Government cannot just folds its hands and sees the economy plummet, it need to intervene to certain extent. This is what the Federal Government is doing to help the financial sector to brace up and move away from its recession state. The financial institution plays a significant role in the government, when left to pull its way out of its depressive state; this may take time, thereby tying down other sectors and the economy in general. As rightly observed, the financial system is seem as the oil that greases the wheel of Capitalism (Bajaj, 2008)
Government has to intervene in the financial sector in order to give investors the confidence that all is well and their interest is being protected. During recession in banking and other financial institution, panics are created making many investors to withdraw their deposits and investment in these financial institutions. This goes a long way in worsening the situation, sometimes leading to quick bank failure, and collapse. This scenario is not good for any economy, especially as buoyant and developed the US economy is.
Thus, government needs to intervene as a way to instill confidence and trust in investors and other stakeholders that the situation is salvageable. In the situation at hand, government through its intervention to some extend has being able to made investor has the trust to take riskier stand. “…Particularly encouraging was the sharp narrowing of the spread between ultra-safe Treasuries and bond backed by Fannie Mae, the government-chartered buyer of mortgages- a sign that investors are willing to consider riskier investments” (ibid).
The US government started its intervention in the present recession in the financial sector started lending directly to securities firm. This intervention role it last took in the 1930s depression. Thus, lowering interest rates and giving financial institutions the ease in accessing loan from the central bank are the major intervention approach adopted by government recently. The federal government does not have a direct intervention on the activities of financial institutions in the country. It operates through its agencies such as the Central bank and the Federal Reserve Board.
For instance, the Federal Reserve has being empowered by the government to regulate virtually the entire banking and securities industry in the country. It will thus, operate under a Treasury Department to regulate and intervene in seeing a healthy financial sector in US. Furthermore, this governmental agency intervenes to remedy the plights of financial institutions in form of giving out funds and loans to lessen the state of credit crisis. In this view, CNN Money (2008) has it that “The Federal Reserve announced…it will auction another $100 billion in April to cash-strapped banks as it continues to combat the effects of a credit crisis”.
This policy of intervene through the Federal Reserve has increased the level of borrowing from companies quoted and operating in the Wall Street. Within a week of the intervention debut, the numbers of borrowing has doubled (ibid). This has prompted the Federal government to propose means of checking against borrower protection, by curbing shady lending that could jeopardize the public and investors confidence. In this instance, it is seen that government is not only seeking for the survival and vibrant operation in the financial sector, but also maintaining policies to safeguard the interest and trust of the public towards this sector.
The Federal government in the past has intervened in the financial institution during periods of nescient stage of the introduction of digital cash payment. The financial institutions were not yet developed to properly handle the use of digital cash. Thus, this illustration shows how vital government intervention has being in the financial industry. For instance, in consolidating the use of digital cash in the US financial institutions, the Federal government came up with regulations that aimed at ensuring stability of the US financial market, and building the confidence of the payment system being introduced.
Government cannot stay aloof not putting in place regulatory system in place to ensure safe and consolidated financial sector. “…a digital cash system that allowed for large transfers of funds through non-regulated institutions and organizations could cause distortions in the stock market, weaken the control of the money supply by the Federal Reserve, and generally undermine confidence in the payment system; it is unlikely that the Federal Government would allow such an unregulated system to develop” (UC Berkeley, 1997).
In the macroeconomic perspective, the role of government intervention is to create stability in the financial market and continue to ensure that its inflationary rate is not increased. When government, stays away from intervening in the credit crisis as witnessed in the financial sector in recent times, it send the message that it do not care about the interest of the public and the investors. This will lead to panic withdrawal of investment funds and capital. The benefits would be to other emerging world market as in China and other Asian developed economies.
This would unnecessarily reduce the purchasing power of the US dollars and go ahead to increase the inflationary rate. Many jobs are likely to be cut off, through retrenchment, thereby increasing the rate of unemployed population, and affecting the household income and their purchasing power. “…slowing demand here will push down prices on commodities markets in the United States and in other countries, many still highly reliant on American consumers” (Bajaj, 2008).
Thus, to prevent this economy depression from taking its wide effect on the US economy, the government intervention in bailing out recessed financial institutions from its downturn state is perceived as a welcome development. In the global power tussle the US has being contending with emerging Asian markets such as the China, India, among other emerging powers. Thus, the non intervention of government in the state of the financial institution would mean that the market of these rivalry countries would be gaining upper hand, tend making the US government a loose the war of sustain and maintain its global supremacy.
For instance, the operation and effect of US stock market and financial operation have great impact on the Asian markets and other markets over the globe. As recognized, the little intervention of government so far has seen the gain in rebound in the Wall Street, while there are losses observed in Asian stock markets. According to Tobias Levkovich, the chief equity strategist at Citigroup cited in Bajaj, (2008) “Wall Street likes a good growth story, and that’s the argument for global growth.
They will keep growing irrespective of the United States”. The important role of US financial sector in its stock market has great impact in the success or failure of this market. Also, the US economy can nor be left unattended to by the government, simply in its resolve to main a capitalist doctrine advocated by the neo liberalists. The global impact of the credit crisis in US has affected global goods such as oil and other natural resources. For the first time, the price of oil has gone beyond $100.
This is attributed in the declining exchange rate of the US dollar and the recession felt in the financial sector of the US economy. Thus, to stop further impact of these observed consequences of the credit crisis the US Federal government sees it being justified to intervene. CONCLUSION The capitalist economy system being practiced in US make government have less intervention in the economy; as the allocation of state resources is through the effect of the ‘price mechanism’.
However, the failure in the market system demands that government need take a bold step in salvaging the credit crisis in US financial sector. This step has being criticized by critics who sees government interventions as not only a way of depriving the state of funds for other viable projects, but enriching the Wall Street (private securities dealers) The US financial sector plays a significant role in US economy and this also has its impact in global economy. Thus, government intervene is to see that the depression observed in recent times is lessen and a rebound to the economy is ensured.