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Money Policy versus Credit Market - Case Study Example

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This paper "Money Policy versus Credit Market" discusses the traditional Keynesian/Monetarist explanation of the money supply and structure that evolves around the concepts of the elasticity of the demand and supply of money. This is normally determined by the short-term interest rate…
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Money Policy versus Credit Market
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Download file to see previous pages Financial institutions generally engage in securitization to enhance their profits by trading in the collateralized backed securities that generate high yield returns to the financiers. This nevertheless inversely and negatively affected the credit markets as their efforts to enhance their liquidity positions backfired. Consequently, the import of these monetary strategies has generated cyclical effects on the monetary system to the detriment of the financial system.

Normally, money markets demonstrate a more efficient allocation of credit whenever additional liquidity is injected into the system, which would otherwise display some undesirable distortions. Ultimately, the liquidity market is not easily susceptible to external factors.

Banks are the financial intermediaries engaged in the business of granting various types of loan facilities and hence deal in credit distribution. Among those seeking credit, the major class of the borrowers consists of household and small-medium enterprises (SME) who are constrained when applying for loans since they lack the necessary information and credit worthiness crucial in obtaining credit (Stiglitz 2002, 1994; Mosley, 1999).

Due to these perceived credit riskiness of the prospective borrowers, banks are forced to fortify their position by seeking higher yields for risky loans hence leading to stiffer charges and penalties for those borrowing. The banks normally ensure they diversify these investments by spreading the risk through diversification. This is normally underwritten by packaging the loan items in a series of asset-backed collateralized securities floated through bonds in the securities exchange at the stock market. These types of securities have very high yields as compared to the normal conservative bonds with minimal risks.

Securitization refers to the structured financial process that transforms solid, non-marketed assets into tradable form though an issue of asset backed securities ABS) or bonds to be sold to general investors with the purpose of risk distribution.   ...Download file to see next pagesRead More
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Money Policy Versus Credit Market Case Study Example | Topics and Well Written Essays - 1500 Words. https://studentshare.org/macro-microeconomics/1731540-subprime-crisis.
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