconstruction. It could have a monstrous impact on the British economy,
affecting also citizens who would end up no longer trusting their financial
institutions as well as the government. This nationalization allowed to
mitigate depositors even if the government had to pay a huge sum to save Northern
Rock from these problems.
could not be funded more quickly than by being rescued under national
ownership. This give the banking structure the possibility to be rebuilt in a
quicker and effective way which guarantee effective regulation of bank in the
Future. After the nationalization of Northern Rock, depositors decided to trust the
bank by putting their saving and money. Even if the failure of northern rock was massive
depositor took the advantage to secure their financial asset under the
nationalization which guaranteed no looses.
The nationalization of this bank is the least bad of the options. She would have the advantage of leaving the treasure alone in charge. It would then be easier to set priorities and ensure transparency. Without the help of the government, the bank would have gone into liquidation and Northern Rock would have received almost nothing. With nationalization, they will receive compensation. Of course I think that the problem could have been stopped if regulations were put in place earlier to influence the I consider the rescue of Northern Rock to be a good decision, I believe it was the best decision in term of value for money to take as not to overshadow the economic situation a part of the western world financial crisis.