Banking Industry Analysis

Introduction

The central bank has emerged to be the greatest financial institution that controls the economy of any country. The Government does rely on the central bank to foresee the economy on its behalf.

Among the crucial roles the central bank plays are supervision of other financial institutions, acting as a banker of other banks, acting as a bank of the government, acting as a lender of last resort, liaising with other international bodies among other functions.

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The way the central bank cooperates with other international bodies including IMF and World Bank enables it to execute its duties. The recent global financial crisis of 2008 had major implications throughout the world. It proved that the issue of economic crisis is no longer a national issue but a global issue and the whole world should work as a team towards providing a safe market for all countries (Samuelson, 2008).

Three bankers, heads of the three great Central Banks

The subprime mortgage crisis was partly caused by poor policies. The Federal Reserve is responsible for ensuring stability of prices in the U.S. economy. A key question is why the U.S experienced a volatile market in which a stock market collapsed causing uncertainty in the economy and the world.

The collapse of the unshakable Lehman brothers and its subsequent effect on other companies compelled the U.S. government to bailout out bankrupt organizations using a package of $ 750 billion. This taught Americans a lesson after loss of jobs and shares.

The economic crisis could have been cushioned if the Federal Reserve had put sufficient measures and restrictions in place especially on interest rates. The chairperson of the Federal Reserve, Mr. Ben Bernanke could partly be held accountable for the decline of the economy global because he was in a position to regulate the financial industry (Samuelson, 2008).

The European Central Bank bears a great responsibility to the rest of the EU community and the world. The bank controls the European states that use the Euro because it ensures euro partners are protected from inflation hence ensuring stable prices. Interest rates are stabilized while inflation rates are put within permissible rates for the wellbeing of the associate members.

The Bank of Japan significantly contributes to the operation of the world economy. Japan is considered to have one of the greatest world economies as it has the greatest technology in the manufacturing sector. Therefore, its central bank policies will have impact on the world economy. Mr. Masaaki Shirakawa would therefore be blamed globally if he comes up with policies that would have negative effects on other economies.

The heads of these banks are accountable for the performance of the world economy as they make decisions that have global impacts. For instance, the recent G20 meeting unanimously resolved that China should devalue its currency. China had made its goods a bit expensive through appreciation of its currency (Yuan) and since it was a global concern, a mutual understanding had to be made.

Generally, economic crisis of 1930s and the worst of 2008 have taught the world that discussions between central banks of great economies are of greater importance to the world economy. The impact that the three people have on the banking industry and the global economy therefore makes them powerful leaders compared to a country’s political leaders (Samuelson, 2008).

What made central banks to lower interest rates in 2008/09 recession

The reduction of interests by several banks worldwide as recession took place in 2008-2009 was evident that the banks wanted to stimulate their economies through expansionary monetary policy. Low interest rates attract borrowing that ends up being invested in productive projects that create employment opportunities among other advantages. This has always been a strategy to cushion a country from the shrinking economy.

Policy on improving US monetary policy

To improve the U.S monetary policy, the Federal Reserve should come up with transparent, complete and timely information for the financial market and public in general. This would ensure that the market is aware of objectives set by the Federal Reserve, implementation and its intended changes in the monetary policy that would have impact on the operation of financial markets in order to avoid such volatility in the financial market (Keleher, 1997).

References

Keleher, R. (1997). Transparency and Federal Reserve Monetary Policy. Retrieved on June 29, 2011 from: http://www.house.gov/jec/fed/fed/transpar.htm#endnot7

Samuelson, R. (2008). Economic Triumvirate. Retrieved on June 29, 2011 from: http://www.newsweek.com/2008/12/19/economic-triumvirate.html