Governments role for the solution of financial crisis in several countries of the world

University Degree Business and Administrative studies

Kamran Maqbool Malkani

Introduction to Economics

COURSEWORK ASSESSMENT, SUMMER 2010.

Government’s role for the solution of financial crisis in several countries of the world

In previous paragraphs, we presented an overview of several economic crisis, their reasons of occurrence along with some background. Now, we look at the questions how to solve this problem? Is there any general solution to overcome financial crisis or not? Since UK is still in some crises and facing some serious financial issues, it is difficult to say that government have proposed and implemented any strong solutions to cope with this issue. In view of this, firstly we discuss about the policies, strategies and solutions proposed and implemented by some other countries of the world, which had similar problem/issue in present or past. Then, we look at some of the feasible solutions to overcome this problem in UK.

Let’s start with United States of America (USA). According to International Socialist Review (ISR Issue-64, March-April 2009), the Federal Reserve adopted some policies, such as lower increased loans to banks and short-term interest rates, to tackle the issue of financial crisis. However, they didn’t get substantial success to achieve their goals. As a consequence, Federal Reserve introduced some new and non-traditional policies. For example first time in the history they extended loans to investment banks. Further, when bankruptcy of Lehman Brothers, the 4th largest US investment bank, caused the increase in financial crises in September 2008, Federal Reserve acted very gently by bailing out the world’s largest insurance company American International Group (AIG), which was in a big trouble and was unable to pay off all sold insurance policies. Congress also took active part in handling the crisis. An economic bill (known as Economic Stimulus) of $168 billion was passed by congress in February 2008, which contains tax rebates for households and tax cuts for businesses. It proved to be an effective and positive step in handling economic crises.

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Furthermore, in 2009, US Government introduced a program called “The American Recovery and Reinvestment Act of 2009” (ARRA ). It was an economic package for the nation enacted by the congress in February 2009. The main objectives of this package were to encourage investment and consumer spending in the time of recession along with creating jobs. The other features include federal tax cuts, increasing in unemployment benefits, spending on social welfare, education, health care and in the energy sectors. In the package there were also some non-economic recovery things that were part of longer-term plans. The budget for entire program was estimated $787 billion. A web-article (American Recovery and Reinvestment Act of 2009) presents some responses and recommendations on this program from several economists According to the article “Martin Feldstein, Daron Acemoglu, National Economic Council director Larry Summers, and Nobel Memorial Prize in Economic Sciences winners Joseph Stiglitz and Paul Krugman were in favor of large economic stimulus to counter the economic downturn. While in favor of a stimulus package, Feldstein expressed concern over the act as written, saying it needs revision to address consumer spending and unemployment more directly”.

On the other hand if we look at UK Government’s policies to deal with such crisis, we can see that there were two big approaches. Firstly, Government’s serious and strong involvement in free market for the purpose of providing bailouts. Secondly, the act of nationalizing the institutes and companies in order to take ownership. For example, Northern Rock and Bradford and Bingley were nationalized in February and September 2008 respectively. Gordon brown government spent £100 billion into banking sector. It also provided up to £200 billion in short term lending support. On November 2008, government announced to spend £20 billion in several areas till 2010 to handle the economic crisis. In the same month government also took control over RBS by taking 58% stake for £15 billion after avoiding the bank’s share offer by shareholders. Moreover, in the begging of year 2009, government announced a plan known as “Second bank rescue plan”, under which the Bank of England would have to set up an asset purchase programme to buy private sector assets with an initial fund of £50 billion. It would also allow banks to insure against extreme losses and guarantee their debts.

We looked on some of the actions taken by two different countries to handle the economic crisis. As we see these crisis are very serious and need to be sort out carefully and seriously, we should prepare ourselves for the upcoming time because nobody knows what will happen in future.

Thus we can see that we got only two possible options when a financial crisis occurs, bailout or suffer the financial crisis. Both are worst but suffering can lead us to more several problems and can effect on the other country’s economy as these crisis were started from US and then spread in rest of the world. Some economist suggested that the only way to avoid and overcome this cruel situation is that finance should be controlled and nationalized by the government. It will not solve the crisis completely but at some extent helpful for sustainable banking system. In addition, some economist stated that there is a need of different reforms in a wide range, because now it is not a single country’s problem, but the whole world. Therefore, it’s the time to be united and try to solve the problem on international level. Otherwise, these crisis seems to be difficult and cannot be handled by individual efforts. as a result of this we will find more worst crisis in the future which may be impossible to overcome.

Refferences:

Wikipedia.org, American Recovery and Reinvestment Act of 2009, last accessed on 20-05-2010, url:

Fred Moseley, The U.S Economic Crisis: Causes and Solutions, International Socialist Review (ISR), Issue 64, March-April 2009.

Britain and the Global Financial Crisis, Online Article, last accessed on 20-05-2010, url:

Governments role for the solution of financial crisis in several countries of the world

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