All-purpose Essay outline / skeleton on “Global Financial Crisis”

Raz · #1 Sunday, June 21, 2009

Dear members this material is posted for multiple objectives. I am assigning a general topic to this outline / Essay skeleton because this outline / skeleton may serve various purposes. One can utilize these points in following Essay topics:

1) Global Financial Crisis / Global Economic Meltdown
2) Global Financial Crisis / Global Economic Meltdown and Developed Countries
3) Global Financial Crisis / Global Economic Meltdown and Developing Countries
4) Global Financial Crisis / Global Economic Meltdown and Asia
5) Global Financial Crisis / Global Economic Meltdown and Capitalism
6) Global Financial Crisis and Globalization
7) Global Financial Crisis / Global Economic Meltdown and Pakistan
8) Global Financial Crisis / Global Economic Meltdown and Emerging Economies
9) Pakistan Economy – Internal as well as External threats
10) Worsening Economic Conditions of Pakistan and Remedial Measures

We can’t exactly call it a formal outline rather an essay skeleton because I have included some facts, figures, quotes etc. for the ease of our members. This material can’t be termed as a full fledge essay because this is in a point form covering maximum directions. Consider this as an effort to help members for writing an essay with a mix of outline and ideas. I have utilized nearly 100 sources for collecting this stuff consisting of various central Banks, World Bank, IMF, Asian Development Bank, EU, Fed, News Channels, Newspapers, Magazines, BIS, Group-20, speeches, summits, conferences, workshops etc.

Note: As my objective was to produce multipurpose master outline so you need to be selective while using this outline in any essay keeping in view the topic of the essay. There will be some points in this outline which will be omitted in some specific essay topics, and there will be the topics which will be requiring a particular ratio / balance in the points. Though this will be like a panacea for financial crisis / economic meltdown / recession / depression related topic yet you need to be cognizant while applying it.

Mods: Please help me in consolidation of various posts in this thread because length of this outline is 20 pages in word document. I wish I could post it in a single post.

Raz · #2 Sunday, June 21, 2009

When Benjamin Franklin said, “There are only two certainties in life – death and taxes,” he might have added financial cycles.

Economic crises or bubbles are often of cyclic nature and keep revisiting the world every 10-15 or 50-60 years whenever there develops fault line in the system.

Financial Crisis defined:

Business cycle defined with focus on recession and depression period
Boom, Bust, and Recovery in the World Economy: A housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, and a hedge funds bubble.

History of economic bubbles and cycles:
As Winston Churchill said, “The farther backward you can look the farther forward you can see.”

Tulip Mania>Ottomans (Turkey)
Mississippi Bubble (value of metallic currency began fluctuating wildly bubble burst in May 1720)>France
Great Depression>Wall Street: market turned bearish on October 24, 1929.
The Japanese asset price bubble occurred during1986-1990 period (speculative real estate bubble) and burst in the early 1990s, leading to Japan’s “lost decade”.
Argentinean crisis in the late 1990s.
The dotcom bubble in the US, driven by technology, began developing in 1995 and burst in 2000.
East Asian crisis (1997)

Root Causes of the Current Crisis / Mechanism of current financial crisis:
The principal causes of the recent turmoil in financial markets were a breakdown in underwriting standards, a significant erosion of market discipline, risk management weaknesses, and the failure of regulatory policy to offset them.
Two different views about American financial crisis:
1)

American Financial crisis: PETRODOLLAR Scam
Subprime fiasco and deregulation: Mortgage Business, Banking credit practices, loose rating mechanism of rating agencies, and loopholes in regulating bodies.

Chain reaction: The Crisis Took hold through following chain: 1) subprime market, toxic mortgages 2) rising number of foreclosures 3) engineering a sale to JPMorgan Chase 4) Sales, Failures and Seizures 5) stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply. 6) bankruptcy for Lehman Brothers. 7) Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks. Merrill Lynch, which had not been previously thought to be in danger, sold itself to the Bank of America to avoid a similar fate. 8) American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. 9) Stocks dropped anyway, falling nearly 500 points.

Week ending Friday, October 10 To will be remembered:

2. Alternate Cause of current crisis:

“Savings glut” VS “monetary glut”

“In fact, Asian savings may have provided the rope; but America hanged itself.”
Alternate Cause of current crisis: The current economic crisis had begun well before the ongoing global economic meltdown. Over the past eight years, official policies had essentially focused on the services sector at the cost of agriculture and manufacturing sectors. The economy faced many challenges with worsening fundamentals, resulting in depletion of the foreign reserves and depreciation of the rupee.

Debate on fixing responsibility: Market vs State:
Transmission mechanism of global financial crisis in different economic systems: The psychology of fear plays a major part in all recessions. We may remember the quote of Franklin Delano Roosevelt. He said,
"The only thing we have to fear is fear itself."
“It is the nature of economics that you play today and pay tomorrow”.

Arguments against Markets
Arguments for Markets

Free economy / market economy / capitalism / liberal economy / laisez fair system
Controlled /managed / planned/ socialistic /communist system.
Thirty Years of Development Economics: After thirty Years of Development Economics there has been a great debate over fixing responsibility that whether states are responsible for global financial crisis or markets?
The late 80s to early 90s saw an intensive policy debate on “market failure” vs “government failure,” and on “neo-liberalism” vs “revisionist” approaches. (To put it simply, “neo-liberalism” is an approach which relies heavily on market mechanism, while “revisionist” is the one which emphasizes the role of state). However, this debate was over 15 years ago.
The World Bank in 1997 backed away from pure free market dogmatism by emphasizing the “role of state” in its World Development Report.
Policies recommended by international financial institutions as well as by leading development economists in this behalf emphasize an appropriate macro-economic framework, a realistic exchange rate which is competitive and stable, the right set of sectoral policies and investments, appropriate role of the state in the economy, integration of the domestic into the world economy, poverty alleviation, clear identification of priorities and peaceful resolution of conflicts.

Measures taken by the US administration such as nationalization of AIGs and bailout packages to rescue the failing financial institutions and commercial organizations, in fact do not fit in the free market regime that believes in survival of the fittest. Many analysts and economists have firm view that free market can’t do self-correction. It is being hyped at present that we are, “entering a new paradigm of tight money, tough regulation, less speculation and more government meddling in markets.” With the loss of credibility of the American model, it is being speculated that because of the shift in the base of capitalism and new centers emerging in Europe and Asia, they will take the initiative to modify the model in light of their experiences.

Linkages of current financial crisis:

The demise of the Soviet Union and the end of the cold war,
The rise of Reagan-Thatcher onslaught towards deregulation and unbridled laissez faire capitalism and finally
WTO agreements and arrangements.
The explosive growth of international capital movements as the principal driver of globalisation,
Financial globalization: integration of national financial markets and its impact
The finance revolution of the past 15 years or so has been rent-seeking rather than welfare-enhancing in character.
Regional trade agreements

Global economic imbalances: When a flow becomes a flood

The financial contagion now spreading worldwide: Implications for Developing Countries:

Why are emerging economies affected? Emerging Economies More Dependant on Foreign Capital
Liquidity crunch, dwindling reserves and falling rupee: Effect of current crisis on developing nations:

IMPACT On ASIA
-- some Asian institutions have exposure to subprime mortgage-backed assets and other CDOs;
-- re-pricing of corporate risks in the US probably caused some normalisation of risk premiums; and;
-- tighter liquidity conditions in the US and Europe may affect capital flows to and from Asia.

Linkages: Living in Free trade (Globalization) era. No isolation
Negative Impact

Unemployment: Job losses
Deterioration in purchasing power
Slowdown in economic activity

Blessing in disguise: Opportunity

Economic centers
China, India, Brazil : Emerging economic superpowers of the future, China and India.

Deteriorating economic conditions of Pakistan: whether caused by exogenous shocks or by endogenous
October 6, both Standard $ Poor and Moody’s, two of the world’s largest rating agencies, downgraded Pakistani bonds.
Current Position of Pakistan Economy: Besides high balance of payments deficit, the country is at present facing a number of challenges, such as:

low foreign exchange reserves;
Impending huge debt servicing;
Shortfall in power generation capacity, resultantly electricity load shedding;
Poor physical infrastructure in terms of ports, railways and roads;
Heavy dependence on imported industrial raw materials, consumer durables and plant and machinery; (f) fast rising population, urbanization, poverty and unemployment;
Deplorable conditions in health and education sector;
Severe supply gap in housing availability; and
Lack of properly-funded and functional development financial institutions (DFIs).

Initial conditions due to internal factors:

The credit and debit side of Pakistan’s economy
Imbalances in the economy
Oil for inflation,
Twin deficit
Monetary and fiscal policies poor coordination: One year of fiscal indiscipline was enough to cause severe macroeconomic imbalances
Stock market: unfolding of the misery
Reality of Pakistan’s Forex reserve management
Currency devaluation and its impact on the economy
Devaluation in Pakistan in different periods not a good experience: First devaluation in 1955, Second Devaluation: On 11th May 1972, Pakistani Rupee was devalued by 56.7%, Third Devaluation: On 8th January 1982, April 2009 it stands to now Rs80

Just growth won’t work: rethinking development strategies

Limitations of govt measures to check inflation
War on terrorism
Political instability
Effectiveness of Vision 2030; a plan of socio-economic transformation of Pakistan has not been witnessed so far.

Fuel to fire by external factors due to current global financial crisis:

Snowballing effect that will set in a recession.
The buoyancy of the external sector
Pakistan is poorly integrated with the global economy. This means that the shocks being felt in developed countries will not be felt to any great extent in Pakistan.
As a developing country, one of the biggest problems that is likely to affect Pakistan because of the global credit crunch will be a sharp reduction in foreign aid flows and foreign direct investment. This, in turn, is likely to severely hamper Pakistan’s efforts to reduce poverty, raise income levels and get out of the morass of the poverty trap.

Negative impact on Pakistan:

Stock Exchange
Consumer spending declining in developed nations will cause Exports to developed countries have decline. Resultantly decreasing production level and ultimately employment
Forex reserves depleting
Dollarization Dilemma
Decline in FDI
The Stock market is affected because of withdrawal of portfolio investment.
Flight of portfolio investment
BOP adverse position
Exchange rate in pressure
Decline in exports: America as our major export country
Decline in foreign remittances
Rightsizing / downsizing /firing
Debt and deflation Depressing times: Are rich economies heading merely for a bout of falling prices, or for a 1930s-style deflationary spiral?
-A deadly mix of falling prices and high leverage could foment a “debt-deflation” of the type first described by Irving Fisher, an American economist, in 1933. In this schema, debt-laden firms and consumers rush to repay loans as credit dries up. That hurts demand and leads to price cuts. The deflation in turn increases the real cost of debt. It also means that real interest rates can’t be negative, and so are undesirably high. That spurs yet more repayment so that, in Fisher’s words, the “liquidation defeats itself.”

Raz · #3 Sunday, June 21, 2009

Realization on the part of regulators in Pakistan:

Monetary policy statement and SBP governor speeches
Fiscal policy statement and fiscal survey results: One year of fiscal indiscipline was enough to cause severe macroeconomic imbalances. Due to lax fiscal policy Pakistan is going to pay a heavy price in terms of growth deceleration, decline in investment rate, rise in unemployment and poverty, higher current account deficit, rising debt burden, a loss of foreign exchange reserves, Higher inflation and rise in interest rate.
Administrative decay and break down of governance: The situation of public administration is particularly acute in Pakistan.
Good governance and economy
Emerging consensus on policy prescription for sustained economic development

Implications of global financial crisis on overall world: A globalized recession

Systemic Risk
Credit or Default Risk
Country Risk
Foreign-Exchange Risk
Interest Rate Risk
Political Risk
Market Risk

Central Banks, that continued to invest their exchange reserves in dollar-denominated paper face another dilemma
Subprime Crisis, Bankruptcy and Layoffs – The Financial Tsunami
World bank forecast: 14 November 2008: World Bank forecasted falling trade, global recession and rising poverty. In the lead-up to G-20 summit in Washington, the World Bank released global outlook in which it predicted a growth rate of just 1 percent for the world as a whole in 2009 and a contraction of 0.1 percent for the high-income countries.

The World Bank revised its projection of developing countries’ growth for 2009 from 6.4 to 4.5 percent, and growth of trade at minus for the first time since 1982.
The effect on the poor is grave. 20 million will fall below the poverty line if 1 percent point growth is curtailed. This is on top of the 150 million who joined the ranks of the poor because of the recent food and fuel price hikes.
World Bank Group President Robert B. Zoellick,
The World Bank:
· Expects private capital flows into developing countries to almost halve, from $1 trillion last year to around $530 billion in 2009.
· Forecasted a large contraction of 2.5 percent in world trade volumes for 2009.
· Predicts that prices for non-oil commodities will fall by 23.2 percent in 2009.
World Bank President Zoellick pleaded for G-20 leaders not to lose sight of the human crisis being created by the global economic turmoil. “As always, it is the poorest and most vulnerable who are the hardest hit,” he said, it would be “an error of historic proportions” if the developed countries ignored the interests of developing countries. “Many of these lower and middle-income countries don’t have much fiscal space: much of it has been used up trying to buffer the effects of the food price crisis. Malnourishment is expected to afflict nearly 1 billion people by the end of the year. “The FAO estimates that in 2007, 923 million people were undernourished compared with 848 million in 2004. We estimate that by the end of 2008 up to 967 million people (or an additional 44 million people) will be undernourished largely due to the rise in global food prices,” the report commented. The worst affected countries such as Burundi, Madagascar, Niger, Timor Leste and Yemen are those which already have the highest indices of stunting and wasting.
· The Organization for Economic Cooperation and Development (OECD), which covers the world’s major industrialized economies predicted contractions in 2009 of 0.9 percent, 0.1 percent and 0.5 percent for the US, Japan and the euro zone, respectively. OECD economist Jorgen Elmeskov told the Financial Times that the “mess” stemmed from a financial crisis that was engulfing rich and poor countries alike.

IMF forecast: “With global financial crisis expected to last for "several more quarters", the International Monetary Fund has called for a large and timely fiscal stimulus with targeted tax cuts, increased spending and and even insurance cover from governments. IMF Says Us Crisis is 'largest Financial Shock since Great Depression'. Fund says there is now a one-in-four chance of a full-blown global recession over the next 12 months

The IMF said it expects the US to achieve GDP growth of 0.6% in 2009, with the housing crash getting even worse. Former President George Bush has already signed off a $150bn tax rebate package to kick-start the economy, and the Federal Reserve has backed an emergency buyout of investment bank Bear Stearns, but the IMF said this may still not be enough. IMF calculated that the British housing market is overvalued by up to 30%, and could be destined for a damaging correction.

The Financial Crisis and Political Risk
Job Loss number 1 global concern: Massive unemployment
Financial crises and the meltdown of national economies: Bailout packages, liquidity injections. (Credit crunch to spill over the world)
Banking Industry Facing Multifaceted Challenges: Bank run
A systemic collapse of the financial and corporate sectors. A vicious circle of deleveraging, plummeting asset prices, and margin calls is underway.
Dampening Effect on Global FDI: Capital flows
Deflation now the biggest risk to world economy
Continued volatility
Increase in soaring deficit
Debt trap
Galloping poverty
Dramatic fall in freight prices and volumes.

Major changes in the global scenario in the aftermaths of current financial crisis:
Unfortunately, the multi-lateral system is in a crisis now. The international community has failed to prevent regional wars and other violent conflicts; the inequities of globalisation are manifest in increasing marginalisation and exclusion; the promised support from the rich countries towards the realisation of the Millennium Development Goals has not been realised; a serious attempt to reform the United Nations failed at the World Summit of 2005; the Doha Round has been close to total failure; little has been done to seriously reform the international financial architecture; sufficient preparation for pandemic disease is lacking; and the disagreements on whether and how to tackle climate change continue to remain unresolved.

What is needed is a rebuilding of the international financial architecture imperfectly put-together decades ago, which has become totally dysfunctional.

epicenter of the quake shifted
New order: Creating a new multilateralism : A revised outlook for developing country growth
Financial crisis to create global realignment : Now Brazil, Russia, India and China – the countries generally referred to as the BRICs – may climb up. One thing can be said with certainty, the system that would emerge from the proposed conference will diminish the prominence of the US as a global economic super-power and increase that of the rapidly developing economies in Asia and Latin America. Unfortunately Pakistan will not be one of the countries that will be able to improve their relative position.

The Pakistan Vision 2030 looks for closer cooperation with SAARC and ECO and charts a new direction towards partnership with ASEAN and Shanghai group etc.

Are we heading for a tripartite financial world?
The need for new mechanism for global economic management: The beginning of rethinking development strategies started in 1980s WB and IMF commenced their Structural Adjustment Programs. Actually they were supposed to adjust the institutions, Financial, Governance and Civil Service, unfortunately their adjustment cost the social sector spending: education, health, social security etc. That is the reason Poverty Reduction Strategies are focusing social sector specifically now. A former World Bank Economist, William Easterly in his book “The Elusive Quest for Growth” has mentioned all those areas where aid, foreign investment and infrastructure, did not work and aid for development was just a futile exercise. After the failed decade of “aid development” the WB was very vocal for its distributional concerns and to shift from “growth promotion” to pro-poor growth.
“A Challenge of Economic Statecraft”

Where does all this leave us? pressing the largest international banks to shrink their balance sheets focus on core activities as the financial supermarket model falls out of favor.

Financial reporting will be enhanced and rating agencies will provide analysis of more aspects of risk more explicitly, while regulatory authorities will have more bite and build up their knowledge of financial product innovation.

Remedial measures on global level:

Need for a Fast, Flexible and Coordinated Response: Responding today, securing tomorrow

A journey from Monterrey to Doha
Economic meltdown: time to re-examine global governance systems?
Struggle for a meaningful change in the existing global economic scenario
Towards a more equitable financial architecture
Govt sector and market economy: a balancing act
World Bank Response: MIGA Tackles Declining FDI Levels and Growth Prospects in Vulnerable Economies
IMF response: One trillion ……..
IFC's Response (International finance corporation)
Bank of international Settlement (BIS) response
Asian development Bank response
EU response
SAARC response
The prospects of regional cooperation: In this Global financial turmoil

Continued global financial meltdown and lessons for Pakistan:
Lessons learnt from 2007 sub-prime mortgage debacle:

Lessons from the sub-prime mortgage saga
Consequences of weak regulatory environments
Consequences of profit-driven expansion
Consequences of offering convenient loans and out-sourcing origination
Unsuspecting players taken for a ride by rating agencies
Imprudence of the credit rating agencies

Raz · #4 Sunday, June 21, 2009

KEY LESSONS TO BE LEARNT FROM THIS RECENT FINANCIAL TURMOIL ARE MULTIFOLD:

There are clear limits of excessive leveraging and off balance sheet transactions.
While spreading of risks across borders help in diffusion of risks, it has serious implications for global financial markets which have wider consequences for developed and developing countries.
Role of rating agencies and investors excessive trust in the ratings.
Weaknesses of regulatory and supervisory models and the lack of oversight of off-balance sheet transactions and securitized products etc.
The sub-prime debacle has served as catalyst for a general reassessment and re-pricing of risk across financial markets. This should augur well for future of structured finance products.

Financial earthquake and the AIG nationalization

Necessary actions taken and to be taken to tackle financial crisis:
Remedial Measures:
Depends upon the ability of the rest of the world to escape unscathed
Foreseeing Vicious circle emerging
Ramifications of the credit crunch
Due diligence and homework
Multi-billion dollar stimulus progr

Steps taken:

· Declaration of the Summit on Financial Markets and the World Economy : the Leaders of the Group of Twenty, held an initial meeting in Washington on November 15, 2008

· London Summit – Leaders’ Statement :2 April 2009: IMF $1.1 trillion programme of support to restore credit. (We have today therefore pledged to do whatever is necessary to: 1) restore confidence, growth, and jobs; 2) repair the financial system to restore lending; 3) strengthen financial regulation to rebuild trust; 4) fund and reform our international financial institutions to overcome this crisis and prevent future ones; 5) promote global trade and investment and reject protectionism, to underpin prosperity; and 6) build an inclusive, green, and sustainable recovery. )

Steps taken by the Federal Reserve
The World Bank Group’s response: MIGA, : IFC's Response (International finance corporation)
Downsizing workforces
Solutions so far: Bailout packages by individual states, and “straight jacket” solution by IMF.
IMF SBA: Success of IMF package depends on good governance
Monetary policy for the second half of fiscal 2008-09 in an environment of inflationary pressure, recession and foreign direct investment crunch. (With reference to Pakistan)
In response to liquidity pressures in October, the SBP reduced the reserve requirement by four percentage points and eased liquidity requirements. In addition, the SBP has encouraged merger of four small banks. These measures seem to have stabilized liquidity conditions in recent months.

Steps needed:

We should know that “Beggar thy neighbors” policy is the best example of “government failure”.

Coordination of monetary and fiscal policies: Fiscal and monetary policies have profound impact on the level and composition of savings, investment, output and employment, as well as viability of the external account
Towards macroeconomic stability: Managing stabilization and growth
DFIs for economic development in Pakistan. (With reference to Pakistan)
Containing systemic risk
Time to restructure the economy
Inclusive and sustainable Programs
broader and deeper regional financial integration
As far as the current financial crisis is concerned, we should not confuse “short-term measures to restore confidence” (blanket guarantee and nationalization of failing banks) with “longer-term measures to reform financial sector governance structure”.
To spread trickle-down effects

Greater and more effective spending on education and infrastructure to build human capital
Labour market reforms should be introduced because it facilitates hiring and improves the employment conditions of non-regular workers,
Level playing-field and social justice will provide empowerment to under-privileged masses.
Improve economic efficiency along with political stability
Regulatory reforms will definitely boast the investment climate in the region.
Broader and deeper regional financial integration
Friends of Pakistan Forum. (With reference to Pakistan)
Boost agricultural and industrial production
Generate economic activity.
A constant high domestic saving rate, high rates of domestic investments and open markets policies were instrumental to rescue the regional economies. (East Asian Economies)
Effectiveness of the IMF bail-outs or massive aid packages depends upon Good Governance
financial reforms and strategies of restructuring and downsizing
Diversified but integrated sustainable macroeconomic policy frameworks
Administrative skills, financial methodologies, marketing strategies,
Institutionalization of more flexible exchange rate systems and
Blanket guarantee for deposits and nationalization of failing banks
The other precautionary element is to hold adequate capital as a cushion against risky investments.

Solution recommended / Strategies:

It will take a big change in economic policy and very radical, coordinated action among all advanced and emerging-market economies to avoid disaster. This includes:
• Another rapid round of interest-rate cuts of at least 150 basis points on average globally;
• a temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut down are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital;
• A rapid reduction of insolvent households' debt burden, preceded by a temporary freeze on all foreclosures;
• Massive and unlimited provision of liquidity to solvent financial institutions;
• Public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
• a massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash-strapped local governments;
• an agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors' surpluses to avoid disorderly adjustment of such imbalances.

Active official reserve management should be pursued,
Better integration of markets and production structures
Greater exchange rate flexibility ought to be institutionalized in order to manage any fluctuation in the markets,
Corporate governance should be the apex of all the financial policies,
Risk management at financial institutions, as well as coordinated efforts to harmonize financial regulations and tax treatments should be the mantra of all the regional countries and

Solution available to Pakistan:

Going by the conventional wisdom, monetary and fiscal stimulus is required to shore up a sagging economy. These can be in the form of tax and interest rate cuts and increased government spending.

We desperately need the IMF bailout package to avert the perception of default in the short and medium term. Besides, the IMF package would also help the government in correcting the macro-economic imbalances through a well-thought reform programme.
To diversify the export items as well as the export markets in order to keep our exports growing in a scenario marked by a global economic downturn.
To cut the import of non-essential items – all such items the country could live without.
Government to persuade China to invest in the country’s export-oriented manufacturing sector, in order to boost the country’s export earnings. At the same time, China may also be invited to invest in Thar coal and the energy sector to help the government in overcoming the current energy crisis.

Role of DFIs

Foreign exchange depletion can be handled by:

(a) regulatory and punitive measures by the State Bank to stop the trade of dollars as a stock,

(b)Prevent money changers and banks from transferring dollars abroad without foolproof business or other legitimate reasons. For this, the Federal Board of Revenue and SBP should ask for fortnightly returns from the money changers and banks.
(c) Money laundering laws should be strictly implemented

(d) Export proceeds should be ensured within stipulated period.
(e) Transfer of deposits of indenting commission on import/export should be made mandatory

(f) foreign exchange for the import of luxury/unnecessary items should be arranged by the importers through their own external sources. The government should issue a list of items with customs PCT numbers for the import of which foreign exchange from internal sources may not be provided, and

(g) strict actions should be taken against over- and under-invoicing.

The government’s role is particularly crucial in managing economic policy, anticipating and adjusting to economic shocks, facilitating transitions in economic policy and designing and implementing economic reforms.
Aside from managing economic policy, the government has also a crucial role in ensuring the provision of a suitable regulatory framework particularly for the financial sector, wherein fraud and unsound management can have profoundly de-stabilising consequences for the economy. Furthermore, government intervention is desirable for addressing market failures such as those posed by the presence of externalities (e.g. pollution and congestion).
The free market economic system is deeply rooted across the world including Pakistan. Despite its pitfalls, it is capable of delivering. It, too, needs to be regulated contrary to the general belief that free markets takes care of it. The current financial crises across the world and the meltdown of national economies clearly show the importance of regulating the markets.

International solution: An alternative would be to try to tackle imbalances from all sides. That would require co-ordinated action by surplus and deficit countries. Such attempts failed in the past because everyone had something to gain from sticking with the status quo. China might think Americans should save more but only as long as that did not curb their spending on Chinese imports. America would ask China to revalue its currency and boost its domestic demand. But it was also keen for China to keep buying its public debt.
The two big surplus countries in the rich world, Germany and Japan, are suffering deep recessions, which may bring them to the table. The problem of imbalances goes much wider than America and China.
America, Britain and other deficit countries have drowned themselves in cheap credit from abroad. Because the structural forces behind the global saving glut are unlikely to abate quickly, there is a real risk that the dangerous imbalances will persist—with America’s public sector as the new consumer of last resort. It would be foolish to focus on fixing the financial industry only to find that the public finances are left in ruins.

Declaration of the Summit on Financial Markets and the World Economy: Group of Twenty, held an initial meeting in Washington on November 15, 2008.

Root Causes of the Current Crisis
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
Actions Taken and to Be Taken
International financial institutions (IFIs).
A broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries. As immediate steps to achieve these objectives, as well as to address longer-term challenges, we will:
Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.
Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
Ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis.
Common Principles for Reform of Financial Markets
In addition to the actions taken above, implement reforms that will strengthen financial markets and regulatory regimes so as to avoid future crises. Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace. Financial institutions must also bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices.
Commit to implementing policies consistent with the following common principles for reform.

Strengthening Transparency and Accountability: Strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions.
Enhancing Sound Regulation: Strengthen regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances. Exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct.
Promoting Integrity in Financial Markets: Commit to protect the integrity of the world’s financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions. Promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency.
Reinforcing International Cooperation: Call upon our national and regional regulators to formulate their regulations and other measures in a consistent manner. Regulators should enhance their coordination and cooperation across all segments of financial markets, including with respect to cross-border capital flows. Regulators and other relevant authorities as a matter of priority should strengthen cooperation on crisis prevention, management, and resolution.
Reforming International Financial Institutions: Bretton Woods Institutions, The Financial Stability Forum (FSF).
Mitigating against pro-cyclicality in regulatory policy;
Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;
Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets;
Reviewing compensation practices as they relate to incentives for risk taking and innovation;
Reviewing the mandates, governance, and resource requirements of the IFIs; and
Defining the scope of systemically important institutions and determining their appropriate regulation or oversight.

Similar Threads
Thread	Thread Starter	Forum	Replies	Last Post
Essay Writing	saharsyed	Essay	16	Saturday, May 09, 2020 01:08 PM
Essay Writing	mnadeem	Essay	2	Wednesday, May 25, 2016 02:21 PM
International Monetary Fund (IMF).	Faraz_1984	Economics	0	Thursday, May 15, 2008 12:27 PM
Essays on Essay Writing	atifch	Essay	6	Friday, December 22, 2006 11:24 PM

The Following 4 Users Say Thank You to Raz For This Useful Post:
irshadsod (Sunday, March 07, 2010), kinzacss (Sunday, April 04, 2010), Last Island (Sunday, June 21, 2009), Viceroy (Sunday, June 21, 2009)

The Following 4 Users Say Thank You to Raz For This Useful Post:
fahad269 (Sunday, June 21, 2009), irshadsod (Sunday, March 07, 2010), Izaz4u (Tuesday, September 28, 2010), kinzacss (Sunday, April 04, 2010)

The Following 2 Users Say Thank You to Raz For This Useful Post:
irshadsod (Sunday, March 07, 2010), kinzacss (Sunday, April 04, 2010)

The Following 4 Users Say Thank You to Raz For This Useful Post:
irshadsod (Sunday, March 07, 2010), jadoon khan (Monday, June 22, 2009), kinzacss (Sunday, April 04, 2010), Last Island (Sunday, June 21, 2009)