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Question I

Part A: Advantage and Disadvantage of Floating Exchange Rate Policies

The advantages of floating exchange rate policies include the fact that it ousts the

importance of using an international system that conducts the management role for the rates of

exchange in the financial system (Pisani et al 4). The floating exchange rates are free of

management initiatives like the use of an international monetary fund to conduct check-ups on

the imbalances in the accounts. The floating exchange policies also remove the use of a central

regulator to intervene on the transactions and the role of the central bank is greatly limited.

Moreover, the policies also remove the restrictions that are traditionally imposed on the flow of

capital within the global trade market (see Appendix 1.1). The policies on floating exchange rate

also serve the role of protecting a country from the adversities of the economic turmoil that the

other trading partners may be undergoing. Floating exchange also acts as a primary buffer

element towards the automatic stabilization of the monetary system. In essence, this means that

the process of unsettling the monetary system from its equilibrium stance within the structures of

the balance of payment get an automatic response in terms of a feedback that alters the rate of

exchange at the instant moment (4). This can be demonstrated by the example that if the United

States undergoes a terrible deficit within the balance of payment rubric, it is easily foreseeable

that there are very high chances that the value of the dollar would instant undergo depreciation as

compared to other operational currencies from other countries. Principally, the disadvantages of

the floating policies include the higher rates of volatility within the market as well as the

increased risk of the exchange rate to those who participate in the market.

Part B: Global Imbalance

The global imbalance is the scenario in which certain countries exhibit asset monopoly as

compared to other countries. The causes include the imbalance that could be experienced in the

current accounts of the affected countries (Engelbrekt 5). This crisis is hard to avoid because it

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occurs out of the trading and commercial undertaking of the countries since importation and

exportation cannot be avoided. This phenomenon usually takes place when capital flows from

the majority of the emerging markets as seen in the recent global imbalance as a result of the

monetary operation of the OPEC countries in Asia (5). It is also a predictable outcome of

instances where positioning of the external or foreign assets continues to exert more influence on

the market and the effect is much bigger than the gross or net output at a particular time. The rate

at which capital flows within the market which is also called capital mobility could also lead to

global imbalance (see Appendix 1.1). The size of global imbalance usually varies widely

depending on factors that include trading trends and global markets structures as well as financial

constraints within the market. Global imbalance leads to effects like the liberalization of the

market with a view to the realization of balance between the input and output in a country’s

balance of trade sheets (5). The way out of a global imbalance is for the affected countries to

monitor the key macroeconomic indicators as the mechanism to predict the future financial

conditions and possible ways out of the crisis. The global imbalance is on the rise as a

consequence of the largely liberalized market which allows for an increase in globalization

trends within the financial markets.

Question II

Part A: Types of Financial Crises

Types of financial crises include a currency crisis which is the scenario in which the

regime that governs the operations of fixed exchange rates collapses and is fully unable to

recover (Howarth and Quaglia 229). The other crisis is the global imbalance which means the

imbalance that could be experienced in the current accounts of the affected countries making

them unable to conduct output and input trading measures. Corporate debt crisis occurs when

the liquidity of an institution comes under question and may at times prompt insolvency. The

other financial crisis is the sovereign debt crisis and under this, a country is usually indebted to

external funders like the IMF or World Bank under the sovereign bond arrangement (229).

Insolvency crisis refers to the scenario in which an entity experiences a higher debt obligation

that overrides its own income and hence unable to run its effective day to day operations (see

Appendix 1.2). In essence, this implies the existence of a debt that is not practically sustainable

and so the move to undertake some simple restructuring in terms of debt restructuring or the

relief of the debt with a view to minimizing the risk of default or write off is usually necessary.

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Part B: Trends in Financial Markets between 1990 -2008

From 1990 to 2008 the growth rate of financial assets within the international market

adopted an accelerated pace at a progressive are of the GDP percentage. Moreover, the trend was

that the mature markets within the financial realm got into a zone of a slower pace of market

growth (Kern and Dhumale 260). The equity holders and private debt trends became slower and

much more stable in growth rate leading to debts on countries and lesser sovereign earnings

between the period; hence, financial crisis. Their 1990s experienced a terrible market crisis that

was characterized by volatile nature of most financial markets of the globe and the years of

1997-1999 saw the growth of recession in the Japanese market (260). The crises shifted the pace

of the global economic order and the growth of the global financial portfolio. The global growth

rate resumed normalcy at the rate of between three to four percent in the early years of 2000 as

the market ushered in the new millennium (260). The year 1999 brought along a lot of economic

slowdown as the major global financial markets of the United States and Japan slowed down and

the forecast on the financial markets remained largely unpredictable and inconsistent. This

prompted the need for the development of a concise recovery plan for the slowed down markets.

Part C: Financialization

Financialization connotes the mechanism that different institutions in the area of finance

adopt in their bid to reach market monopoly and influence. For example, this has been seen in

multilateral institutions like Samsung fro Japan and HSBC Bank from the United States (Marise

and Kilpatrick 85). This concept has a lot of impact on the operations of both the macroeconomy

as well as the microeconomy and this is realized by effective a salient overhaul in the structure of

the financial market. Financialization relies on the use of key indicators of the economy with an

intention of rendering a considerable amount of influence on the economic policy formulation as

well as the corporate and organizational behavior in a given financial market (85).

Financialization process is a positive action for the economy because it helps in the retention of

the liquidity of the market by allowing for optimal growth of asset management; banking as well

as venture capitalism and insurance in the economic angles (see Appendix 1.2).

Question III

Part A: Common Factors to Banking Crises in Emerging Economies

Common factors to banking crises in emerging economies include the existence of a

weaker policy and regulatory regime in the market. The other is a range of macroeconomic

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factors like the liquidity and strength of the currency in the market within which the institutions

operate and this leads to high-interest rates hence debt (Kern and Dhumale 260). Moreover, the

manner of not being assertive on the part of the regulator like the central banks in the emerging

economies is also a major cause. The other common factor is that the banks are very quick when

it comes to lending and this is done without proper policy or regulatory framework to cushion the

lenders against market adversity. The banks tend to lend out much higher than their own

portfolio recommendation and this leads to banking crises in most of the emerging economies

(260). The economic growth rate in most emerging economies is at a slower pace and the

banking industry is usually fronted with the problem of having to make a determination on

whether a particular bank is stable enough and capable of financing its return upon lending. The

aspects of a bank’s finance of return are usually weighed out as against the rapid economic

growth rate in the developed world and this contrasts the slow growth rate that is the custom of

most emerging economies in the world; hence, banking crises are currently on the rise (260).

Part B: Similarity in the Financial Crises of Japan and the United States

There is a similarity in the financial crises of Japan and the United States on the causes of

the problem which include the high rates of inflation caused by the volatility of the currency.

This in turn cause illiquidity of the local financial institutions within the two countries hence the

financial crisis experienced (Kern and Dhumale 260). In both scenarios, there was the

availability of excess monetary flow within the market in the period before the crises. The

Federal Reserves of both countries did little in the initiative towards having the right control

measures for finance and this could have included the adoption of strict monetary policies to

prevent the bubble burst within the financial market (see Appendix 1.3). In particular, the Bank

of Japan failed to appreciate the uniqueness of the circumstances and by so doing; it exposed the

ailing Japanese economy to a crisis with far-reaching implications. Moreover, it is clear that

another commonality between the crisis in the United States and Japan is that in both countries,

the value of assets experienced an exponential rate of appreciation as a consequence of relaxed

monetary rules and policy document (260). In essence, the lack of tight conditions causes the

bubble within the economy as witnessed in the United States and Japan during their respective

economic crises. It is apparent that the two countries must put in place key recovery and

mitigating measures that will ensure that the risk of the bubble burst that was experienced in

Japan in 1990 is hugely reduced(see Appendix 1.3). This can be achieved by the formulation of

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key policy measures to govern monetary or capital circulation within the financial market. The

assets within the financial market must also be cautiously regulated by only allowing for

maximum securitization of real estate market in a bid to gauge the pricing rates. Moreover, the

stock markets of the United States, as well as Japan, must be retained at any expensive rate to

steer it off away from the potential bubble territory upon critical evaluations.

Question IV

Part A: Is Germany to blame for Greece Crisis?

Germany is not to blame for the crisis that Greece faced because Germany was under no

primary obligation to bail out Greece in light of its impending financial turmoil. At the forefront

of the crisis was the problem of full loyalty and cooperation amongst the member states of the

block that was further compounded by the multiplicity of other unresolved issues (Dunaway 7).

To begin with, the existing debt issues and the crisis that faced Greece depicted the issues of

monetary distribution and economic injustices that show the inequality within the monetary

policies of the European Union. It is important to note that the monetary issues led to the

excessive burden and operational cost that the state of Greece had to shoulder and this was the

precursor to the Euro crisis itself (7). The challenge of the debt crisis in Greece and inequality

within the operational framework of the European Union monetary regime laid a perfect

foundation for the thriving of the Euro crisis (see Appendix 1.4). Moreover, the deficient state of

the institutional framework governing the functional realities of the European Union agencies

and stakeholder operations proved largely incapable of dealing with the impending crisis. In

view of these shortcomings, a lot of people who live within the European Union member states

experience problems that range from social labor hardship to live survival as well as other

political and economic consequences of the Euro crisis on the civilian population and by

extension to the governments (Uchino 235). The road to the Euro crisis was wrought with a lot of

design problems and flawed policy adoptions by the member states of the union. Primarily, this

is readily evident in the loose arrangement within the union in which member states considered

themselves as autonomous clubs in which they operate as sovereign entities and without any

external interference (see Appendix 1.4). In the last moment that led to the Euro crisis, the

member states sought to adopt a common regime when it comes to currency and this led to a

fundamental problem in the economic situation of the union. On one hand, some of the member's

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states of the union decided to quit the arrangement as they viewed themselves as solely

autonomous clubs with absolute power to control themselves and to assert their sovereignty

Part B: Lender of Last Resort

A lender of last resort connotes a central institution which in most scenarios is usually the

regulator of the financial market and accords a range of loan products to other financial

institutions such as the banks that may be in serious financial turmoil or on the verge of

illiquidity (Uchino 235). We do not have a Lender of Last Resort within the Eurozone and this is

not necessary because the member states have such regulators already in operation. Principally, a

lender of last resort usually comes into play as a precautionary measure that is aimed at the

protection of individuals with funds that are deposited within the banking industry and to act as a

safeguard in times of illiquidity of the bank (235). In most scenarios, the usual do not borrow

from the lender of last resort because such a move would be interpreted to mean that the

financial institution is experiencing operational difficulties. However, the downside of having a

lender of last resort within a financial setting is that most banks tend to assume risks that are

greater than their capacity in the hope that the lender of last resort would bail them out in case of

any financial crisis (235).

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Work cited

Alexander, Kern, and Rahul Dhumale. Research Handbook on International Financial

Regulation. , (2012): 260. Internet resource. (Japan)

Pisani, Massimiliano, Massimiliano Pisani, Alessandro Rebucci, and Pietro Cova. Global

Imbalances: The Role of Emerging Asia /cpisani, Massimiliano. Washington, D.C: International

Monetary Fund, (2009):4. Internet resource.

Engelbrekt, Antonina B. The Eu's Role in Fighting Global Imbalances. , (2015):5.

Internet resource.

Dunaway, Steven V. Global Imbalances, sand the Financial Crisis. Washington, D.C:

Council on Foreign Relations, Center for Geoeconomic Studies, (2009):7. Print.

Cremona, Marise, and Claire Kilpatrick. Eu Legal Acts: Challenges and Transformations.

, (2018):85. Print.

Howarth, David J, and Lucia Quaglia. The Political Economy of European Banking

Union. , (2016):229. Print.

Uchino, Kenji. Global Crisis and Sustainability Technologies. Singapore: World

Scientific, (2017):235. Internet resource.

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A. Appendix 1.1

Graph 1: current accounts for global imbalance

Source: rba.gov.au

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B. Appendix 1.2

Graph 2: Graph showing world economic outlook

Source: IMF

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C. Appendix 1.3

Graph 3: showing the balance sheets of major central banks including Japan

Source: Eurostat

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D. Appendix 1.4

Graph 4: Graph showing debt accumulation of select EU States

Source: Eurostat

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