An investigation on the effect of the American financial crisis and international monetary order

Introduction

United States is one of the big players in the world economy. Decision made pertaining issues of money affect so many economies of the world as well. The U.S currency is the most used currency in the world, in most countries it is used to base the strength of their economy. In turn this means that the American banks and the Federal Reserve who are the main controllers of this currency need to be careful on the way they formulate their policies in regard to the dollar.

the federal reserve has most of the control on the way banks in America operate. It determines the amount of money that needs to be lent to the public (Shane, 2011). The Federal Reserve controls the U.S policy in regard to monetary matters to meet the basic objectives in the economy. It then controls the banks on the way to act so that the implementation of the policies it lays down succeeds.

Most of the implementation work of financial issues is done by the banking sector. Since it is commercialized, it aims of making profits like any other commercial organization. It is sometimes hard to balance the two motives and at times things may get out of hand. It is therefore important that the banks are controlled to make sure that they strike a balance between the two motives so as to avoid major crises from occurring (Oliver,1910). There is also the importance of controlling the market among them where each and every bank is trying to get a bigger market share of the customers. The banks therefore may turn to ways of ensuring that they entice more people as their customers to enjoy the economies of scale brought about by having a higher customer base. Some of the policies put in place have adverse effects on the banks and may lead to banks having problems controlling the money they have in their disposal.

The international monetary order succeeded the Bretton Woods systems, which had become volatile and reported more financial crises. Due to this, the international monetary system was created withy the aim of fostering global reserve currency in order facilitate the stability of global currency exchange rates and facilitate international trade. The new international monetary system is characterized by freely flowing exchange rates depending on the demand and supply of the currencies. Due to its dependency on US Dollar, the international monetary system causes financial crises because it allows the US to borrow cheaply and continuously, which in turn results to financial and economic consequences to the rest of the world. It is evident that the present economic crisis is due to immense borrowing by the United States, fostered by countries that are willing to buy US securities in order to increase their gold reserve. This implies that American financial and fiscal policies are bound to affect other countries. The international monetary system also causes global financial crisis due to the fact that countries have limited control of the international monetary policies. With the current economic crisis, it is evident that the international monetary system has failed to stabilize the international currency rates, resulting to global financial turmoil.

Motivation

The reason behind the interest in this topic is the recent global crises that affected many countries of the world and see the reason that lead to its existence, how American economy especially the banking economy influenced it and how the world can make sure that it never occurs again. The topic in question is so much related to this because it was mostly the actions of the bank that lead to rise of this phenomenon. Also the effect felt lead to changes of many currencies of the world.

Problem statement

American financial crisis is bound to affect the various variables of global economy. In this context, the research paper aims at investigating the effects of American financial crisis and the international monetary order on the global economy.

Global currency

The international relations between different countries of the world means that the countries exchange many things among them been currency. Any action in the American banking system means that the effect is felt not only on America but also in different parts of the world. The reason behind this is that there are many investors all around the world, who deposit their money in American banks. The dollar also works as a unifying currency among many countries as people use it in their exchange rate. Any effects that may arise due to currency shifts of the American dollar means that the deposits by customers abroad will also be affected. Therefore, the recent crises in the banking sector means that it also affected many currencies of the world. The high domestic interest rate was one of them, the customers in the banking sectors had much expectation concerning the money they invested. In turn, the banks rendered their money to ensure that they get enough returns on the money they invested. The bank overdid it by even giving loans to individuals that were not credit worthy and could not be able to repay their monthly in time. Reckless lending is also one of the reasons that led to the crises, banks failure to follow procedures need to ensure that the individuals awarded the loans were creditworthy meant that individuals who did not have might not have been eligible to the get loans were issued with the loans. Rise of new powers in the manufacturing industry led to having the crises. The fact that immerging exports were turning to be weaker to other countries like china meant that the current account was getting weaker. Due to this the American dollar seemed overvalue to other countries currencies which in turn reducing competitiveness of the banking sector, recession due to less of competitiveness as well as weakening of the external market was the outcome. Businesses fell and the quality of the loans given by the bank went down which later lead to the currency crises. Recessions are known to spell to other countries this means that even recession from other countries of the world could be experienced in America economy. Floating of the fiat currency is also another cause of the crises it meant that the banks issued monetary money for exchange of gold this minimized the amount of money in the banks as the liquidity ratio went down. The declining level of economic activity in the country merit that the fiscal policy the government had putting place affected the interest rate in such a way that they were becoming so high. The real domestic rate was affected in return and people were involved in interest rate parity. In the research, other causes of financial crises like inflation that is due to by excessive monetary expansion in many countries will be discussed. Incidences of contraction of the bank deposits due to there were more money withdrawn or given out as loans in an excessive way will also be given much emphasis.

Hypothesis

The hypothesis of this research is a deductive one: that is effect of the crises in the American banking sectors was felt all over the world. The cause of the crises will be closely be looked at to determine how they occurred and what can be done to ensure that the banking sector does not find itself in such a predicament. There are many effects that came about due the crises, the effects ill be highlighted and detailed. The best way to solve them will be determining as well as to ensure they never occur. Then the main focus of this research which is the effect of the crises on different currency will be given and analyzed. The rates of exchange of the currency before and after the crises will be analyzed to ensure that the effects are noted down.

Research questions

What are the financial crises that faces the present America?
What are the causes of the financial crises that are been experienced in the American banking system?

What are the effects of the banking crises?

What do the crisis in the American banks have an effect on the currencies of other countries?
What effect did the crisis in the American banks have in other currencies economies?
What can be done to ensure such an occurrence do not occur again?

Literature review

The literature serves to find out the causes of the financial crises in the United States and its resultant effect it had on the currencies of the world and the global economy. Firstly, the crises in the banking sector comes first from first having a currency crises amongst the banks the as part of the latter stages it transforms to be a problem of all banks. The meaning of this is that this started with one bank and when several banks followed soot it and then became a problem all over the country to an extent that it was not able to manage it. Banking crises may occur due to various reasons, one of them is a scenario where the depositors of the money in the bank wake up one day and decide they need to withdraw their money. A problem may arise due to this problem since banks usually led some of the deposits it gets from the customers. The reason for these is because banks are commercial institutions that are out to make profit and by lending the money the money is going to be returned in some interest which is part of the profit of the banks. The sudden request by the customers of their deposits means that bank will be forced to give out all the money it has in its reserves. If not enough the resultant will be that the bank becomes bankrupt and costumers who have not insured their money in the deposit insurance risk losing their money. Such scenario is called systematic banking crises if it runs to many banks in the country (Hoelscher, 2003).

An other cause of financial crises is when the banks get reluctant in lending the money in their account due to the risk that they might not have money in their accounts incase the customers comes calling for their money. Such a move by the banks is called a credit crunch, in this case the banks are considered as the instigators of the financial crises. However, this is not one of the wisest moves by the banks since at the end of the day the customers expect returns on their deposits and banks may not have the money to pay the interest. In America several things led to the banking crises. Among them were the policies put in place, dating back in the 1970’s the rate of employment among the countries were high, the government countered this problem by lowering the interest rates and spent more to counter this problem(Farrell, 2008). The firms with the capitalist objective during this time decided to counter the government move not by increasing the employment levels but by increasing the prices so as to enjoy the profits. 1980 so the firms putting pressure on the government to put restrictive policies increasing the interest rate was the result of the government action and the response to these was increased employment levels as well as reduction in the rate of employment (Wunderlich, 2009). At different times government had different action to solve the problem but one thing that has remained is the reduction in the profit which has reduced investments in the banking industries.

According to Moseley research, another cause of the crises in the banking sector was the investment in the home mortgage market. Commercial bank in the past used to make mortgages their own for a period not exceeding thirty years and this had them develop the incentives that the borrowers were creditworthy and would be able to pay the monthly fees for the mortgages. The 1980 saw the commercial banks not holding these mortgages but instead soling them to the investment bank. Pension funds and foreign investors were later bought these mortgages from the investment banks. The fact that commercial banks were no longer involved directly involved in these investments meant that not always that the worthiness of the borrowers in regard to payment were taken into account. Due to this change, banks did not care at all whether the borrowers were able to pay monthly payment since they got their share directly from the investment banks. The same applied to the investments banks since in no way were they involved with the borrowers and since they were out to make business and the much mortgages they sold the more money they made (Mises, 2009). Since the work of determining the creditworthiness of a person can be tiresome, the investment companies assigned the work to other companies (Lipsey, 2007). The other companies mostly approved many clients including the ones who were not credit worthy and could not be able to make the monthly payments so as to keep doing business with the investment banks. The result of these was the rise of the housing bubble.

The housing bubble resulted due to the inability of some of the clients to pay back the mortgages in the required time. In return the mortgages resulted to them been foreclosed. The remittance of the monthly payments was also not possible in this time since some of the clients were not credit worth and there was recession coming in. The banks therefore did not have enough money to pay back their clients on their request (Moseley, 2009). The losses due to mortgage crisis were estimated to be about I trillion dollars, halve of this loss was to be borne by the banks. An estimate of the banking sector is about 1.5 trillion dollars. A serious blow is then felt in the American banks since it means they would loss about two thirds of their capitalization to pay up this enormous loss. Ultimately the desire of the banks to enjoy higher profits is what has lead to this big problem conning up. The fact they were involved in leading money to people who are not creditworthy is the reason such problems rose up (Farrell, 2008).

The effects of the financial rises are diverse. Many sectors of America economy has been affected since they are dependant on the banking sector. Globally the effect has been felt in many parts of thee world. According to Prasad “contagion is the transmission of a crisis to a particular country due to its real and financial interdependence with countries that are already experiencing a crisis” (Prasad, 2003). The currency crisis has been transmitted to other countries due to the cross-market relations that exist in these countries. The reasons that lead to this crisis may be attributed to the equilibrium that exists due to speculative attacks (Hoelscher, 2003). According to Shah (2011), currency crises can occur even if the countries are not related economically. The currencies also have international effects among many countries. Many countries were forced to devalue their countries’ currencies due to speculative attacks.

Techniques of collecting data

Since the research is quantitative in nature the select group of data collection will be included. Some of the techniques use in collecting the data includes the following: questioners are some of the means that data will be collected with. To add on that, both the web based questionnaires and the pencil-to-pencil questionnaires will be used. the pencil to pencil questionnaires will be used locally while the web base one will be involve internationally especially to answer questions in regard to the effects of the currency globally. A website will be launched where the participants of the research will be welcome to fill the questionnaires online. Interviews will also be conducted in this research; face-to-face interviews will be conducted as well as computer assisted personal interviewing: this therefore means that the researches will have some field workers who are going to collect the information needed.

Research design

The variables in this project will be analyzed in using computer programs to come up with the expected results. However, the fact that the research is quantitative in nature poses several problems, effect of the currencies in the different countries is not only dependent on the crises in the American banking industry there are so many factors that can affect the same. There is also the risk that there will be a limitation of recipients especially on the online questionnaires control of the recipients may to be a problem. The questionnaires will contain four questions that the recipient will need to fill.

Sampling plan

My target population is the banking sector employees especially the bank managers. The research will be conducted mainly in the afternoons at this time of the day there are less busy as compared to the morning and the mid-morning hours. However, the web questionnaires will be still in operation all the day to ensure adequate representation of people in different parts of the world since different people access the internet at different times of the day. After two weeks all the data got will be compiled and subjected to statistical tests.

Operationalization of variables

In this research, the following are the valuables. The American banking system is the independent variable while the currencies of different countries is the dependant variable. The measurement of the effect of the currency will be measured using special purpose software. The software is used to measure the conversion processes between various currencies in the world (Olsen, 2009).

The value of currencies from different countries of the world will be corrected then compared with their values previously before the occurrence of the crises then a conclusion will be derived from that. According to Olsen conversion among currency of different countries is simply a matter of multi plying the country’s currency with the conversion factor. The conversion factor is not always constant and is subjected to many fluctuations due to international market as well as scenarios like these one of changes in different countries (Olsen, 2009). However, conversion is also dependent slightly on the direction the currency is flowing. According to Barfield, measurement systems are rarely identical: this is brought out due to the different customs put in different places (Barfield, 1997).

Data Collection & Analysis

The main thing that will be greatly observed in my research is to ensure that it is brief since most of these participants are usually vary busy. The questions contained in the internet questioner will be simplified to such a level that even those people who are not that good are able to understand. The information will also contain different languages especially the commonly spoke all over the world to ensure worldwide representation of the information. The purpose of the research will be communicated and the target group indentified for the sake of relevance of the information. The random e-mails sent to different recipients of the world will also mostly focus on the individuals who are in the banking sector. The interview method of collecting data will only be used only in the United States since it might not be possible to travel to all parts of the world.

The questionnaires will contain my contact to ensure that any question that may arise in regard to the study may be able to be communicated to me. For the interview method, the team that will be carrying out this process will be sure to leave the participants with my contacts in case of any queries. The observance of the variables; that is independent variables and the dependent variable will be observed to ensure that the intervening variable will not affect the results that will be achieved.

Anonymity of the participants will be granted incase that will be their wish and also in case someone does not feel like answering their wish will be granted. The first question will be “what are the causes of the financial crises that are been experienced in the American banking system?”. The second question that will be contained in the questionnaire will be “do you think the crisis in the American banks have an effect on the currencies of other countries?” Then the next question will be “what effect did the crisis in the American banks have in other currencies economies?” The final question will be “what do you think can be done to ensure such an occurrence do not occur again?” The rest of the information which contains the previous records of the measurement of the currencies will be got from books as well as from banks.

Data Analysis

For this research study, I will use a bi-variate statistical analysis to compare the effect of the banks in the America on other currencies of the world. The reason for choosing a bi-variate analysis is that any observed differences between these two groups can be interpreted as an association between the independent and dependent variables.

Barriers of implementing the research

There were some of the problems that were likely to occur in the process of carrying out the research are inclusive of the following. The main problem was the scope: that is the effects of the financial crises extended to different parts of the world and might be hard to go or communicate with the individuals from all these parts of the world on the effect of their currency.

There is also the problem of other factors that leads to the effect experienced by the different currencies of the world. The currencies of different countries are usually affected by different factors in the economy one of them been inflation and the government policies it will be at times hard to determine the effect they had on the current value. Language amongst some of the respondents was also a big problem, the fact that not every country speaks English means that there was need to translate the questionnaires to fit the language of these people.

Clarification of concepts

The following concepts in the research are key words that need clarification.

Unifying currency is the currency that is used by people in substitute of their currency since it is commonly used. The housing bubble is also another of the terms that may bring ambiguity in this research, it means a combination of various sectors around the hosing sectors that brought about the problems in the housing sector. The target population other hand is the population which will be subjected to this research. Interest rate parity is expression of economic concept n terms of exchange rate and the interest rate. Contraction of the bank deposits on the other hand, means wiping out of money in banks due to more money been withdrawn or given out as loans. Recessions means that the economic activity of the country is declining. Currency overvaluation means that value that the currency is have is overstated and it is less in the exchange market. Real domestic rate is the interest rate on return of an investment less the inflation in the country. Inflation is rising of cost of goods and services in the country over a period. Fiat currency is the currency whose value is determined by the policies that are put up by the government.

Framework

The following is the framework, which is going to be followed in my research.

Introduction: the introduction is going to contain the introduction of the topic to be discussed as well as the problem statement; the hypothesis will also be inclusive in this section. The section will take a day.

Body: the body contains the literature review of this research also inclusive will be the different ways of collecting the data. The questionnaires and the interview questions as well as the ways of testing the data will also be include in this section. The section will take eight days.

Conclusion; this section will include communication of the results got from the research as well clarification of concept. The problems encountered in this research will also be communicated in this sections as well as the qualification of the research. The section will take three days,

References: this is the section that highlights the sources that are incorporated in carrying out this research this section may take a maximum of a day.

Qualifications and experience

The reason why I decided to take this topic and research on it was because of the pain I felt when I held that some people were in the likelihood of losing their homes due to the crises in the banking system. The fact that many companies especially the insurance companies were collapsing and people faced retrenchment due to the crises in the banking system also made me thinking of taking the topic.

The questions in the questionnaires

What are the causes of the financial crises that are been experienced in the American banking system?
Do you think the crisis in the American banks have an effect on the currencies of other countries?

What effect did the crisis in the American banks have in other currencies economies?

What do you think can be done to ensure such an occurrence do not occur again?

The questions in the interview questions are

What are the causes of the financial crises that are been experienced in the American banking system?
Do you think the crisis in the American banks have an effect on the currencies of other countries?

What effect did the crisis in the American banks have in other currencies economies?
What do you think can be done to ensure such an occurrence do not occur again?

The following are the survey questions

Is the banking crises affecting other sectors of the economy?
How can we avoid another recession?

Are all sectors of economy going to be affected?

Should we establish a framework of ensuring this never happens again?
Should there be a structure globally of ensuring that such crises do not occur again?

References

Barfield, T. (1997). The dictionary of anthropology. Massacheusts: Wiley-Blackwell.

Farrell, R. R. (2008, march 10). A Financial Tsunami Approaching! Retrieved march 17, 2011, from America’s Banking Crisis: http://www.realtruth.org/articles/080229-007-abc.html

Frazer, W. J. (2000). Central banking, crises, and global economy. Michigan: Praeger.

Hoelscher, D. S. (2003). Managing systemic banking crises. Washinton D.C: International Monetary Fund.

Wunderlich J, M. W. (2009). A Dictionary of Globalization. London: Taylor & Francis.

Moseley, F. (2009, March). Retrieved march 17, 2011, from The U.S. economic crisis:: The U.S. economic crisis:Causes and solutions

Oliver Mitchell Wentworth Sprague. (1910). History of crises under the national banking system. New York : G.P.O.

Olsen, D. (2009). Building Interactive Systems: Principles for Human-Computer Interaction. boston: Cengage Learning.

Prasad, E. (2003). Effects of financial globalization on developing countries: some empirical evidence. Washington D.C: International Monetary Fund.

Lipsey R. G., K. A. (2007). Economics. New york: Oxford University Press.

Shah, A. (2010, December 11). Global Issues. Retrieved March 17, 2011, from Global Financial Crisis: http://www.globalissues.org/article/768/global-financial-crisis

Shane, W. M. (n.d.). Retrieved march 17, 2011, from The World Economic Crisis and U.S. Agriculture: From Boom to Gloom: http://www.choicesmagazine.org/magazine/print.php?article=59

Mises, V, L. (2009). The causes of the economic crisis: and other essays before and after the Great Depression. New York: Ludwig von Mises Institute

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