Now, the economy of the United States of America took a negative turn in 2007, and this spiraled into a nosedive that led to a huge recession. At this point, the level of unemployment rose to more than 8%. However, in the years after, the recovery process began, due largely to the fiscal policies embarked on by the government. These gave rise to some positives in the stock market and an increase in consumer spending. But, the crux of the matter at the moment is how to avoid such from repeating itself.
After the great depression in the 1930s, the United States made a distinction between the commercial banks and the much riskier investment banks through the Glass-Steagall Act. But around the 1980s, the market was deregulated. The above categorization gave way, and government welfare packages reduced.
This gave rise to cases of inequality in earnings and wealth, regular financial scandals, prevalent federal deficits, dilapidated infrastructure, and an ongoing recession. These are added to the amount spent by the country in the last two major wars and what they spend on social security, Medicare and Medicaid every day. The result seems to signal no end in sight to these troubles.
When searching for a solution to this, we have to look at the state of the banks. Most of them have grown so large that they believe they can’t fail. This is also inspired by the fact that the bailouts will always come. These banks have grown larger after they were bailed out last time, and their hold on the economy is more of a threat.
Now, the truth is that the economy and these big banks are intertwined. Loans for huge firms that employ the majority of the masses come from them, loans for individuals to finance their lifestyle and make the big-ticket purchases come from them, etc. So the government won’t allow them to go bankrupt. But doling out funds to them in form of bailouts whenever they are on the edge is not the best thing to do. The best thing is to find a way of making them stop taking those huge risks that land them into bankruptcy. Stop them from acting as if they are playing the online casino book of ra.
The number one solution to this is to break down the bigger banks to some measured size. When this is done, laws that will prevent other banks from growing beyond that size would be enforced. With this, the smaller banks could be allowed to fail and fold up when they take too many unacceptable risks. But this is likely not going to happen because of the unholy relationship between the political actors and the bank executives. Most of the political ambitions of these executive and legislative dudes are sponsored by these banks. With more than $1 billion in campaign contributions and $2.7 billion in lobbying funds spent by the banks between 1999 and 2008, the problem will continue to linger.
Most of these executives even get into active politics. The man who went ahead to become Barack Obama’s economic adviser was previously paid $135,000 for one speech by Goldman Sachs. But, America should learn from what happened to Ireland, with regard to the influence of the bank executives.
- If the banks cannot be broken into smaller pieces as posted above, then policies to prevent them from growing bigger and incentives for the avoidance of risk-taking must be encouraged.
- Some form of minimum capital requirements must be encouraged just like Switzerland and Nigeria did at some point. With this money at hand, the banks will have some cushion whenever the next explicit financial crisis arrives.
- The asset-based reserve requirement may also be employed. Here, each bank will be mandated to keep an on deposit in no-interest-bearing or low interest-bearing accounts with the federal reserves. These will be in form of reserves and fixed percentages of all the receivable types of loans. With this, the financial institutions that dole out loans will understand and have the real costs of riskier loans in mind.