Money and Capital Markets, Problems Affecting the Financial System - Essay Example

nеy and Сарitаl Маrkеts By Student’s Name Code+ course name Instructor’s Name University Name City, State Table of Contents Моnеy and Сарitаl Маrkеts 1 Executive summary 3 Introduction 3 Mortgage in the financial sector 4 Problems affecting the financial system 5 Corruption as a vice 5 Importance of the money and capital market 8 Employment in the financial institutions 8 Researcher’s analysis 8 Liberal financial system 9 Conclusion 10 Reference list 12 Executive summary It has been approximately 15 years from the time the process of financial deregulation in Australia was completed. The process was started in the early 1970s with the slow process of removing of controls by the government of bank interest rates; however, it picked up momentum in the early 1980s. The key steps to the removal of the controls on banks by the government are letting free of interest rates on government securities, floating their exchange rate and eventually opening up the banking system to the foreign competition (Thomas 1964). Introduction It has been noted that the Australian mortgage rates have fallen drastically. This has been witnessed this week due to what is termed as a drop in Treasury bond yields. It must be noted that Australia has been struggling to ensure growth in mortgage market following the subprime crisis that was witnessed globally in 2007. During this period, the rates of the mortgages were seen to drop very low as a result of excessive borrowing by the public, which eventually resulted in to public debts (Culbertson 1972). However, in April 2012 the rates were seen resulted in to a drop in the mortgage rates. This is because investors had developed fears that the economy of Australia was dwindling. Investors developed higher demand for the government securities. It has been noted that the Treasury bond had improved by 1.92%. This higher demand for the government securities affected the demand for the 30-year mortgage hence resulting in to even more drop in its rates. Mortgage in the financial sector 30 year mortgage whose rate is always fixed is the most prevalent and common type of loan in Australia. The rates for the 30-year mortgage fell from 3.88% to 3.84%. This has been noted to have effect in the economic growth of Australia. It is also true to note that this drop is the lowest that Australia has witnessed since 1971. However, the country also witnessed a lower rate of 3.84% on 9th February. Frank Nothaft who is a chief economist at Freddie Mac argues that this low rate witnessed this week resulted from the fact that Australia has always witnessed signs of slow economic growth and inflation. It is however noted that the mortgage rate had jumped drastically to 4.08% in March due higher rates of bonds. This has shown very well that the rate of the 30-year fixed mortgage rate has not been stable over the last 1 year. The higher rate of 4.08% was witnessed due to the fact that there were higher levels of optimism concerning the economic growth of Australia. The higher levels of optimism and confidence on the economic growth of the country resulted in to even higher rates for the mortgage. This means that investors were very confident to invest in the mortgage because they were highly optimistic of gaining in the deal. Apart from 30-year mortgage, other mortgages were also affected in as far their demand and rates were concerned. For instance, the 15-year mortgage rate dropped from 3.115 to 3.07%. This dropped has been witnessed in this week. In addition, it has also been noted that the one-year adjustable rate mortgage rate has also dropped drastically. This drop has been seen to be as low as 2.70% (Macht 2001). Due to subprime crisis that swept over the world and especially Australia in 2007, the government decided to take some deserved actions. They reduced the borrowing rate for those in the sector. This action was taken by the Australia government in 2008 so as to improve access to home loans by the public. These two companies handle a greater percentage of home loans in Australia since 2008 when the mortgage market collapsed. The company has illustrated that 87% of the mortgages bought from the company has been majorly for refinancing. This has resulted in to improvement of about 2% from 2011. Freddie Mac has also noted that there exist loosened restrictions in the mortgage market that surround the process of refinancing. Due to this problem, the government has decided to enact a program that is aimed at improving refinancing process of home loans (Mortgage Bankers Association of America 1981). In summary, it is wise to note that the drop in the 30-year mortgage rate is likely to affect the economic growth of Australia. This must therefore be handled with a lot of care that it deserves. It has also been noted that the drop that has been witnessed this week has resulted from the fear of slow economic growth of Australia. The Australian government should therefore assure investors that the economy of the country would be stable. This will motivate investors to invest more in the housing market (Theil et al 1980). The government should also ensure that only credible companies are allowed to advance the home loans to the public. The borrowers must be keenly scrutinized so as to ascertain their ability to repay the loan. This will prevent the country from experiencing another subprime crisis similar to the one that occurred in 2007. Problems affecting the financial system Corruption as a vice In sum, clearly, as explained by Goldsmith (1999), there are valid narratives as well as theoretical arguments that support both the functional and dysfunctional views of corruption in the mortgage sector. However, rooted in the empirical study conducted by Olken and Pande (2011), substantial evidence adds weight to the validity of the dysfunctional view of corruption. This is by adhering to the realities of the marketplace, suggesting that corruption may raise the marginal tax rate of firms, decrease business activity, and raise marginal costs of public funds, thus leading to a range of inefficiencies and reducing economic growth. This paper adopts an approach by conducting a case-specific study, which is coherent with the existing theoretical context, yet functions to determine the pragmatic impacts of corruption on Australia. The research will unfold in the following fashion: Firstly, by examining the theoretical and conceptual flaws within the argument that supports the functional view of corruption. This will necessitate an examination of the empirical evidence from the Australian experience to substantiate the dysfunctional view of corruption. Secondly, a focused scope on the telecommunications sector in Australia will take place to validate further the role that corruption has played in the business sector. Thirdly, it outlines the repercussions on the private business sector and the economy from utilizing anti-corruption measures in Australia (Hubbard & O'Brien 2012). The research presents conclusion and recommendations about the research. It can therefore be note that the widespread corruption witnessed in Australia can be blamed on the lack of goodwill from the government in curbing it. Bureaucracies like ministry of finance always act according to the instructions from the top bureaucracies like the parliament and office of the president. In this case, such bureaucracies can be easily manipulated by the top bureaucracies in the country. This research also shows that 55% of the respondents said that the power has changed once, 35% suggested that it has changed twice, 5% argued that it has changed thrice while another 5% noted that the power has changed more than three times. This shows clearly that Australia has not witnessed rapid change of power from one economic agency to another. The lack of rapid change of power inn such economic agencies is a very good recipe for increase in corruption in Australia (Hudson Highland Suspension Bridge and New England Railway Company 1988). What is evident is that the research has also shown that new regimes in Australia always come up with their own economic agencies. In this case, the new governments always alter completely the former or existing economic agencies and financial institutions. This can be said to a factor that as actually promoted corruption in the country. I must note that in cases when a new regime comes with its own economic agency, the likelihood that the new agency will work in favour of the new regime is very high. In this case, dealing with corruption is very difficult due to the fact that involvement is always very significant. I must also note that the research has revealed that it is not probable that the plans begun by the central agencies will succeed. 65% of the respondents argued that it was not probable, 25% noted that it was just quite probable while 10% argued that it was highly probable. The percentage of respondents that argued that it was highly probable is very low. In this situation, it is true to note that the probability that the new central agencies will succeed is very low (Moir et al 1989). Importance of the money and capital market Employment in the financial institutions This research has also revealed in a more coherent manner that most of the employees in the central economic agencies get employed without formal assessment. This can be viewed as a very significant factor that shows how widespread corruption is evident in Australia. It must be noted that when employees are employed without any formal assessment, corruption can be seen to increase at a very high level. To reduce corruption in most government sectors, it is very important that employment is done in a formal and transparent manner. However, this has been seen to be lacking in the central economic agency and other financial institutions of Australia. It has also been noted that most of the respondents noted that employment in the central economic agencies and other financial institutions does not take in to account a university degree as a fundamental qualification (Burton Nesiba & Brown 2010). In this case, most of the people employed always have very low qualifications. I must also note that in cases where university degree is not considered as a minimum qualification, corruption is always seen to be widespread. This is because; there is no limiting factor in employing people in such sectors. It is fundamental to note that such acts always demote the morale of acquiring such qualifications. It is also likely that the lowly qualified personnel are always employed leaving out the highly qualified and experienced fellows (Green et al, 1991). Researcher’s analysis From the researcher’s analysis of the economic situations and financial structures, which exist in Australia, the researcher strongly, believe that different banks will not engage in game playing tactics. Australia is a very stable economy and with proper standards in place to regulate the financial structures and instruments. It is not a coincidence that big banks in the banking sector in the world set their foot in Australia; they must have been attracted by immense potential that the Australian economy exhibited (Saunders & Cornett 2009). It is almost impossible for investors to be engaged in gaming activities due to a number of reasons. Game playing is a sign of managerial incompetence and negligence, when the top management is rich in skills and managerial experience they should be able to formulate achievable targets for the firm and not depend on game playing to save face. An example is Citibank, which is a large financial firm with three broad line of business namely, individual banking, capital markets and corporate banking. It is therefore, expected that they should have highly qualified and experienced staff who are able to accurately read the economic patterns and make informed business targets based on this economic patterns. It is expected that the managers, heads corporate banking will not be over ambitious in their budgetary estimations and later use short cuts in the name of data manipulation to meet their target. Game playing is broadly divided into two groups, data manipulation and slack creation. Game paying is an economic crime and should be avoided by the financial institutions at all cost (Gordon & Natarajan 2009). Liberal financial system Another aspect that makes it hard for financial prayers to resort to game playing is the fact that the Australian economy is fairly liberal and allows them and other firms to operate optimally and achieve their full potential. For instance, the government does not limit foreign investment in the country. Additionally, the Australian government does not impose lending quotas to banks; they are allowed to lend out any amounts to any type of client. These have given financial institutions confidence to fully exploit all the potent business lines in the financial market. Large banking firms has been able to acquire huge client base both corporate and household, as such they are able to realise improved revenues. This aspect of less restriction has made it possible for the banks to make achievable business targets in terms of revenues and as such no need for game playing (Auerbach 1983). Australian economy is relatively strong and this is due to the fact that they are endowed with resources such as oil and tin. The Australian government has the political win to see the economy grow even bigger. The existence of political will shows that the economy is not hostile to investors such as Citibank will thrive and be able to easily meet its financial targets. The researcher portrays the primary goal of the Australian government as economic development and that this is achieved through development of sound capital markets improvement of financial product and services as well as having well trained and qualified human capital. Consequently, banks and other financial institutions have been able to grow their operations (Howells & Bain 1994). Conclusion With the trend of the past 15 years with comparisons to other countries in the region and the world at large, give a suggestion that the financial system of Australia will, on average, continue growing in faster rate than GDP. It is also seen that the growth is to be concentrated in the wealth and assets that are held with funds managers. This will underpin the expansion in the financial market activities and particularly in the emerging areas with examples like corporate debt. This becomes good news to the investors and not just those who work in the financial markets. However, Australia should deal with the vices that affect the country and the economy like corruption. This will enable them to grow as a nation and the financial system to stabilize. It is a show that, as the financial markets mature, healthy competition produces greater benefits to the users. The benefits may be in terms of greater choice of products due to availability of variety and also more competitive fees and interest rates. The economy of the country especially its performance should also benefit. A financial system that is diversified with an improved and dynamic financial markets becomes more efficient in the quest of channelling funds to the areas of the economy that are most productive so as to help the economy in absorbing the shocks that it is subjected to in times. Reference list Auerbach, R. D. (1983). Financial markets and institutions. New York: Macmillan. Burton, M., Nesiba, R. F., & Brown, B. (2010). An introduction to financial markets and institutions. Armonk, N.Y: M.E. Sharpe. Culbertson, J. M. (1972). Money and banking. New York: McGraw-Hill. Gordon, E., & Natarajan, K. (2009). Financial markets and institutions. Mumbai [India: Himalaya Pub. House. Green, C. J., Llewellyn, D. T., & Money Study Group. (1991). Financial markets and institutions. Oxford, UK: B. Blackwell. Howells, P. G. A., & Bain, K. (1994). Financial markets and institutions. London: Longman. Hubbard, R. G., & O'Brien, A. P. (2012). Money, banking, and the financial system. Boston: Prentice Hall. Hudson Highland Suspension Bridge and New England Railway Company. (1888). Mortgage. S.l: s.n. Macht, N. L. (2001). Money and banking. Philadelphia, PA: Chelsea House Publishers. Madura, J. (2001). Financial markets and institutions. Australia: South-Western College Pub. Mishkin, F. S., & Eakins, S. G. (2009). Financial markets and institutions. Boston: Pearson Prentice Hall. Moir, B., Bennett, B., & Film Australia. (1989). Mortgage. Sydney?: Film Australia. Mortgage Bankers Association of America. (1981). Mortgage banking. Washington, D.C: Mortgage Bankers Association of America. Saunders, A., & Cornett, M. M. (2009). Financial markets and institutions. Boston: McGraw-Hill Irwin. Theil, H., Clements, K. W., & Macquarie University. (1980). Recent methodological advances in economic equation systems. North Ryde, N.S.W: Macquarie University, Centre for Studies in Money, Banking and Finance. Thomas, R. G. (1964). Our modern banking and monetary system. Englewood Cliffs, N.J: Prentice-Hall. Read More