The global financial crisis of 2007-2010 highlighted many weaknesses of the world economy. In particular, it has shown that many financial institutions are too much dependent on one another, and the collapse of one organization can result in the collapse of the entire system. This problem has been discussed in the article by Sara Munoz, Alistair Macdonald, and Carrick Mollenkamp. In particular, the authors focus on the attempts to save such banking institutions as Royal Bank of Scotland (RBS) and Citigroup Inc.
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For example, the government of the United Kingdom invested $ 36 billion in order to avert the bankruptcy of RBS (Munoz, Macdonald, and Mollenkamp, unpaged). Similarly, the City Group and Fannie Mae were supported by American government. This support is essential because too many organizational investors are dependent on City Group or Royal Bank of Scotland. The authors point out that many of these former giants were on the verge of complete nationalization.
The journalists also argue that to a large this situation was created by irresponsible risk management policies of these organizations (Munoz, Macdonald, and Mollenkamp, unpaged). Their rapid expansion was carried out at the expense of investors. At the given moment, American and British governments have no alternative but to invest capital in these organizations.
Such situation can be observed in the United States, the United Kingdom, Germany, and other advanced countries. Again, even now one can hardly tell whether the attempts of American or British governments will be effective in the long term.
The main question is how to avoid such situations in the future. The problems highlighted in this article can be resolved only by a set of measures. First of all, banking institutions should be required to provide more information to their clients so that these people were more aware about the risks of investing money into a certain type of stocks.
In this case, one can speak about mortgage-backed securities. Again, one should take into account that thousands of people invested their money into City Group or Royal Bank of Scotland. At this point, these people depend on the very survival of these financial institutions.
Secondly, the government should distinguish deposit banks and investment banks. These organizations should have different risk management policies; otherwise the savings of many people can be endangered. Special attention should be paid to the policy of deregulation. Admittedly, it provided a stimulus to the development of this industry.
However, at the same time, it resulted in many adverse outcomes, for example, predatory landing and risky investment policies, especially in the cases when they are impressible. Overall, one can even argue that this reckless behavior significantly contributed to the recession.
The strategy can be implemented only if a set of legislative acts will be adopted by local governments. Moreover, more active role should be played by those agencies which monitor the activities of financial institutions. For example, the Securities and Exchange Commission has been criticized for its failure to warn investors about the impending crisis. Similarly, governmental agencies of other countries also proved to be inefficient in protecting the customers of deposit and investment banks.
To a great extent, global financial crisis could have been averted provided that these agencies forces banks to disclose information about their potential risks. The proposed changes can be adopted provided that legislators and governmental agencies join their efforts.
Munoz, Sara, Macdonald Alistair, and Mollenkamp Carrick. “U.K., U.S. Expand Bank Rescue Bids”. Wall Street Journal, 27 February 2009. Web. Available at: https://www.wsj.com/articles/SB123562943994280083