Past, Present Pieces on Banking Crisis

The emerging global economic challenge is seen as the most serious slowdown since World War II, with some analysts claiming that the world is now on the verge of a global downturn. It is suggested that the current financial crisis would be more severe because it is predicted to be worse than the 2008/2009 type, and it is expected to be uglier (Elliott). Some may also suggested that the planet is now facing another threat within the decade, with the most important aspect being a severe financial crisis, however, has been the realization that the current global crisis is comparable to the one that occurred in the Depression Era. Furthermore, it is noted that in both, the US has played a pivotal role with the hard-hitting effects appearing to be fed in America before other countries. The current setback facing banks and a deep financial crisis is comparable to the one of the 1930s Great Depression in the US in the infrastructural consideration and offers the chance for an exit strategy to warrant overturning the challenge.

One of the major implications has been the acceptance of the fact that the US has played a huge role in both the Great Depression crisis and the presents day economic situation facing the banking and global financial situation. A majority of the American population has aired their views about the present state and a many have stated their disappointment with the federal government and its ability to salvage the situation. It is reported that 74 percent of the respondents claimed that they are angry with the federal government and a further 73 percent are not happy with the work of the Congress (Allen). It is also clear that unemployment is a common vice in both scenarios of crises. In 1936, the rate of unemployment was at 17 percent and even though the proportion of those who lack jobs is lower today the rate of 9.8 percent people having government jobs is way too low compared to that experienced in the 1930s. It is also noted that socialistic and capitalist perspectives are the key differentiating feature in both crises (Allen). The common feature that historians relate with the present state is that the political parlance in the mid-1930s was featured by socialistic tendencies while the present state is being defined by less than 2 percent of socialists. Despite the difference, it has been identified that they should opt for the same spending pattern in case there is an impending global depression.

At the epicenter of the problem has been the effect of the vulnerabilities and the financial challenges that are putting world economies at stake. It is noted that both episodes of the economic challenges have been preceded by a scenario of rapid credit expansion that has resulted in high leverage (Helbling). A related feature has been the financial innovations that have ended up in financial shocks especially in the US where the financial integration is more widespread that anywhere else. It is, however, noted that the case that was witnessed in the 1920s is different from the present state in the manner in which it has impacted on the nations because while the 1920 case more specific to the US, the 2007 crisis is more global in nature. The incidence and realization of economic vulnerabilities have necessitated the need for balance with weaker global economic conditions. In 1929, Germany was already in a recession and the consumer prices in major economies had begun going down before the onset of the US crisis. In contrast, the inflation witnessed in the mid-2008 has acted as an initial cushion to the present challenge. A further effect has been the apprehension of the role of the financial sector hat has played a key role in the balance sheet adjustment. In both settings, it has been identified that the liquidity and funding problems have played a significant role in the realization of a financial sector transmission. Furthermore, the Helbling notes that in both times, the concerns regarding the net worth and solvency have been the defining features of the financial intermediaries though the specific mechanics have tended to be different considering the financial evolution (Helbling). During the 1930s crisis, it is reported that the problem arose from the lowering of the capacity of the deposit rate of the US banks while there was an inability of sustenance of deposit insurance. In the present case, economic experts have identified that the reassurance of deposit insurance has limited the capacity of funding especially in banks that are run by retail depositors. The problems have instead been translated on to the financial intermediaries that depend on wholesaler for the funding processes. It is, however, apparent that the money-supply contractions have tended to spread their spillovers through the rising capital flows to the US.

Amid the challenge, financial experts believe that the crisis will be best addressed through targeting recapitalization for the asset-cleansed banks and the removal of impaired assets. Perceived as a form of exit strategy, it is noted that the recapitalization process for banks as a component of capital regulation objectives. It is stated that banks need to raise the capital that plays a major role in offsetting losses and that will more a more prudent capital regulatory measure. One way of achieving this goal would be through the setting up of an upper limit that will leverage the tangible equity (Blundel-Wignall, Atkinson, and Se-Hoon 13). Thus, to ensure that the capital levels are higher, the limit would have to be set to be much lower than the standard for regulated banks. It is also worth noting that there is a need for a clear understanding of the need for banks to hold significant cushions of tangible equity that are way beyond the minimum. Furthermore, dealing with impaired assets should be at the focal point in the resolution of the problem that is threatening to cause a major depression. One notable feature in this dimension is that it has been identified that valuation is a difficult effect as it is no standard for determining the non-performing loans on the banks (Blundel-Wignall, Atkinson, and Se-Hoon 13). The asset management criterion has largely been applied in the Asia crisis and rather than think of it as a simple technique involving the cleaning of the observed balance sheet crisis, it is imperative to consider the need for appreciating the possibility of conduit issues. As a result of the great uncertainty about valuation that has become imminent, it has become apparent that the risk to the taxpayer could end up soaring high and emergency measures will have to be high in consequence. The use of asset management as a solution to the challenge presents several advantages that validate the need for the use of the criteria (Blundel-Wignall, Atkinson, and Se-Hoon 4). It is noted that through considering this approach, it will be possible for public servants to run banks while at the same time, the process does not create a market that permits better price discovery. It is also advantageous to consider this approach as it presents the advantage of the ability to be structured as a public-private approach, it is an open-market approach and it also uses the existing fund managers and is thus fast enough.

In conclusion, the challenge of the global crisis that is being experienced today is a reflection of the one that happened in the Great Depression based on the manner in which there are shared similarities between the two phases. Americans are not pleased with the federal government; there is soaring unemployment, and a perception of socialism that is changing to capitalism. The problem has largely been due to the economic vulnerabilities and economic challenges that are manifested in balance sheet adjustments. To overcome the problem, it will be vital to consider the need for considering the recapitalization process and instituting asset management measures. It is anticipated that through the implementation of the processes identified, it will be possible to avert the challenge posed in the future and overcome the looming depression in the twenty-first century.

Works Cited

Allen, Jodie T. “How a Different America Responded to the Great Depression.” Pew Research Center (2010): n. pag. Web.

Blundel-Wignall, Adrian, Paul Atkinson, and Lee Se-Hoon. ”Dealing with the Financial Crisis and Thinking about the Exit Strategy.” Financial Market Trends 1 (2009): n. pag. Print.

Elliott, Lary. ”Beware the Great 2016 Financial Crisis, Warns Leading City Pessimist.” The Guardian Jan. 2016. Web.

Helbling, Thomas. ”How Similar Is the Current Crisis to the Great Depression?” Great Depression (2009): n. pag. Web.