Question

In: Economics

Find and explain the different methods to stopping a finicial crisis . Explanation of each method...

Find and explain the different methods to stopping a finicial crisis .

Explanation of each method should be a paragrapgh long .

Solutions

Expert Solution

Last Financial Crisis of 2008 - 2009 has taught great lessons to the world. Follwing are certain steps which can avoid another financial crisis.:

  • Qunatitative Ease Quantitative easing is a process whereby a Central Bank, such as the Fed purchases existing government bonds (gilts) in order to pump money directly into the financial system. Quantitative easing (QE) is regarded as a last resort to stimulate spending in an economy when interest rates fail to work.Quantitative easing (QE) – the purchase of assets with electronically created cash – was the defining policy instrument of the last financial crisis. By rebalancing investors’ portfolios out of cash into non-monetary assets such as bonds, equities or real estate, QE would increase the demand for these assets, which would lead to new supply that would finance new investment in the real economy.quantitative easing can fuel economic growth since money funneled into the economy should allow people to more comfortably make purchases. This can have a trickle down effect on both the consumer and business communities, leading to increased stock market performance and GDP growth.
  • Macro Prudential Tools Macroprudential policies are financial policies aimed at ensuring the stability of the financial system as a whole to prevent substantial disruptions in credit and other vital financial services necessary for stable economic growth.Macroprudential policies aim to reduce the financial system’s sensitivity to shocks by limiting the buildup of financial vulnerabilities. This may include higher charges being applied to Global Systematically Important Bnaks as they pose more risk to the system. Higher Capital Charges will resuce the likelihood of financial collapse because the ability to absorb losses will increase.A macroprudential approach would assess and control for the mechanism that banks would implement to reach their required capital ratio, essentially encouraging them to raise capital rather than pull back on lending.  
  • More Rules and not Discretion This question addresses the issue of whether monetary policy should be made by discretionary policy or be implemented according to a set of rules.Tthe lesson of the crisis is that we need more rules to rein in credit growth during a boom, not more discretion. The central banks should act prudently and judiciously and tighten the credit limits when they feel that it is required.A rule, based on bank profitability or credit growth, could determine when higher-than-now capital requirements are raised during the boom or relaxed during periods of financial stress.
  • Managing Risk in the System Risk can be hedged, spread and pooled, but it is not so easily reduced. The task of the new macro-prudential central banker is as a risk manager for the financial system.All financial institutions, irrespective of what they are called and what sector we think they are in, to place capital against mismatches of liquidity, credit and market risks. This would incentivize those with wells of liquidity to draw liquidity risk from others and, in return, sell them credit risks that they cannot easily match and vice versa.
  • Role of IMF International Monetary Fund has palyed an important role in times of finnacial crisis and have saved the world economy.  it is essential for the process of IMF evolution to continue – across the range of lending, analytical and research activities as this will save the world economy from financial crisis and promote fianncial stability.

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