Financial Organization - Essay Example

of Financial Organization Introduction There has been an increase in the number of unemployed people all over the world because of the widespread effects of the economic recession. Many companies are reducing the number of employees in an effort to cut costs while there are no new companies or growing companies that are creating more job opportunities. On the other hand, the lending ability of many banks has gone down. The rates of unemployment are in themselves a threat to the efforts that are being put in place to try and revive economic growth by stabilizing the banking systems. The government of the United Kingdom has been applying several strategies to strengthen banks including recapitalization efforts and asset swap which are aimed at removing dangerous assets from the balance sheets of these banks. It's with this in mind that the government of the UK has to change tactic in order to enable companies to remain in business and create job opportunities despite the economic recession The Rising Unemployment The number of people in full time employment fell drastically between 2007 and 2009 (Arnold 2001). The rate of loosing jobs is alarming. About the same number of jobs lost the previous year were lost in just four months last year from October 2008 to the beginning of the year 2009. it better to make the assumption that those who lost their jobs were those who were being paid well from their professional expertise and could still be living on their bonuses. The number of people unemployed but actively seeking employment has increased by about one million, other people appears to have opted for part time jobs and as a result the number of part-time employees has increased by almost 1.3 million. Some people have already given up (Gilbody 1998). By the beginning of the new millennium, (the year 2000) the world was very different from the way it was in the 1900s. The United Kingdom underwent a massive change. The labour party of United Kingdom had won its second term to serve again in office. In the beginning of the year 2001, the government wanted to have enough money to be spent on public services especially the national health services which was being under funded by then (Arnold 2001). The economic growth rates have been quite stable operating at about 2-3% since the beginning of the millennium. Inflation has not been a problem to the economy of the British government. The bank of England has been able to regulate the interest rates therefore managing to stabilize the economy of Britain. The pound has maintained a stable increase in value reaching a minimum rate of 1.37 dollars against the US dollar in 2001 and rising again to about a rate of one pound going for two dollars (Arnold 2001). With the emergence of the current economic recession, the number of people loosing jobs has caused a serious setback or rather it's an impediment to the banks lending, prevention of debt deflation strategies to be implemented and to renew output growth (Gilbody 1998). There has also been a wave of rising defaults all concentrating in the riskier parts of the banks loaning documents; buy to let loans, subprine mortgages and lending money to private equity enterprise as well as the management of financial asset acquisition among other activities, Europa Publications Staff (2003). Intervention to Support Economy It's very correct to stick to the conventional parts of lending schemes as advised by senior bankers since they have been performing well till now. The problems have only emerged on the financing side of bank's balance sheets and other particular aspects of the lending side. In other parts, the process of risk management on the ability to lend has performed convincingly fine. The amount of loss encountered rose in regions where systems for management of risks and credit control schemes are purposively overridden by senior managers anxious to take over the market share or produce mortgages for the packaging as a section of the model known as originate and distribute. The debt crisis that may ensue is because of the failure in leadership rather than the technical mistakes in the process of credit control (Kemp 2009). Bearing in mind the increasing wave of unemployment in the UK and the US, there is a threat to creating new and even more dangerous problem to the banking system. With the global economic depression set to intensify if not well managed now, the government will have to set in place a comprehensive strategy designed specifically to strengthen and stabilize the financial system so as to be able to create jobs despite the economic recession and also to ensure that private firms do not run out of the market or get out business (Gilbody 1998). There are several ways through which the government can achieve its goal of ensuring that no more jobs are lost and that companies especially the private owned corporations remain in business to provide employment. These include cutting down the taxes, encouraging lending by banks and encourage borrowing, provide government subsidies to investors, reduce interest rates on loans (Gilbody 1998). Reducing barriers to lending: the government should encourage the banks to lend money to the publics, private businesses and others. This can be achieved only when the obstacles to lending have been resolved successfully. The government shall have to purpose to 1. Extend the drawdown window (under the credit guarantee scheme by the government) to address the new debts in the effort to cut down the risk on lending experienced between banks 2. establish a new resource for asset supported securities 3. the banks of England's discount Window Facility will be encouraged to extend its maturity date, which will provide liquidity flexibility allowing the banks to swap less liquid assets(Kemp 2009) 4. establish a new facility of the bank of England to purchase high quality assets(Kemp 2009) 5. offer asset and capital security system for banks, with proposal for this to be synchronized by an international body and 6. Clarify the regulatory strategy to capital needs, via a declaration by FSA- Financial Services Authority (Gilbody 1998). The government will have to carry out negotiations with banks taking part in particular facilities lending conscientiousness accord that will state detailed and quantified lending obligation and this will have a legal binding and audited externally. The possible effect of these changes on the general public finances will in most cases be short-term, as the investments will not be held longer than necessary to make sure that there is stability and to offer protection to the taxpayers interests; liabilities will be supported by assets; and the charges will be levied on pertinent schemes. These changes can actually work well if they are built on the previous measure initiated by the government to support the revival of economy, HM Treasury (2009) In the year 2008, the government had announced to implement an all-inclusive package of support for the economic scheme both to enhance the stability of the banking systems and to safeguard savers and depositors. These measures have previously been used by other nations like Japan and south East Asian nations. The sane year in October, the government declared its commitment to an all-inclusive fiscal stimulus package to back the wider economy, ventures, clients and home owners. Again such measure have also been implemented somewhere else by other nations, HM Treasury (2009). Currently the government should be building on the previous strategies to support lending to small businesses as well as those that can be described as medium sized corporations. By recapitalizing the banking system, the government will be able to increase the capital ratios of the main banks considerably and to provide them with a buffer system which will enable them to cope up with the current economic changes which are very challenging (Kemp 2009). Over the previous year, the global economic and financial situation has deteriorated and especially the operation of international banks' confidence to augment lending has been restricted by the uncertainty about the worth of previous investments. In the United Kingdom, the lending by banks particularly foreigners, non - banking organizations and smaller lending organizations has greatly decreased. In order to support the process of economic recovery fully, the government should understand that it has to meet the lending demands of business ventures, consumers and homeowners to otherwise creditworthy level (Kemp 2009). The all inclusive measures to be implemented therefore will focus on the principal sources of continuing insecurity in the economic system and target to enhance confidence, allowing UK lenders to raise their lending and so carry out a more efficient role in the support of the wider economy. Credit guarantee system: this is a very important aspect for the government of UK, as it will have to extend the drawdown window following approval. This will encourage systematic issuance of debt guarantee, HM Treasury (2009). Banks can issues new debts and on issuance, the banks can keep on rolling it after the window closes. Asset protection system: in order to provide certainty and establish trust and confidence to the UK and foreign banks in their lending responsibility, the government will have to make commitment to offer asset safeguarding and capital security on the assets that are seriously affected by the current experiences in economy. This will help to decrease banks uncertainty about the worth of previous investments, so giving them greater confidence to give loans in future and to give them to the businesses found to be creditworthy, as well as clients and home owners who meet the same criteria, HM Treasury (2009). Assurance system for asset backed securities: apart from extending the period for credit guarantee scheme, the government should also invest in a new guarantee system for asset backed security. To enhance the accessibility of banks to wholesale financing markets, assist and support lending, and to encourage healthy and sustainable markets over a longer period of time (Baker et al 1998). The government should work in consultation with finance issuers and the investing firms to provide total or partial guarantee labelled as triple A categorised asset backed security plus mortgages and commercial and customer debt. The UK local banks and building organisations eligible to partake in the credit guarantee system will be allowed access to the new scheme following fulfilment of the systems requirements. The building organizations and banks will be allowed to follow the international standards and best practical ethics when underwriting, revelation, assessment and reporting. The government will also have to ensure that conforming criteria is strictly observed and that only those structure that prove to be transparent and of high quality obtain eligibility (Baker et al 1998). The government of Great Britain and Northern Ireland will have to function with the industry and observe the scope of the system under review. Lenders will be encouraged to provide mortgage backed securities to revive this market. Asset purchase facility by the Bank of England: this bank will have to set up a purchase program for assets if it has to increase the availability of corporate credit and reduce the illiquidity of the fundamental instruments behind all these developments. This will have to be done by a specially funded system that will be authorised by the treasury to buy high quality private property from private sector ventures, including paper given following entry in to the CGS program, HM Treasury (2009). The property will also include corporate bonds, syndicate loans, commercial paper, and several asset backed securities obtained in feasible securitisation. Bank of England Liquidity Facilities: the bank has been providing long term discount window facility to other banks and a standard borrowing period of about 30 days. If the government is able to successfully introduce the special liquidity system, as a contemporary resource, the program will remain in operation for over three year from now. Banks will benefit by having long term liquidity depend on the necessity (Baker et al 1998). Capital regulation: other than addressing the possible uncertainty and to reduce unintended pro-cyclical impact. The government in conjunction with the FSA deem true that it is preferable for the capital management to integrate counter cyclical processes which cause banks to build up buffers in good years which they can rely on for survival in the periods of economic downturns, HM Treasury (2009). The government will also be expected to continue working in collaboration with other nations with an intention of stabilising and strengthen the global economic system, political News (2009). The government will have to take into account all the relevant measures to make sure that there is stability of the economic system, to make sure that business ventures and home owners, and to also reduce the duration and depth of the ensuing recession as well as supporting the subsequent economic recovery process. Tax Cuts Tax cuts are very critical aspect of economy as they have been referred to the world over in relation to reviving the economy by encouraging investments. The British government should consider to use this tactic to encourage saving, investments and consequently creation of employment (Feng 2005). During instances like this when there is an economic crisis; many nations have offered tax cuts their citizens as an economic stimulus. To explain in simple terms this means that if a nations offers tax cut of about $ 3 trillion for a period of ten years, it will return back cash worth about one percent of the consumer expenditure for that same period. There have been a lot of questions raised about the ability of or the way in which tax cuts are able to initiate economic changes. For one to understand how the economy is stimulated is very critical because the government sacrifices a lot in this process. As the government issues the tax cuts, somehow it has to make up for the deficit caused and this may include selling of bonuses to the UK citizens or to foreigners instead or cut down its purchases (Feng 2005). The major process that takes place when the government issues tax cuts is that there is flexibility, something that is much needed in times like that of economic recession. In this case, the people who wish to sue up more can do so by spending their tax cuts for that reason, Political News (2009). On the other hand, those that wish to save some more resources can do so and even buy up new bonds from the government. It's a perfect scene as previous over investment ended up in distended inventory levels and poor private venture opportunities. For any nation to be prosperous, it has to have a healthy economy. Increasing the government expenditure will not assist in solving the problems of recession. Strengthening the economy requires that investors be provided with the correct and relevant incentives to help shape up the economy. This is what is termed as the pro economic growth tax policy, Political News (2009). This means that the government should find a way of ensuring that the tax cuts are directed at enhancing savings and investments in long term projects as well as short terms ventures. Energy security is critical factor of production that needs to be addressed when one is tackling issues of investment and economic recession. The UK government should try to regulate its dependence on oil from abroad and invest in green technology (Feng 2005). This is because having plentiful and varied resources of energy will encourage investment and will also be safe for the environment. There are some barriers to the development of economy that have to be eliminated. This includes interest rates on borrowing which have to be reduced during thesis time of recession. This would greatly boost the economy. The current recession is pertly due to the government policies that have been implemented for over a long period of time by now. Policies that put excess burden to the business venture or those that show favouritism for certain business are very dangerous (Feng 2005). The short-sightedness in the political manipulation of the UK market should be ended an d the government act to reduce economic burdens The UK government should be strict to offering the spending guidelines. Nonetheless it's very critical to follow fiscal constraint to avoid undermining other priorities, Political News (2009). Conclusion Since there in the risk of loosing skills and expertise following long term lack of employment, the problem of solving the economic recession could be very difficult even worse than ever thought. The government of the United Kingdom should therefore put in place a plan that will support even those not in any kind of employment. This is what refered to as guarantee intensive strategy. The government will have to depend of strategic budgeting as the contingency in case other initiatives like tax cuts, lending, and the provision of factors of production fail References Arnold B. (2001). Stimulate the Economy, Not Big Government. Citizens for a sound Economy. Freedom Works retrieved on 30th April 2009 from http://www.freedomworks.org/publications/stimulate-the-economy-not-big-government Baker D, Epstein G.D. & Pollin R. (1998). Globalization and Progressive Economic Policy. Cambridge University Press Europa Publications Staff (2003). The Middle East And North Africa. Routledge Feng Y. (2005). Democracy, Governance, and Economic Performance. Theory and Evidence. MIT Press Gilbody (1998). The UK Monetary and Financial System. An Introduction. Routledge HM Treasury (2009). Statement on Financial Intervention to Support Lending In The Economy. Newsroom & Speeches retrieved on 30th April 2009 from http://www.hm-treasury.gov.uk/press_05_09.htm Kemp J. (2009). Rising Unemployment Gravest Threat To U.S and UK. The Great Debate retrieved on 30th April 2009 from Http://Blogs.Reuters.Com/Great-Debate/2009/02/10/Rising-Unemployment-Gravest-Threat-To-Us-And-Uk/ Political News (2009) SCENARIOS- Can Budget Revive UK Economy and Labour's Fortunes Retrieved on 30th April 2009 from Http://Www.Lse.Co.Uk/Politicsnews.AspArticlecode=I38hijzf7opcs3p&Articleheadline=Scenarios-Can_Budget_Revive_Uk_Economy_And_Labours_Fortuness Read More