Transnational Financial Crime in the United States - Essay Example

Transnational Financial Crime Introduction The incidents of recent times, specifically with Greek crisis suggest that the period of financial and economic instability which started nearly three years ago is not over yet. The first chapter of the instability, beginning in 2007 occurred mostly in the financial marketplaces, ranging from the stock markets to money markets (Tara Siegel 2009, A1). With the collapse of Lehman Brothers in 2008, the financial crisis spread to other sectors of the economy, causing investment, consumption, and trade to fall globally. The financial policy administrators have tried to deal with the recession with enormous injections of cash to support the financial system. Public shortfalls have increased to unparalleled levels, driving up the liabilities of all the developed nations. This has led the IMF to characterize the present condition as a wartime liability, without a battle. Most countries have already moved into the third chapter of the financial crisis in which the markets have started to question the sustainability of monetary policies, in particular as regards public funds and, accordingly, the feasibility of the economic recovery itself. However, initial signs that the United States economy may be finding its way back from the global recession to be experienced since the Second Depression are starting to become apparent, a year after the panic started. Comparable signs are emerging in China, Japan, and China. Most economists seem to concur that period of economic prosperity propelled by cheap debt is over. A number of analysts are of the view that a lengthened period of slow employment growth and suppressed wage expansion will keep most consumers and the enterprises in the crisis for years. This is true considering the fact that the rates of unemployment rose to 9% in 2009 and was anticipated to peak over 120% as the year ended (Robert 2009, 84). It could be even five years before the United States economy creates sufficient employment to overwhelm those lost and provide employment to new employees joining the workforce. Inefficiency of Financial Markets The financial crisis has forded a widespread consensus: financial markets are for the most part inefficient (Bolton, Freixas & Shapiro 2007, 301). They do not most of the times use the accessible information is such a manner to appropriately value the assets that are traded by participants in the financial market. Topical experience has proven there is a natural propensity to miscalculate risk when financial markets are ecstatic and to overrate risk in crisis. These behaviors are derived from the fact that the market participants have to try to maximize the returns on capital employed, either using their personal accounts or on behalf of their customers. Presently, there is a growing body of evidence that sheds light on the reason why, even with reasonable agents, financial markets cannot be effective at the summative level, and specifically lead to emergence of speculative bubbles (Robert 2009, 85). One year following the near downfall of the international financial markets, this much is apparent: the financial world as it was known is over and something novel is emerging from its ashes. It is no doubt that historians will always view 2008 as a watershed for the United States economy. In 2008, the U.S government held mortgage giants Freddie Mac together with Fannie Mae. Several days later, investment financial institutions Lehman Brothers applied for bankruptcy, instigating a worldwide financial anxiety that threatened to bring down blue-chip banks across the globe. In the numerous months that ensued, governments from Beijing and Washington reacted with unparalleled intervention into markets and in their financial systems, seeking to halt the wreckage and lessen the damage. One year down the line, the easy-cash system that funded the boom period of 1980s until lately is broken down. Once-ravenous United States consumers are saving cash and repaying debts. Financial institutions are building reserves and hoarding funds. And administrations are fashioning a fresh international financial order. The Obama administration and Congress have lost patience in self-regulated financial markets. Collectively, they are writing the most all-encompassing new rules over financial markets since the Second Depression. This seems ever more related to global economy; U.S government is working with its allies through the G-20 to come up with global regulations to govern finance. The aim is to establish an economic structure that is going to ensure a more balanced growth pattern globally, less dependent on a buildup of unsustainable borrowing around the globe. That implies finding means of balancing the role of markets and governments. As U.S president Barrack Obama stated during his swearing in speech, the query is not whether the federal government is too small or big, but whether it functions. Similarly, the supremacy of financial markets to expand growth is unparalleled, on condition that they are subjected to effectual oversight to stem excesses. Bilateral financial institutions including the IMF, ILO, and OECD, the WTO and the World Bank have been requested assist administrations take on their duties. But collaboration should also involve other market players too, including international fiancé and business.   The third chapter of the financial crisis has affected Europe first. Money markets consider, wrongly or rightly that in state where there is an ideal overlap between the fiscal and monetary authorities the threat of insolvency is restricted because the national bank can produce money and generate inflation so as to lessen the load of public debt. Nonetheless, the Euro region which monetizes its liability has to address the problem without delay and make sure that every state is solvent without monetary contributions. If the EU is capable of overcoming the present problems and reinstate its public finances, it will leave this phase of the financial crisis before others. The financial crisis can only be made worse if countries give way to the allure of petty nationalism and protectionism. In the interim, administrations have no alternative but to continue channeling their efforts towards stimulating financial activities. 2009 was a tough year. Joblessness kept on rising, consumers were diffident, and investors remained became nonessential. The initial and pressing mission for lawmakers is to try to stabilize the financial markets while persevering spending on infrastructure to strengthen financial systems by creating jobs and encouraging demand. The Case for More Regulation Examining the historical accounts, there is a strong case that government control of financial markets has indeed worked previously to lower risks and inspire consumer confidence. From the time the U.S was founded, it has witnessed banking fears approximately 15 to 20 years. During the time when Second Depression emerged, it was basically in a club of its own in terms of government response and severity. With the financial system just about to collapse, the Roosevelt government engineered all-encompassing government intervention in the financial market, including the establishment of federal deposit insurance, banking supervision, securities regulation, and the separation of investment and commercial banking all under the Glass-Steagall regulation. In this way, the government regulated and insured the most systemically hazardous part of the financial system, the commercial financial institutions, and it exercised a touch which was much lighter elsewhere, leaving the other parts of the economy to be innovative, dynamic, and do the whole lot that markets do so well. This targeted approach helped guarantee both stability and improvement in the U.S financial system over most of the twentieth century. In actual fact, for the next five decades, the nation experienced no key financial crises, the longest such interlude on record. Noteworthy financial failures came back to the market in the 1980s with the loan and savings crisis, ensued by a rash of financial institutions failures in the 1990s that coerced the government to consider recapitalizing the FDIC's Bank Insurance Fund (Abreu an Brunnermeier2003, 204). A largely free hedge fund, Long Term Capital Management came dangerously close to disintegration in the year1998, threatening the worldwide financial system. The bubble split open in the year 2001. Accounting frauds brought down Enron in the year 2001 and WorldCom in the following year. The recent global financial recession is the worst ever since the Great Depression is yet to run its path. It is no mistake that all these financial problems followed a concentrated push by policymakers, economists, and bankers to deregulate the financial marketplace. Even though a deregulatory schedule was embraced by congressional Republicans and Democrats alike, President Reagan put the idealistic tone during his 1981 inaugural speech when he legendary observed: "administration is not the answer to the problem; government is actually the problem (Benabou and Laroqu 1992, 923)." Afterward, regulatory simplicity and a "market knows everything" attitude took hold in Wall Street and in Washington and subjugated decision-making for practically three decades. Policymakers not only dismantled or weakened New Deal-era financial market rules; they also failed to pass innovative regulations to match with financial modernism, spurred by globalization of financial markets and technology and globalization. Over time, a massive amount of financial movement moved away from controlled and transparent institutions and markets into the unregulated or lightly regulated shadow markets encircling off-balance sheet structured-investment vehicles, hedge funds, private-equity funds, mortgage brokers, and a thriving market in obscure derivatives, particularly credit-default swaps. The Treasury Department estimates that, by the year 2007, the shadow banking arrangement had built up assets reaching approximately $10 trillion, corresponding to total assets in the whole United States banking system. Whilst new systemic risks had surfaced along the path, there was modest effort to control them, undercutting the innovative New Deal plan of targeting such risks. As a consequence, the United States economy was left more susceptible than ever to a key shock. Given this history of regulatory neglect and failure, the present financial crisis was not an unforeseeable catastrophe. As some have contended, Wall Street was not a victim, but a vigorous participant in a extremely large mistake rooted in reckless regulatory ideology. In lots of cases, regulators decided not to use weapons they previously had, or they ignored the idea to request novel tools to meet the confrontations of a growing financial system (Peterson 2003, 23). Persuaded by these findings, the Congressional Oversight Panel has already seen the need to recognize and control financial institutions that pose systemic threats at the pinnacle of its agenda of crucial problems calling for of legislative refurbishment, together with restricting leverage and restructuring the credit rating scheme. Shortcomings in the Supervision and Regulation The financial crisis has also exposed shortcomings in the supervision and regulation of liquidity control. In reaction to this, the G20 plan and the Basel Committee plan to put into place a longer-term liquidity ratio. As it is widely believed, the excessive dependence on wholesale financing has also been a problem in some Asian nations, specifically in Australia, New Zealand, and Korea. Some countries such as New Zealand have already put in place a core funding regulation that lessens dependence on short-term funding. The financial crisis has plainly illuminated the interrelatedness of lender of the last resort structures and financial stability, which in numerous nations are handled by various agencies. In some nations, it has brought back the discussion over whether the central bank should have the responsibility of supervising and regulating financial markets. How can the central bank be anticipated to offer exceptional funding during a financial crisis if it does not have the responsibility to prevent crisis? This argument cannot be dismissed as baseless and unfounded. In essence, some states such as Korea have already ensured the setting up of additional formal structures to smoothen policy coordination and data exchange between the national government, the central bank and the regulator. Nonetheless, there are also notable arguments against a monetary stability role for the central bank. Most notably, it could endanger central bank autonomy and undermine the trustworthiness of the inflation targeting government. The financial crisis has also caused the reevaluation of the relationship between monetary policy and financial stability. Many people believe that slack monetary policy had a responsibility, if not the dominant one, in producing the credit bubble. Few are of the view that it is possible to rectify the situation after a credit bubble has burst. Thus, should central banks have the responsibility of thwarting the creation of asset bubbles? Once more, making central banks explicitly responsible for ensuring financial stability, or more unswervingly, asset price steadiness may cause confusion about devotion to inflation fighting. In addition, fiscal policy is somewhat a dull tool and first line of protection should at all times be prudential control. That said, prudent regulation many not at all times prove effectual in controlling asset bubbles and central banks may be required to become more willing than previously to use conventional monetary policy techniques to lean against unfeasible increases in credit. Inadequate Regulatory Another significant cause for the financial crisis has been an inadequate regulatory perimeter (Peterson 2003, 13). More specifically, financial institution’s leverage turned out to be much bigger than previously assumed given their contact with off-balance sheet units, which had propagated beyond the control of financial regulators. Undoubtedly, this holds significant lessons for some countries such as Korea. The state has embarked on al all-encompassing deregulation of its monetary markets with the passage of the Financial Investment Services and Capital Markets Act. This regulation removes limitations that segregated providers of financial services and introduced a negative record for fresh financial products. This is definitely a welcome development that must foster increased access to financial intermediation, specifically for dynamic and new segments of the economy. Nonetheless, this had to go jointly with the capability of managers to make sure that dogmatic arbitrage does not surface. In this milieu, supervisory and regulatory capacity needs o be at par with rapid innovation and market growth. The federal government poured billions of dollars into rescuing financial institutions viewed too big to fail (Mehran, and Stulz 2007, 271). In its hurry to assist, the government unwittingly established the mother of all risks; inherent rescue guarantees. The extension of guarantees to every systematically important business takes moral peril to a new level. Instead, the government should have slapped new tough regulations on all businesses that pose systemic threat; the threat that a failure of a single business could negatively affect the whole financial system. In most cases, regulators decided not to use tools they previously had, or they decided not to request new tools to match the developing financial system. Proposed Changes The changes of the financial markets that are being debated presently in the different bodies that provide information to the G20, such as the IMF, the Financial Stability Board, and the Basle Committee are aimed at establishing or strengthening regulations that lessen pro-cyclical behavior, for instance, through the financial institution’s financial requirement. The effectiveness of these novel rules and of the supervisory bodies that will enforce them will rely on their capability to impact the incentives of market participants and banks. Some people have expressed doubts about it, as it is hard to alter the incentives of market participants. Others argue that financial crises are unavoidable in advanced economies. Further, they argue, the financial crisis is bound to occur again but it will not be similar. Financial crises are all dissimilar but they have one basic source. That is the voracious ability of humans when confronted with considerable periods of affluence to presume it will remain. In simpler words, financial problems are parcel and part of the society. Among the suggested new regulations: FDIC-like insurance charges; leverage limits; higher capital requirements and, when all else are not successful, a receivership procedure to reform, liquidate, or sell, a failing business (Peterson 2003, 24). Bottom line, no business should be deemed too big to fail. Simultaneously, the majority of financial companies that pose no systemic threat should face comparatively light regulation, ensuring their sustained innovation and dynamism.  Domestic Efforts Since the last decades, Australia has been following far-reaching plan for economic changes. As a consequence, the financial system is presently in its 7th year of sustained development with low inflation. After some difficulties in the 1980s, the banking sector has been reinforced considerably, so that non-performing credits have decreased below one percent of overall loans. There are some of the rationales why Australia has not been drawn into the financial crisis. Australia has played a supportive role in helping to resolve the financial crisis. Australia agreed to offer $1 billion to the global financial packages to support Indonesia, Korea and Thailand (Camdessuss 1998, 1). Furthermore, Australia understands the need to reinforce performance and policies on a regional basis.. More freshly, it has vigorously contributed to the creation of the Manila Framework Group as a platform in which the Pacific and Asian countries can support each other to pursue superior policies and in that way complement the IMF’s multilateral supervision over countries’ economic performance and policies. OECD Other economic organizations such as the OECD are directing their efforts towards strategic reaction to the financial crisis involving policy recommendations. Promoting economic co-operation has been the core role of OECD’s task. For almost 50 years, the organization has collaborated with business and with governments, labor and civil groups to assist markets develop, societies move forward and nations come out from paucity. By involving some of the world’s main players such as India, Russia, Indonesia, Brazil, South Africa and china in this work, jointly, they are following a communal long-standing goal to put together a cleaner, and fairer international economy, without fraud, tax evasion, corruption, voracious exploitation and resource obliteration that have tended to discredit globalization and blocked the profits it can produce (Tara Siegel 2009, A1). Some of the policy recommendations being considered by OECD include reinforcing corporate power and doing much to fight the negative effects of globalization including tax evasion and corruption. Some political figures such as the Italy’s Finance minister has gone beyond seeking the establishment of international legal standard that would borrow from tasks previously carried out by global organizations including the OECD’s doctrine of Anti-bribery convention and corporate governance. Other areas that seem to have attracted new thinking include pension policies, investment, competition, and tackling poverty, climate change, and social exclusion together with an increased need to boost output while keeping investment and trade frontiers unlocked International Efforts The drive to refurbish regulation comes after extreme risk-taking by the international banks that led to massive losses, global recession, taxpayer-financed bailouts, and write downs. Bearing this in mind, the financial markets require a considerable change to avert further mayhem. Some of the proposed measures include new regulations on bank capital requirements, a worldwide standard for financing liquidity, new leverage ratio, and a structure for smoothing financial institutions susceptibility to economic cycles (Malize 2009, 1). Financial institutions will be required to hold additional capital on their books. Moreover, they should set aside extra profits as cushion against economic hardships and come up with limits on how much liabilities they incur under new global regulations. This should provide support to these financial institutions particularly in the risk management area while protecting and insuring them against economic downturns and market disruption (Malize 2009, 1). The need for higher capital requirements for financial institutions across the board should definitely improve practices of risk management. Another proposal that is being considered involves introduction of leverage ratios that limits the levels of debt financial institutions can run up as a percentage of their capital. The success of this proposal hinges on it being introduced and coordinated globally while adjusting for variations in accounting (Malize 2009, 1). The U. S regulators have by now introduced leverage ratios even as their European counterparts remain more unconvinced. It is important to note that a simple leverage ratio is improbable to work as long as there is no distinct accounting standard. European financial institutions face increased pressure to issue a higher number of shares in bid to meet the worldwide regulatory structure which calls for much better and bigger capital shock absorbers. The move follows disparagement that some European financial institutions have relied too a great deal on multifaceted securities which are thought to be poor lines of defense against big shocks. All financial institutions will have to keep larger capital buffers once the recession has passed. Further, banks should be required to keep some fraction of the loans they re-package and put up for sale as asset-backed securities (Malize 2009, 1). The Germans and French have stressed the need to continue essential reforms to guarantee a transparent and responsible financial sector. Conclusion It is clear that the anguish and pain of the present international financial crisis were as a result of successions of huge malfunctioning in the center of the globe’s most industrialized nations. Many countries are in their present situation because of an extreme of financial modernism, propelled by an ever-rising hunger for temporary profit. Against a backdrop support from the governments for the expansion of markets, majority did turn a blind eye to fundamental problems of business regulation and ethics calling for the great need to redesign the regulations of global business and finance. To reinstate the confidence that is essential to operating markets, there is an increased need for superior supervision, enhanced regulation, enhanced coordination and improved corporate governance. In turn, these call for better collaboration at different levels. In such an atmosphere, administrations should not be enticed into rescuing all ailing national firms or interest. But away from short-term pragmatism, policymakers should also make a decision concerning how to put in place a long-standing path for the world financial system. Together with more effectual regulation, there is need for just social regulations and ending of bottlenecks that have been known to discourage innovation and competition and block sustainable growth and development. There is a need to find means for administrations to leave their momentous urgent interventions once the global financial system is back on development track. Bibliography Abreu, D. and Brunnermeier M 2003, Bubbles and crashes, Econometrica, vol. 71, no.1, pp. 173-204. Benabou, R and Laroque G 1992, Using privileged information to manipulate markets: insiders, gurus, and credibility, Quarterly Journal of Economics, 107, pp. 921-948. 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Harvard Business Review, vol. 87, no. 11, pp. 84-92 Tara Siegel, B 2009, Rewriting Rules to Protect Money Funds, New York Times, pp. A1 Read More