Question

1. What Pro's and Con's do you envision coming from one Global Central Bank (list and discuss)? Given your reasoning should there be one Global Central Bank?
2. Do you think that large financial institutions should have been rescued by the Fed during the Sub-Prime crisis?

Answer 1

We are considering ‘Federal Reserve’ or the ‘Fed’, the Central Bank of United States of America (U.S.A.), established by the Congress on December 23, 1913 under the Federal Reserve Act – providing the country with a safer, stable and more flexible financial and monetary system.

The Pros coming from The Fed would include:
-   It regulates and supervises banks and other major financial institutions in the U.S. to ensure soundness of the financial system and protect consumers’ credit rights in the country.
-   It prevents frauds and financial crimes by keeping a check and monitoring the operations of financial Institutions within the country. It maintains the financial system stability and contains systemic risk that may arise in the financial markets.
-   It functions by conducting the country’s monetary policy by influencing credit and money conditions in the economy to ensure full employment and stable prices.
-   Its monetary policy increase predictability and transparency, helping the Central Bank with explaining its actions to the public and helping the market to predict the future course under normal financial and political conditions.
-   Establishment of the national currency; it made a single currency valid throughout the country, helping the economy to run smoothly.

The Cons coming from The Fed would include:
-   It is often regarded as anti-capitalism, as finances are controlled by a huge government organization, instead of a group of private businesses.
-   It’s speculated that the government would simply decide to print as many US dollars as it wants and then pay off all debts of the government. However, under the Fed system, this is not allowed.
-   Favoring private interests over public interests and other lobbying groups having great influence over the Federal Reserve, allowing individuals to benefit rather than the whole society and taking away the well-being and rights of the public.
-   Manipulating the US economy by setting national interest rates at will.

The argument is still debatable that there should be a single Global Central Bank. Provided the national financial reforms and regulations are a result of research and work done financial and economic professionals and institutions under each and every sector within the overall Industry, and to a holistic approach towards the finances and related regulations, it would not be fair to say there should a single Global Central Bank operating within the country.

“Too Big to Fail” would have been still a WallStreet chant among the financial and non financial ending institutions if there wouldn’t have been Dodd-Frank Act and Volcker Rule, implemented within the financial system under Obama Administration.

The concept overall didn’t take into account the public interests in the form of leverage the big financial institutions carried due to unsecured Debt lent to these institutions. Investment banks started doing ‘proprietary trading’ freely, played on the Public money for their own interest.

Lehman Brothers’ and AIG’s failure was mainly due to trading of sub-prime unsecured loans (which were apparently collateral or mortgage backed assets), but were traded and underwritten by Lehman Brothers to the extend till they were defaulted and there were no actual assets to be claimed and liquidated for recovery purpose, all other Investment Banks earned a huge chunk out of the sub lending activity, underwritten by AIG and Lehman Brothers.
It wouldn’t be fair to say that AIG and Lehman Brothers should have been rescued by Fed or the central bank, as this collapse set an example and established the standard and regulation which is Basel I, II, III norms prompting the Investment Banks to maintain enough liquidity and assets to pay off the interests to the Public upon difficult times in the financial system.