In the modern world, more and more often, all financial transactions are carried out using e-commerce, reducing cash turnover. However, the development of technology invariably leads to the development of fraud in new areas that are not yet thoroughly familiar to ordinary people. As a consequence, this process can lead to theft of money from a credit or debit card. Therefore, the issue of card safety both on the part of banks and consumers is now the most acute. A variety of strategies are used to prevent and prevent these occurrences. However, the best result can be achieved only through the efforts of two parties cardholders and banks.
However, preventive measures require prior analysis. Unfortunately, a relatively large number of fraudsters operate in different countries and go unpunished. Just as a bank is developing a security system, fraudsters are also developing their schemes to deceive cardholders. This paper reviews the literature on this topic, which is an introduction to further research. Since it is the ratio and agreement of the actions of bank employees and cardholders that is a critical element in the money security chain, so as a result, the method of interviews with the heads of organizations issuing credit cards was chosen. As an analysis of this study, the theory of diamond fraud is used to define the phenomenology and ethnography of the topic. Twenty academic sources were analyzed for a thorough and deep understanding of the issue.
Accordingly, the literature review includes a review of critical strategies to combat identity and money theft, such as improved security technologies, customer education, and a heightened vigilance strategy. This review then examines specific interventions to prevent such incidents. Finally, the diamond fraud theory method and its application to related topics are explained.
Protection of Personal Data and Credit Cards
Stealing money from credit and debit cards is almost impossible without first stealing the holders identity. Consequently, the root of the problem lies precisely in the security of each persons data, which fraudsters can collect bit by bit on the Internet and elsewhere in different ways (Berghel, 2017). Todays extremely high rate of cybercrimes is dictated not only by the overall development of technologies, including fraud schemes, but also by the extremely low literacy in protecting peoples data (Goel, 2019). The methods of education developed by experts do not give the desired results for several reasons. First, users prefer automated security systems that do not require interaction with them. However, at the moment, it is the constant inclusion of a person in the protection of their security that is a crucial element in the preservation of personal data (Zou et al., 2020). Secondly, the determinants of the positive dynamics of users attention to this side of the issue are the presence of technical education and previous negative experience (Li et al., 2019). Consequently, people lack personal and financial cybersecurity knowledge due to the rapid development of technological progress and an insufficiently strong education campaign.
Several aspects further complicate this problem. First, victims do not always report such cases to the police or other relevant authorities (van de Weijer et al., 2019). In addition, there is a correlation between the types of cybercrimes and the percentage of police reports. Some victims experience psychological distress and depression after such cases, which require lengthy litigation, wasted time, and the possible loss of livelihoods (Golladay & Holtfreter, 2017). As a cause and as a consequence of such emotional and physical disorders, it also leads to the victims isolation, and many criminals who steal funds from credit cards go unpunished.
Control methods include many different strategies. Modeling and analyzing the text of identity theft stories helps to classify the constant flow of information about identity theft unstructured on the vast Internet (Zaeem, 2017). Such an analysis helps determine the average statistical portrait of the victim and the methods of actions of fraudsters and form a particular warning complex of actions that reliably protect people from theft.
Strategies for using new technologies and education are also highlighted. Both strategies imply actions on the part of banks and organizations that issue cards since the safety of personal data directly depends on their security system and organized available instructions for users. Therefore, in this work, a decision was made to use a targeted sampling approach. In other words, a person from such organizations is specially selected for the interview, passing according to strict selection criteria and holding a leadership position. The statistical aspect of this sample is achieved by inviting five such specialists. This approach is explained by the fact that it is necessary to understand the work of such organizations and how they answer urgent questions and problems in this area.
Consequently, the above measures leading to the theft of personal data entail other fraudsters who bypass the security system of banks and credit card organizations in pretty straightforward ways. Even everyday online purchases, which have increased in connection with the global pandemic, can lead to data loss (Burnes et al., 2020). This problem affects directly not only the cardholders and banks but also the entire health care system and the state (Al-Nemrat, 2018). The regulation of e-commerce, one of the newest areas in financial technology, requires regulation at the level of the law, with requirements for security systems, proper instructions for users, and appropriate penalties for offenders.
The Fraud Diamond Theory
The Fraud Diamond Theory looks at fraud by an attacker, which is also necessary for analyzing this problem. The theory includes four main elements regulating the commission of fraud: pressure, opportunity, rationalization, and capability (Rustiarini et al., 2019). The pressure can be dictated by social, government, and less often personal factors. Criminals most often commit these atrocities without being wealthy or successful people in life. The problem of poverty, structural inequality, and other social ills of society always lead to increased crime (Manhica et al., 2020). The high availability of knowledge in programming by sufficiently educated people with abilities can be used not only for good purposes. Security flaw-finding programs are encouraged by the companies themselves. However, the professional question that finding a bug can lead to much more enrichment for their purposes than reward for helping the company is most pressing (Maillart et al., 2017). These two factors reveal the main elements of the theory: pressure and opportunity.
Other elements depend directly on the psychological motives of the fraudsters and directly follow from the first two factors. Rationalization is always moral, namely the violation of the potential victims legal and moral rights (Peprah, 2018). Finally, the ability depends on the confidence of the fraudster in the performed action since most of them are always aware of the possible consequences and penalties. These factors are exacerbated by the victims frequent silence and non-reporting to the relevant authorities, and ignorance of their security capabilities (Sujana et al., 2019). In addition, the favorable economic situation in the country, which is the goal of any state, only creates a fertile ground for such fraudulent activities (Rengganis et al., 2019 and Christian, 2020). Finally, the imperfect study of some aspects of security systems by banks and the imperfection of laws regulating such offenses leads to a carte blanche situation for attackers (Azmi et al., 2017). As a result, it turns out that there are more than two interested parties in security financial organizations, cardholders, a society that regulates the social situation, and the state, which needs to find a balance of security for its citizens.
A triangulation strategy is used to determine the validity of the results obtained in this study. The capabilities of this method suggest a more reliable assessment of the results and limitations of empirical social research (Christian et al., 2019). This model leads to the need to improve audit activities and classify companies that issue credit cards for performing a set of actions that support security (Zaki, 2017). Nevertheless, the application of this method must be combined with quantitative indicators for a more accurate assessment (Utami et al., 2019). The integration of such a method will help reveal the theoretical potential of the interpretation of the results and reveal paradoxes and questions that require other, atypical solutions.
Conclusion
Identity theft and subsequent theft of funds from potential victims are urgent and require an integrated approach. An ideal analysis picture involves using both quantitative and qualitative methods to determine the validity of the results. Ultimately, efforts are required not only for the security systems of the relevant organizations but also for educating consumers of these services and government decisions that keep pace with technology development.
References
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Azmi, L. M., Herwanti, T., & Asmony, T. (2017). E-Procurement fraud in government sector: In the perspective of fraud diamond theory. E-Proceeding Stie Mandala.
Berghel, H. (2017). Equifax and the latest round of identity theft roulette. Computer, 50(12), 72-76.
Burnes, D., DeLiema, M., & Langton, L. (2020). Risk and protective factors of identity theft victimization in the United States. Preventive medicine reports, 17, 101058.
Christian, N. (2020). Behavioral strategy analysis using the Fraud Diamond theory approach to detecting corporate fraud in Indonesia. International Journal of Business and Management Invention (IJBMI), 9(4), 66-74.
Christian, N., Basri, Y. Z., & Arafah, W. (2019). Analysis of fraud triangle, fraud diamond and fraud pentagon theory to detecting corporate fraud in Indonesia. The International Journal of Business Management and Technology, 3(4), 1-6.
Goel, R. K. (2019). Identity theft in the internet age: Evidence from the US states. Managerial and Decision Economics, 40(2), 169-175.
Golladay, K., & Holtfreter, K. (2017). The consequences of identity theft victimization: An examination of emotional and physical health outcomes. Victims & Offenders, 12(5), 741-760.
Li, Y., Yazdanmehr, A., Wang, J., & Rao, H. R. (2019). Responding to identity theft: A victimization perspective. Decision Support Systems, 121, 13-24.
Maillart, T., Zhao, M., Grossklags, J., & Chuang, J. (2017). Given enough eyeballs, all bugs are shallow? Revisiting Eric Raymond with bug bounty programs. Journal of Cybersecurity, 3(2), 81-90.
Manhica, H., Straatmann, V. S., Lundin, A., Agardh, E., & Danielsson, A. K. (2020). Association between poverty exposure during childhood and adolescence, and drug use disorders and drugrelated crimes later in life. Addiction.
Peprah, W. K. (2018). Predictive relationships among the elements of the fraud diamond theory: The perspective of accountants. Management, 8(3), 141-148.
Rengganis, R. M. Y. D., Sari, M. M. R., Budiasih, I. G. A. N., Wirajaya, I. G. A., & Suprasto, H. B. (2019). The fraud diamond: Element in detecting financial statement of fraud. International research journal of management, IT and social sciences, 6(3), 1-10.
Rustiarini, N. W., Sutrisno, T., Nurkholis, N., & Andayani, W. (2019). Why people commit public procurement fraud? The fraud diamond view. Journal of Public Procurement.
Sujana, E., Yasa, I. N. P., & Wahyuni, M. A. (2019, January). Testing of Fraud Diamond theory based on local wisdom on fraud behavior. In International Conference on Tourism, Economics, Accounting, Management, and Social Science (TEAMS 2018) (pp. 12-15). Atlantis Press.
Utami, I., Wijono, S., Noviyanti, S., & Mohamed, N. (2019). Fraud diamond, Machiavellianism and fraud intention. International Journal of Ethics and Systems, 35(4), 531-544.
van de Weijer, S. G., Leukfeldt, R., & Bernasco, W. (2019). Determinants of reporting cybercrime: A comparison between identity theft, consumer fraud, and hacking. European Journal of Criminology, 16(4), 486-508.
Zaeem, R. N., Manoharan, M., Yang, Y., & Barber, K. S. (2017). Modeling and analysis of identity threat behaviors through text mining of identity theft stories. Computers & Security, 65, 50-63.
Zaki, N. M. (2017). The appropriateness of fraud triangle and diamond models in assesing the likelihood of fraudulent financial statements-An empirical study on firms listed in the Egyptian Stock Exchange. International Journal of Social Science and Economic Research, 2(0), 2403-2433.
Zou, Y., Roundy, K., Tamersoy, A., Shintre, S., Roturier, J., & Schaub, F. (2020, April). Examining the adoption and abandonment of security, privacy, and identity theft protection practices. In Proceedings of the 2020 CHI Conference on Human Factors in Computing Systems (pp. 1-15).
Countries faced a major stumbling block occasioned by conflict of different laws due to the intensive growth of international trade in the early 20th century. It was at this period that letters of credit were adopted as a main mode of steering a uniform way of carrying out international trade in different countries. The 1933 International Chamber of Commerce conference was held to give the letter a valid legal position.
The member state meeting had various objectives (Hinkelman and Karla 26). The main aim of their meeting was to come up with a Uniform Customs and Practice for Documentary Credits (Dabydeen 41). These rules were later narrowed down to rules that are used to govern letters of credit. The rules have been revised to capture the new developments due to growth in international trade and the banking sector.
Letters of credit have had effective application due to the existence of uniform regulations among major countries. The set framework has made international trade easy. Banks and traders have conducted business without fear of being defrauded. Assurance of security has been the main impetus towards a better playing ground for all concerned parties. The popularity of credit letters has been growing throughout the years and more people are picking consistent interest in their use.
The operation of letters of credit is not basically based on one type of a document. The letters are in numerous occasions in two types (Dabydeen 41). This paper will critically analyze the effectiveness of letters of credit in facilitating international trade.
A letter of credit is a document that shows an importers commitment to make payment to an exporter once goods are received. The precondition of payment is that the exporter must present all the necessary documents and conditions set out in the letter of credit. The conditions of payment stipulated in the document must be strictly followed.
It is possible to have a letter of credit that can be repealed and one that cannot be revoked. The distinction is based on the fact that the revocable letter may be revoked without first seeking the consent of the exporter (Bertrams 46). The foregoing literary means that the documents may be cancelled or challenged before the other documents are presented to the exporter.
The letter is rarely used, considering its limited protection to the exporter. On the contrary, an irrevocable letter of credit is not revocable without issuance of consent by all parties in the transaction. The general rule on the letters of credit is to the effect that all letters are irrevocable, unless there is a document stating otherwise within the knowledge of the parties.
The rationale behind making letters of credit to be irrevocable is to guarantee protection to all parties in the transaction. W distinction that is based on the payment terms is made on understanding their operation.
A sight letter of credit is evident when the importer is allowed to see the documents before effecting payment. On the hand, if the payment is to be completed at a later fixed date it follows that the document will be known as deferred payment letter of credit (Bertrams 46).
To maintain gradual uniform, the International Chamber of Commerce reviews and subsequently publishes the agreed rules that are geared towards governing letters of credit in several banks in the world. The standardization of letters of credit has played a critical role in ensuring that banks subscribe to uniform standards. The International Chamber of Commerce continuously revises the rules from time to time.
From the making of the letters of credit rules, there are certain steps that are essentially followed by the persons and institutions in transactions involving letters of credit. To start with, the importer and exporter reach an agreement that their purchase and sale respectively will be through a letter of credit.
Secondly, the importer is required to fill in an application form asking his bank to issue a letter of credit in favour of the exporter. At this point, the importer must be in possession of a line of credit with the issuing bank. Thirdly, the issuing bank is duty bound to transmit the letter of credit through the convenient means possible. In many occasions, this is done through telecommunication or registered mail.
Fourthly, the authenticating bank must receive the letter in due time to authenticate it and communicate to both the importer and exporter. Fifth, the exporter goes through the letter diligently upon receipt of the letters of credit. This is done to establish whether there is compliance to the terms as they are stated in the initial contract.
On the same vein, the exporter checks the document to ascertain whether the documents can be produced and whether the terms and conditions in the letter of credit can be fulfilled. Sixth, the exporter is expected to act expeditiously when he notes that some of the conditions or terms may not be fulfilled (Hinkelman and Karla 26).
This affords the exporter an opportunity to request the importer to amend the conditions or terms in the letter of credit. Seven, the new conditions are incorporated in the letter of credit when all parties are in agreement on the amendments. At this point, the exporter is advised against any goods shipment until the amendments are received and accepted.
Eighth, the exporter makes physical arrangements on how the goods will be shipped. At the same time, the exporter prepares letters of credit. Upon completion, the letters are forwarded to the confirming bank. The drawing in the issuing bank is paid or accepted depending on the circumstances (Dabydeen 46).
Ninth, the issuing bank has an obligation of examining the letter of credit before hand. This is mainly done to safeguard the interest of the importer. Finally, the documents are forwarded to the importer for permitting possession of goods. There is a shift of possession of merchandise from the exporter to the logistics company.
The transaction is deemed fit when the importer receives goods and the exporter has received payment. Banks deal with documents and not goods as it has been noted from the afore-discussed steps. The precondition pegged on payment is based on the fact that the documents presented appear to be in compliance with the terms and conditions of the letter of credit.
Possession in these circumstances is the possession of documents (Winston and Winston 47). It is highly impractical to talk about dealing with goods since the seller and the buyer are far from each other. The letter of credit depends on the integrity of the seller and the buyer. Documents related to the transactions must be inspected with due diligence.
There are numerous merits and demerits for the exporter and importer in the use of the letter of credit. First, the importer is guaranteed that the exporter will be paid upon adhering to all terms and conditions in the letter of credit. In addition, this moment presents a viable chance for the importer to review his negotiation for better terms at a stage when the credit has not been offered.
The letter of credit may be to the disadvantage of the importer in that there is no protection against the exporter shipping goods of low quality (Winston and Winston 48).
The letters of credit if not carefully followed with supporting documents seem to be offering more protection to the importer at the expense of the exporter. The importer is required to do a thorough research on the nature and reputation of the exporter. It is imperative to note that some of the details may not be discovered during the research, thus putting the exporter at a greater risk.
Further, it is a requirement that the importer ought to have a line of credit before the issuing bank can commit to issue letters of credit. The final payment is grossly affected by the line of credit a party has applied for. There are several advantages to the exporter. First, the risk payment may be interfered with by the political risk where the issuing bank domiciles. The letter of credit presupposes an agrement.
The exporter may be required to execute his obligation. In addition, the exporter may reduce credit risk at any given time he deems fit. On the disadvantageous side, the exporter has the obligation of preparing all the necessary documents. The documents must be in strict compliance with the letter of credit. Due to lack of credit facilities, some exporters may lack credit facilities, thus preventing export.
There are broad categories of impacts presented by the use of a letter of credit. Substantial discrepancies in the negotiating bank may not be detected. It is recommended that once the discrepancy is detected, there is room for correction before the other documents are returned. It is possible to have the documents sent back to the bank if there are errors.
The only disadvantage is that there could be no time for such documents to be returned, which is disadvantageous to one party in the transaction (Bertrams 61). Waiver in cases of discrepancies in the contract is allowed.
This can be done whereby the parties agree that the payment and transportation of goods to the buyer will take place even after the discrepancies have been discovered. The parties to the agreement or their agents must reach a consensus about the waiver.
There are numerous characteristics that make a letter of credit favourable. Its negotiability makes it convenient and practical to the exporter and the importer. It is mandatory for the issuing bank to pay the beneficiary any arrears. The payment is made through the bank where the beneficiary holds an account. It is the negotiable character that makes the transaction flow in a similar was as if money was used.
The promise to pay in the letter of credit makes the document a negotiable document. This can be on demand or at any other time as stipulated by the agreement. The nominated bank in this case becomes the holder in due course, waiting for the remaining requisites to be fulfilled.
The holder of letters of credit is supposed to take the face value. Any party with a claim on it is defeated. Straight point negotiations may arise bearing in mind that the beneficiary of the credit is covered. Under the foregoing condition, the promise does not pass to the purchaser in due course (Grath and Anders 50).
The instrument is negotiated on the basis that it can be revoked. A revocable letter of credit is not subject to confirmation. The advising bank in such cases engages in correspondence transaction for the parties in the contract. All requirements must be met as demanded by the transacting parties.
Revocability is a salient element of credit letters. However, documents of such a nature are mostly used when providing crucial guidelines as to shipment (Grath and Anders 51). Worth noting is the fact that an irrevocable letter of credit may not be amended without consent from the issuing bank. Equally, the beneficiary and the confirming bank must provide their consent.
It is possible to transfer letters of credit, just the same way they can be assigned. Upon reaching the negotiations the beneficiaries are free to deal with the property in the desired way, including assigning. There is a limitation imposed under the international control. The transfer is only possible at once.
In instances whereby the instrument is not transferable, parties to the transaction may transfer their rights before the performance of conditions commences. It should be noted that letters of credit are applicable where there is a contract of sale of goods. In addition to the requisite documents, the transaction must be evidenced by a written contract. There are two types of drafts in regard to the letter of credit.
A draft created by the beneficiary may also be termed as a bill of exchange. The drafts are based on time and sight. They are distinguishable depending on the time they are presented for payment. In some instances, the time draft may rely on a condition of payment after the lapse of some time. The credit terms will predict the use of the documents depending on the terms earlier agreed on.
It is clear that the most fundamental steps concerning the transaction between the exporter and the importer are handled by banks (Bertrams 63). This is because the transactions are international in nature and the two parties may meet. The banks in this case act to the best interest of the parties.
The fact that the documents are not a substitute to the goods is worth critical examination. The buyer of the goods in one country is sure that the documents will arrive in the bank before the money is paid. The buyer is, however, not certain on the condition of goods.
Actual possession of the goods comes earlier when the payment has been effected. The issuing bank acting in the best interest of the buyer and the seller should make sure that the documents are examined. The appropriate bank is advised to pay against the documents once they are authenticated and said to be mature. The standby letter of credit can be used in places that the commercial letter of credit is no applicable.
The standby letter of credit is the second preferred payment method. This type of letter has greatly fostered international trade by ensuring that the customer is able to fulfil his or her obligations. This provides security to the beneficiary. When the parties enter into such arrangements, there are no guarantees that drawing of the letter of credit will be done.
The standby letter is the only document that is designed to provide assurance to parties in the agreement of sale. Standby letters, as the name suggests, are used to stand behind monetary obligations by providing assurances to other people. The letter is used as a guarantee since it acts to inform either party in the transaction on the nature of credit they have.
The holder of the letter in this case is the supplier, while the bank is the issuing authority. The seller pursues the seller directly, but if the customer is unable to pay the seller presents copies of the draft to the bank which should be paid immediately (Schaffer et al. 75).
In international trade, the most essential step to follow is assuring security to both the buyer and the seller. The distance between the two makes them unable to carry out the transaction differently. Both the issuing and confirming banks ensure that the buyer and the seller are compliant. The banks steer the contract of sale of goods. There are other obligations that rest on the exporter and the importer.
For instance, there is the risk of damage since the goods are mostly shipped. Any damages occurring in the course of transporting the merchandise are not borne by the exporter. The liability shifts when the exporter prepares all the necessary documents and forwards them to the bank. The exporters obligations are extinguished upon payment.
The transport company that is in contract with the importer is expected to safely transport the goods to the importer (Grath and Anders 55). The buyer is encouraged to enter into a contract of insurance to safeguard the safety of the goods in transit.
The contract is at some instances entered into by the importer and the exporter for the benefit of the exporter. The cost of insurance is paid by the exporter. The documents indicating that the goods on transit have been insured should be given to the confirming bank.
The documents in international trade are the crux of the transaction. The transaction cannot be effectively achieved without the document. It would be cumbersome to transport the document from one country to another without consideration. The letter of credit comes in to strengthen the security of the contract.
The payment is only secure in an event that documents are presented to the bank, which has the sole duty of confirming compliance. Handling of the letter of credit backs up the reputation and creditworthiness of the bank. The bank will assume the responsibility of paying the exporter within the prescribed period.
In essence, the contract is between the bank and the importer, but the exporter is paid upon meeting given conditions as per the contract of sale. The documentary collection method lacks the required degree of security to facilitate smooth running of international trade. The letter of credit fills that loophole by detailing the conditions (Grath and Anders 56).
As mentioned before, the banks in such transactions heavily rely on the exporter reputation in issuing the credit. Arguably, this is a major disadvantage to new exporters who have not built any reputation. However, the banks preconditions before payment may be used to cure that.
The bank may impose conditions stating the nature of the goods to be received before payment is effected and the time when the documents will be received. The bank is under obligation to pay the exporter, despite the importers breach.
The letters of credit have gained their popularity for their ability to offer unique and a universally accepted mode of payment that satisfies the exporter and the importer. They make international trade transactions smooth in that the documents have to be received and not the merchandise. In order to protect the importer, shipment of goods may be postponed up to a time when payment is done.
This means that the importer is protected against being provided with goods of poor quality. The exporter remains with a draft in the bank that has been requested to effect payment. The letter is the most efficient mode of payment today due to its universal acceptance. Banks all over the world find it safe to associate themselves with letters of credit.
The International Chamber of Commerce has strengthened the acceptability of the letters of credit. The industrial utilization and strict conformity with the International Chamber of Commerce Customs and Practice Publication No.
600 has made letters of credit a preferable mode of payment as opposed to other means. Although there are many safeguards to protect transactions through a letter of credit, it is clear that neither the exporter no the importer is protected from fraud. The risk of fraud still remains unchecked (Grath and Anders 54).
In the transactions that the mode of payment is by letters of credit, banks confine themselves to the face value of the document. The practice in international trade is that documents of international trade are acceptance without actual verification of the merchandise. The duty of safeguarding the transaction from fraud rests on the exporter and the importer to act on the reputation of the each other.
The parties to the transaction take over the responsibility of exercising diligence, a rule that would have been executed by the bank. This is one of the main draw backs of the letters of credit. It should be noted that the security of payment does not depend upon the importers financial status. The exporter is allowed to continue controlling the title until the payment for the goods has been effected or documents are accepted.
On the other hand, the importer gains several advantages. The importer will only be required to pay when the documents providing shipment are presented. The letter of credit being a document of payment should specify the type of payment and the mode. This means the timing of payment as well as the timing of the payment. There should a clear specification on the manner in which the payment is to be made.
The face of the letter specifies the availability of payment. In circumstances whereby the payment is on the tenor, it means that the payment will be effected at the sight of the document. Payment at sight greatly favours the exporter since the payment is received immediately (Schaffer et al. 74).
The importer must evaluate his or her ability to pay for the merchandise. This should be done before remitting the payment. The letter of credit has a time frame in which acceptance is deemed to be effective. It requires the exporter to be paid after a given period of time. The wording of the letter of credit ought to be understood in the context of the contract terms. The word acceptance is very common in the letter.
It means that payment will be effected at a future date. The date in the ordinary contract of sale is specified. If the letter of credit is indicated on its tenure at sight, this means that payment has to be made six months after sight. The letters of credit have made transactions in the international trade become more flexible (Hinkelman and Karla 26).
A basic letter of credit may address special considerations, which create a flexible way of effecting transactions. The bank may settle on a special letter of credit to enhance flexibility. A revolving letter of credit allows reinstatement of credit without amending the letter of credit every time. This is used to maintain constant control on the shipment schedule.
The letters of credit may adopt the cumulative or non cumulative mode. This means that goods that would have been shipped in the previous periods are carried forward to future shipping periods. This also includes carrying forward the value of the delayed goods to be considered for shipment at a future date. On the contrary, a non-cumulative revolving credit prohibits shipment of merchandise to a future date (Winston and Winston 42).
The letter of credit may also take the red clause credit. This allows the exporter to receive the payment in advance. This happens prior to the presentation of the necessary documents. The transferable credit enables the exporter to act as an agent or in some instances as the middle man. The proceeds may subsequently be transferred in another payment option.
The option given by the importer in relation to the goods is optional to the exporter as far as there is prove showing that all other terms have been met. The role of the bank at this point is to engage in a serious undertaking. A letter of credit once issued becomes a pending liability to the bank. The state of the importer or goods is not a factor to consider when there is a clear indication that the documents are in good order.
An advising bank in such a case is not required to effect any payment, but to forward the letter of the credit to the exporter without any responsibility. The overall effectiveness is enhanced when the confirming bank forwards the document to the other bank in a move to accept payment. The letter of credit in simple words is treated by a bank just the same way a loan is treated.
The bank introduces a clause for its protection once the owner of the goods refuses or is unable to pay. This clause expressly stipulates that the documents that are to take part in the negotiations are to be issued under the banks orders. There is a massive evaluation by the bank to ascertain the capacity to pay by the parties in the contract.
The financial stability of the importer and the proof of his capacity to pay are of grave importance to the bank. The issuance of letters of credit should not be understood to mean that the bank is ready to pay.
The financial history of the importer is very essential as a condition before issuing the letter of credit. In addition, the importer is required to accept certain conditions before the bank permits the issuance of letters of credit. The proof agreement is reached by signing the letter of credit agreement (Bertrams 64).
The agreement with the bank by the importer is to the effect that the importer should reimburse the bank all the payments under the letter of credit. This condition is dependent on the fact that the bank will pay the exporter. The bank also acknowledges the fact that it has the sole right to deal with the title of the goods.
The responsibility of the validity of the documents is covered in the agreement between the importer and the bank (Grath and Anders 56). The dealings between the importer and the bank are that the information presented in the credit application acts as the instructions to the bank at a later date. The importer should be having sufficient knowledge of the requirements of the contractual agreement with the bank.
The applications for letters of credit have various conditions to facilitate secure transactions. First, the amount of credit for the importer is a requirement that banks consider before they agree to transact with the exporter. The total amount of credit and the mode of payment should be indicated.
In some instances, the mode of currency is required. It has been observed that trading overseas is based on various factors, the major issue to deal with being that the exporter and the importer should have confidence in the transaction.
Letters of credit are legally binding, thus the importer is assured of payment. Secondly, the importer only pays for the goods agreed; hence the exporter makes sure that the goods conform to the conditions. This reduces the risk of not being paid (Mugasha 34).
Conclusion
International trade has many challenges that emanate from the nature of the transactions that constitute it. There are documents that are used in securing safe transfer of title in goods from the exporter to the importer. The complexity of cross-border trade is compounded by the fact that the importer does not get the chance to check the goods. The transactions rely on documents.
One of the main documents that have gained popularity throughout time is the letter of credit. Its credibility is derived from the fact it has the recognition of the International Chamber of Commerce. The document has gained universal applicability due to its advantages. Letters of credit are reliable since they are issued to a person with the credit line.
It is not possible to get letters of credit void of credit. Letters of credit are issued by the bank upon confirmation of certain conditions. The legal binding of the letters makes them essential when engaging in business. International transactions largely depend on the reputation of the exporter and the importer.
A bank will be very reluctant to issue letters of credit when the importer has a history of defaulting payment. A clause in the contract of sale may be invoked in instances whereby the bank is not sure about the payment by the importer, thus postponing payment. Payment of goods in the international sphere would be very hard without letters of credit.
Works Cited
Bertrams, Roeland I. V. F. Bank Guarantees in International Trade: The Law and Practice of Independent (first Demand) Guarantees and Standby Letters of Credit in Civil Law and Common Law Jurisdictions. Paris: ICC Publ., 2004. Print.
Dabydeen, Sally R. UK Steel Industry & International Trade. New York, NY: iUniverse, Inc, 2004. Print.
Grath, Anders. The Handbook of International Trade and Finance. London: Kogan Page, 2012. Print.
Hinkelman, Edward G, and Karla C. Shippey. Dictionary of International Trade: Handbook of the Global Trade Community Includes 19 Key Appendices. Novato, CA: World Trade Press, 2004. Print.
Schaffer, Richard, Filiberto Agusti, and Beverley Earle. International Business Law and Its Environment. Mason, OH: South-Western Cengage Learning, 2009. Print
Mugasha, Agasha. The Law of Letters of Credit and Bank Guarantees. Sydney: Federation Press, 2003. Print.
Winston, Jay, and Winston, Arthur. Complete Guide to Credit and Collection Law: 2010-2011. Aspen Pub., 2010. Print.
Essence of Decision: Explaining the Cuban Missile Crisis
The major argument of the book created by Graham Allison and his colleague Philip Zelikow is the possibility of several variants, or scenarios, according to which the political events are being developed in the world. The focus of the book is the so called Cuba Missiles Crisis used by Allison and Zelikow (1999) as the case study to test their three fold model of policy analysis. The three aspects that the authors consider are the so called Rational Actor , the Organizational Behavior , and the Governmental Politics models. According to the first model, the governmental decisions made by the USSR and the USA were conditioned by rational thinking and the pursuit of utility. The second model suggests that the imperfection of the state run construction process results in the inability of the government to act freely and makes the government commit political mistakes. The final model, concerned mainly with court politics , states that the personal benefit pursued by each of the situation players conditioned their actions during this crisis.
As for the evidence presented in the book, and its credibility, the work considered can be called a well-documented and reliable source of the political, historical, and social information. To support this statement, the history of the publishing of Essence of Decision: Explaining the Cuban Missile Crisis can be considered. The first edition of the book was carried out in 1971, but in 1999 the authors saw the necessity of the revised edition as far as the new information about the governmental negotiations and other proceedings was revealed in the late 1990s. Therefore, the argument of the book and its major ideas are supported by the specific governmental materials, including the tapes of the governmental hearings of the issue, the correspondence of certain politicians including Kennedy, Khrushchev, etc. What also adds credibility to the evidence presented by Allison and Zelikow (1999) is that their own hypotheses about the reasons and the outcomes of the political proceedings are supported by specific research data.
Drawing from these facts, the book under consideration teaches a lot about the general principles according to which the public policy making is carried out. Although these principles are not made public, as a rule, it is evident for a number of scholars including Allison and Zelikow (1999) that intriguing and personal benefit are the driving forces of the political changes in the local and the global scope. Accordingly, the major revelation this book presents is that the political events are not planned and carried out for the sake of nations, whose leaders conduct them. Vice versa, the statesmen are involved in their special game in which the political parties and personalities, usually funded by certain mighty corporations like EXCOMM, pursue the interests of these companies and of their own. Moreover, if the personal interests are under a certain threat, as the Soviet ones in case if the USA undertook the air attack on Cuba, the decisions claimed to be for the universal good are easy to change for the opposite.
Finally, the book under consideration has taught me a lot in respect of policy analysis process. First of all, the ideas presented by Allison and Zelikow (1999) demonstrate that no political event can be analyzed in a single way, mostly because any approach is biased to some extent and to see the objective picture of a situation the comprehensive analysis is needed. For example, the analysis of the Cuba Missiles Crisis would be incomplete if carried out through only one of the models offered by Allison and Zelikow (1999). The Rational Actor model would examine all the occurrences from the rational point of view, regardless of any underlying reasons that might condition the launching of the Soviet missile base in Cuba or the US decision to implement a blockade. On the other hand, the Organizational Behavior and the Governmental Politics models would also provide the reader with an incomplete analysis by applying to hidden messages and leaving the rational thought behind. Thus, the book by Allison and Zelikow (1999) teaches that policy analysis process is multifaceted and applies to a lot of approaches to obtain the objective picture of a political event or a decision.
Policy Design for Democracy
Policy Design for Democracy is a perfect book for those busy with the study of the policy making procedures and the basic political systems that can be implemented in the modern society. The authors of this book, Schneider and Ingram (1997) offer the comprehensive overview of the main principles of democracy as well as the four basic theories of the political study used by scholars nowadays. These theories include pluralism, public choice, critical theory, and the policy sciences. In more detail, pluralism presupposes both the variety of political views and movements and the variety of the opportunities to study and examine them. Although the main democratic values are pluralism and the personal freedom, such an approach leads to anarchy rather than a structured society using its freedom properly. Public choice theory is close to the pluralist one as it states the innate right of any person to choose his or her political preferences, but this theory is undermined by the fact that choice is traditionally presented to those having power while those powerless have to accept decisions of the latter. The other two theories does not allow the comprehensive overview of democracy as such either, and in their book Schneider and Ingram (1997) stress the need of the combined study of politics.
Therefore, the credibility of the evidence presented in the book under consideration cannot be doubted. The ideas expressed by the authors are supported by the complexity of theoretical considerations related to the study of politics and major political systems of the past and present. Moreover, the positions that the authors take in the scholarly world also do not allow us doubt the reliability of the ideas they offer. Thus, Anne Larson Schneider occupies the position of the dean of the College of Public Programs which is the part of the Arizona State University. It is evident that the person holding such a position is a well-educated and proficient specialist in the area of public policy making, and the ideas expressed by such a person can be relied upon. The same can be said about Helen Ingram whose position of the Warmington Endowed Chair taken in the School of Social Ecology and the degree of professor obtained in the University of California, Irvine allow her to currently work for the Department of Society and Politics in the same University. Therefore, the credibility of the source considered is undoubted.
So are the ideas presented in this book by Schneider and Ingram (1997) who manage to teach the readers the basics of the democratic society. In its relation to the political system implemented, democracy can often be misunderstood and misinterpreted by politicians and other statesmen. The result of this misinterpretation is the distorted essence of democracy as applied to a particular society. On one hand, democracy allowing too much freedom can evolve to anarchy on a certain stage of its development, especially in the societies of a transitional period. The examples of such societies include the countries of the former USSR, which could not control their political forces on the initial stages of their formation. On the other hand, democracy can be a mere cover to the totalitarian regime under which the democratic freedoms are enjoyed by a selected group of powerful people, while others are deprived of freedoms.
In accordance with this, the means of the political analysis, as Schneider and Ingram (1997) argue, should also be a combination of different approach allowing the examination of various aspects of democracy. For example, pluralism is the means of studying the variety of public minds as for this or that political phenomenon, while public choice theory provides the opportunity to monitor the social opinions with the highest degree of objectivity. Critical theory strives at finding out the disadvantageous of the political system which is currently in force in a country, while political sciences theory ensures the comprehensive overview of the possible political systems and social structures. Thus, none of the above mentioned theories presents a comprehensive means of the policy studies, and to ensure the latter an analyst of policy process should apply all four approaches.
In Retrospect: The Tragedy and Lessons of Vietnam
The main argument of the book by Brian Van Demark and Robert S. McNamara is the acknowledgement of the mistakes that the American government headed by Presidents Kennedy and Johnson failed to recognize at once when they had been made. Vietnam War is viewed as the major failure of the US Government and Robert S. McNamara as the Secretary of Defense in the years 1961 1967. In In Retrospect: The Tragedy and Lessons of Vietnam Robert S. McNamara tries to present his views on the issue driven by the best reasons including the wish to help the American nation with the understanding of the fact that their 1960s leaders committed their mistakes not intentionally but only in trying to benefit the USA. Moreover, the author of the book explains his quite delayed reaction to the Vietnam War events by the reluctance to present his book as trying to publicly apologize. Having published his book over three decades, Robert S. McNamara has managed to make the hindsight to the past events, while Brian Van Demark has served as a critical assessor of the argument from the viewpoint of the younger generation.
Accordingly, the question about the credibility of the facts and evidence presented in the book under analysis comes next. But this question is of little value in relation to this book as the facts presented in it are taken by the very participants of the events depicted from the original sources, from talks with the highest ranking politicians of the time and from the personal judgements of the former Secretary of Defense of the United States. Therefore, the account on the Vietnam War and on the political events that surrounded it is rather full and credible. Moreover, the help of the second author, Brian Van Demark, is hard to underestimate in adding credibility to this books evidence. Being a critic of the arguments presented, Brian Van Demark assures the absence of biases or subjectivity in the book, as well as interprets the facts presented in it from the modern point of view, i. e. three decades after the horrors of the war are in the past.
As a result, In Retrospect: The Tragedy and Lessons of Vietnam presents a specific and credible data on the Vietnam War but also provides a huge amount of information about public policy making and its basic principles. Considered as the historical document, the book under analysis displays a wide range of data beginning from the exact timeline of the key events in the 1960s American politics and Vietnam War as one of its major failures. The accounts of the author about his communication with the American presidents and their reaction to his arguments against the War are also presented in the book. But the major value of this source for the public policy study is that it reveals the principles according to which the American policies were developed at that period. The idea of stopping Communism expansion to Asia made all other considerations minor and led to 58, 000 of killed American soldiers in Vietnam, thus demonstrating that the public policy is mainly concerned with the global goals but not with the lives of ordinary people as such.
Therefore, this book has changed considerably my view on the traditional procedure of policy analysis. The facts revealed by the authors, especially by Robert S. McNamara, show that the traditional approaches used by scholars are not always effective or applicable at all. For example, using one of the traditional methods of policy analysis one might consider the decision to start the war in Vietnam as a politically conditioned one, as the US Government wanted to stop the Communist expansion to other countries. However, the person who is well informed about the underlying facts of the policy making in Washington, like Robert S. McNamara, is able to present another view of the problem. This fact shows that apart from using the purely scholarly methods of analysis, to understand politics it is necessary to be ready to assume and try to prove everything, even the most incredible scenario. For example, in Vietnam War such a scenario could be the interest of corporations that funded the Government in the Asian markets and their desire to keep the Soviet interests out of that area. Thus, policy analysis should be a combination of science and creative thought able to predict any possible scenarios.
Bureaucracy: What Government Agencies Do and Why they Do It
The main argument of Bureaucracy: What Government Agencies Do and Why they Do It by James Wilson is that the publicly understood goals of bureaucracies at different levels usually do not match with the actual, legislatively dictated, duties that these agencies are to fulfill. The analysis of the bureaucratic apparatus of every country is started at the lowest level, i. e. private organizations and businesses, and is developed up to the highest levels of the state authority including the Government, the Congress, and the very office of President. This is achieved by dividing the book into six major sections that include Organizations, Operators, Managers, Executives, Context, and Change. The latter are in their turn subdivided further into chapters dealing with such aspects as people, their beliefs, and needs of people in bureaucracies, etc. Finally, the difference between the private, i. e. profit-oriented, and the governmental, i. e. non-profit, bureaucracies is clarified in the fact that the former pursue their goals while the latter act according to the governmental and legislative restrictions.
Accordingly, the evidence presented in Bureaucracy: What Government Agencies Do and Why they Do It is rather credible because the author does both he manages to provide a substantial body of theoretical information on bureaucracies, their types and development principles; at the same time, this argument is supported by a number of specific examples. For instance, Wilson (2000) considers the institution of the US Army Procurement and the duties of the main official of the latter as an example of the non-correspondence of the officially presented duties with those assumed for this institution by the public. Thus, the US Army Procurement official is supposed to be in charge of purchasing the weapons for the military, but the government imposes other functions on this person, including support to the American business and the native producers of goods and services, providing the employment opportunities for mentally disabled people, monitoring and regulating the wage rates in the countries, and many other minor functions.
As a result, Wilson (2000) presents a lot of information about the public policy making of today. Using bureaucracy as the specific, and at the same time generic, example, the author manages to depict the very structure of the political system of the United States of America. For example, the author refers to the multiple nature of subordination of the local bureaucracies to the central authorities saying that the Congress might decide a matter in one way, the President might keep to another point of view, while the Supreme Court might rule the matter in a third way. This ambiguity of bureaucratic subordination makes its work difficult and, rather often, inefficient. However, positive examples are also present, including the US Army Corps of Engineers, the FBI, etc. The success of this bureaucracies is, according to Wilson (2000), is conditioned by their proper organizational structure and management.
Finally, this book contributes greatly to my understanding of the basics of the policy analysis process. Bureaucracies, as a substantial part of the political system of every country, should be considered for their efficiency and possible improvements, and the book under analysis classifies them for the easier study. Moreover, the specific examples presented for any type of bureaucracy help in understanding the essence of their operation. Thus, the complex of data that Wilson (2000) presents in his book constitutes the valuable tool for any person dealing with the public policy analysis. The ability to distinguish between the types of bureaucracies and see their specific reflections in the real world politics is difficult to overestimate for the purposes of the public policy analysis.
Works Cited
Allison, Graham T. and Philip Zelikow. Essence of Decision: Explaining the Cuban Missile Crisis (2nd Edition). New York: Longman, 1999.
Schneider, Anne L. and Helen M. Ingram. Policy Design for Democracy. Lawrence, KS: University Press of Kansas, 1997.
Van Demark, Brian and Robert S. McNamara. In Retrospect: The Tragedy and Lessons of Vietnam. New York, NY: Vintage Books, 1996.
Wilson, James. Bureaucracy: What Government Agencies Do and Why they Do It (Second edition). New York: Basic Books, 2000.
The three credit agencies constitute TransUnion, Experian, and Equifax, and each has the mandate of gathering information on people and how they use their credit. Further, the agencies are responsible for collecting information on whether any business has turned a persons debt over to collection agencies or whether an individual filed for bankruptcy. With the involvement in peoples credit activity, it becomes significant that people report instances of identity theft to agencies since identity theft often results in credit abuse (Johansen, 2018). In their mandate, it becomes the responsibility of the credit agencies to prevent identity theft from happening. However, if identity theft occurs, credit agencies have to ensure credit abuse is reduced.
One of the challenges identity theft victims faces in the reporting process is slowing down the credit recovery process once the theft has been reported. Credit reporting bureaus and creditors often decline to consumer efforts resulting in credit disputes. Reporters of identity theft are often victims of unclean credit reports when dealing with credit agencies, making it challenging or time-consuming to recover their credit (Johansen, 2018). The other challenge with the reporting process is that hackers may sell clients social security numbers to criminals and use sensitive information once their identity is stolen. With the falsified information on the loop, identity theft victims may be arrested for evading authorities. Another familiar challenge associated with identity theft and the reporting process is that victims are sadly victimized and are forced to face unpaid medical bills in their collection of debts (Johansen, 2018). Last but not least, the challenge with identity theft in the reporting process is that victims are made to encounter damaged credit reports since fraudsters run up charges on their accounts and leave them unpaid.
With a clear analysis of the court system and the civil rights act, it is evident that the Court has left many natives employees with no redress for any case of harassment that occurs in their employments. For instance, there are many prevailing cases of discrimination in the employment sector that the Court has not fully or rightly addressed. However, with the political and public response of the civil rights in 1991, the decision by the Court was reversed, and foreign employees in the United States have something to smile about. After the Civil War, Congress passed many laws that aimed to guarantee the newly-freed slaves the same rights as white Americans (Ressein, 2017). During this period, discrimination by the states was vividly presented by the Thirteenth, Fourteenth and Fifteenth amendments. However, there was still a huge spread of discrimination cases against the African Americans by the White Americans.
Among the key laws that Congress passed was the Civil Rights Act of 1981, which claimed that provided that all citizens, regardless of race, shall have the same right& to make and enforce contracts& as is enjoyed by white citizens (Refsin, 2019). Despite Congress passing laws that prohibited all acts of discrimination within the employment sector of the United States, the Supreme Court later in 1981 explicitly held the section that covered discrimination acts by private persons. According to the case filed by Runyon versus McCrary, the Supreme court claimed that section 1981 prohibited pure private discrimination.
Presentation of the Problem
Brenda Peterson case versus McLean Credit Union was spurred up amid a suit for typical fair rights for Peterson. However, the case became one of the critical cases that aimed at rallying for the civil rights of advocates. According to the case, Peterson, who served as an African American bank teller, filed a case to suit the McLean Credit Union for what she termed as discrimination against being promoted in her professional ladder despite the promotion of her white American colleagues. She also claimed that she was subjected to patterns of harassment by her supervisor for ten years that she was working in the bank (Refsin, 2019). However, the trial court ruled in favour of McLean Credit Union, claiming that the job contract did not cater to harassment and could not be enforced in the contract. Despite efforts by Peterson to appeal in the Court of appeals, the decision by the district court was upheld. She then sought to appeal in the Supreme court using a procedure termed a writ of certiorari, a case that saw both parties arguing on 29th February 1988.
The research questions that this case study aims at discussing entail: How do you think this case squares with the Courts statement Neither party would be likely to conciliate if there is the possibility of the employee recovering the greater damages permitted by section 1981? and Why did the Congress want to overrule the Supreme Courts decision by enacting the 1991 legislation? In this paper, the key emphasis will be on analyzing the section 1981 civil rights act and evaluate the Supreme court decision on Petersons case against McLean Credit Union.
Literature Review
According to section 1981, [a]ll persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts& as is enjoyed by white citizens (Refsin, 2019). However, according to the article that was composed by Fagel (2018), there have been many plaintiffs who have successfully relied on the statute in the suit for racial discrimination in their areas of work, with most of them claiming that they have been facing harassment and racially denied promotion benefits despite having the required merits. Similarly, according to Ressein (2017), the Supreme Court rejected the section 1981 expansive reading by a vote of 5-4 in a poll conducted in 1989. After the Civil War, Congress passed many laws that aimed to guarantee the newly-freed slaves the same rights as white Americans. During this period, discrimination by the states was vividly presented by the Thirteenth, Fourteenth and Fifteenth amendments.
In an article titled Washington and Lee Law Review, the authors present a discourse that the scope of the section 1981 first appeared in the Civil Rights act of 1844 within section one. The authors also claim that Congress believed that the thirteenth amendment had accrued the Congress with powers to pass the act that defines the employees civil rights (Refsin, 2019). Plaintiffs, in most cases, take advantage of section 1981 by failing to comply with the administrative requirements of title VII (Fagel, 2018). According to the administrative requirements of Title VII, a plaintiff is required to file a charge with the Equal Employment Opportunity Commission (EEOC) within a period of one hundred and eighty days amid the execution of the discriminatory offence, of which most of the time it does not happen.
Methodology
This case study incorporated various qualitative methodology paradigm that entailed critical concepts to address the Peterson versus McLean case. The study involved collecting various sources of evidence through evident quantitative means such as key research methods; among them were interviews, observations, use of surveys, and analysis of secondary and primary sources such as newspaper articles and journals.
Findings and Discussions
Section 1981 of the US constitution claims that [a]ll persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts& as is enjoyed by white citizens (Ressein, 2017). However, with a clear analysis of the court system and the civil rights act, it is evident that the Court has left many natives employees with no redress for any case of harassment that occurs in their work environs. Neither the Fourteenth Amendment nor section 1983 may be used for discrimination by private employers (Fagel, 2018). They both redress actions by government personnel. The government may not be sued without its permission because of the Eleventh Amendment to the Constitution, so it is brought against the government official in its individual and official capacity.
Compensatory and Punitive Damages
The Civil Rights Act of 1991 permits recovery of compensatory and punitive damages squares with the Courts statement on conciliation upon employee recovering of the greater damages permitted by section 1981. The fact is evident as the Civil Rights Act of 1991 provides the jury trial on all claims concerning discrimination that would help eliminate possibilities of limited amount that the jury can award and emotional distress (Refsin, 2019). According to the act, women have been given the right to sue and collect their punitive and compensatory damages in harassment or sexual discrimination in their places of work (Ressein, 2017). These aspects are also following the Supreme Court statement on the fact that Neither party would be likely to conciliate if there is the possibility of the employee recovering the greater damages permitted by section 1981 (Fagel, 2018).
Congress would want to overrule the Supreme Courts decision by enacting the 1991 legislation to uphold all the tainted policy considerations. Usually, this arises due to innocent miscommunication or temporal coincidence between the two branches (Refsin, 2019). In addition, with how the 1991 legislation rule was reached, the miscommunication between the two critical branches may have been fuelled by critical philosophical differences on the scope of roles of the federal government on policy matters.
Conclusion
In summary, the paper has demonstrated that section 1991 claims that all people within the jurisdiction of the United States have equal rights against discrimination and harassment. Still, the Court system in the US has not often upheld this. The Court has left many natives employees with no redress for any case of harassment that occurs in their employments. Despite Congress passing laws that prohibited all acts of discrimination within the employment sector of the United States, the Supreme Court later in 1981 explicitly held the section that covered discrimination acts by private persons. There is a need for future research to determine ways that can be used to solve the misunderstanding and miscommunication within Congress and the Supreme Court.
Refsin, B. (2019). The Lost Clauses of Section 1981: A Source of Greater Protection after Patterson v. McLean Credit Union. University of Pennsylvania Law Review, 138(4), 1209-1246. Web.
Credit reports have been applied in many organizations across the US to make hiring decisions. However, it creates a barrier to accessing jobs and limits organizations ability to recruit the most talented and experienced employees. This paper discusses the reasons as to why credit reports should be considered irrelevant in making hiring decision.
Introduction
There are various opinions coming from different stakeholders on how to get people back to work given the high levels of unemployment and job cutbacks. There is a general consensus that more jobs should be created and barriers to accessing these jobs need to be done away with. As a result, the selection process applied by the employers and organizations to determine the suitability of potential employees for various positions, have come under scrutiny. Stakeholders are debating on how to provide solutions to restrictions that limit individuals ability to obtain jobs by defining what should and what should not be considered when it comes to recruiting employees. The use of credit reports is one issue that needs to be reviewed considering the current economic environment. The use of credit reports involves reviewing credit files of potential employees during recruitment; however, there are many issues on compliance, appropriateness and legal perspectives of their use. Consequently, the question that is still debated remains whether having bad credit makes an individual a bad worker or whether having a good credit report guarantees best performance? I would say no. Having more than ten years or over with good credit in any industry does not guarantee an individuals proficiency or excellent performance of tasks. There are several reasons as to why credit reports should be irrelevant to hiring decisions.
Credit reports cause discrimination
Credit reports are founded on the premise that there are normally bad credits whenever employers or selection panels are evaluating employment credit reports. In reality, employment credit reports unlike other credit reports used for other purposes such as for loans and mortgages have no score associated with them. An employment credit report only provides history of the individuals payments as well as debt levels plus a list of public records which include bankruptcies, liens as well as judgments. When an employer or selection team reviews an individuals credit report, the aim should be to conduct a background check of the individual concerning the job and not separate good workers from presumed bad workers in terms of their credit reports. Employers and selection teams normally conduct screening of potential workers to manage risks associated with the organizations performance so as to make informed decisions during the selection process. However, most of the information contained in credit reports are not related to the applicants job or expected performance, meaning that in most cases, credit reports do not help selection panels and employers in making hiring decisions (Rebecca & Smith 30). Instead, when used, they can result to discriminations against individuals with bad credit reports regardless of their abilities and performance credentials even in positions which do not require the person to deal directly or indirectly with finances of the organization.
Credit reports could have errors
Credit reports are also subject to potential errors since they are based on numerous pieces of data which are collected by human beings and computers from various sources across the United States, thus, mistakes can always occur (Rosen 6). Negative information on the credit reports may also result from disputed bills, dissolution of marriage as well as other problems which are out of the individuals control. These errors can adversely affect an individuals ability to obtain employment when a credit report is used. Rosen (8) explains that when such errors occur on a credit report and the job applicant is not able to resolve the issue with the creditor, the applicant can write a letter to credit bureaus explaining the case. However, due to the processes involved in investigation of such issues, the applicant has to wait for as long as 30 days to allow the credit bureau to complete their investigation and resolve the dispute. This could cause the job applicant to miss an employment opportunity especially if the vacancy had to be filled urgently or where many of the applicants to the position were qualified and therefore the wrongly reflected credit report is used to eliminate the applicant.
Violation of privacy rights
The use of credit report is in itself an invasion to an individuals privacy, hence, a violation of job applicants civil rights. A credit report is analysed by a whole selection panel and passes through several hands before it finally reaches the selection panel. As a result, many people including those the applicant may not want to share their financial details with get to know the financial details of the person. This could be worse in organizations which have weak security controls for their information systems. Malicious individuals or hackers can use an individuals private information/financial details to blackmail the person or for their own selfish gains.
Limit organizations effectiveness
Use of credit reports in the recruitment could also affect an organization negatively. Unnecessary credit reports may discourage potential employees from applying for the vacant positions or participating in the recruitment process (Fray 234). In some cases employers use credit reports as tool for evaluating candidates during the hiring process without determining whether there is a sound business need to obtain applicants credit reports. Potential employees may consider credit report discriminatory and therefore may fail to apply for the job. This means that organizations which adopt the use credit reports in hiring processes may limit their ability to employ talented and more experienced employees who can help the organizations better achieve their objectives. Thus, such organizations may not have the capacity to improve their competitiveness in the market.
Impact on minorities
Applying mass credit reports on all individuals who apply for any position in the organization regardless of the requirements and responsibilities of the job may discriminate against some protected classes (Steingold 128). The US constitution protects minority groups including those above forty years and minority tribes. In most cases those aged above forty yeas have several years of experience which come with diverse employment history regarding financial details. Some of the negative information contained in their credit report may have occurred in circumstances out of their control. However, these details form part of what the applicant is judged upon, meaning that protected minority groups could be discriminated against unfairly.
Conclusion
Credit reports are often used as tool for evaluating job applicants in most organizations; however, their use should be reviewed as they could discrimination against job applicants. Again, organizations also limit their chances of employing talented and experienced employees who can drive the company to greater heights.
Works Cited
Fray, John. Encyclopedia of security management. New York: John Wiley & Sons, 2009. Print.
Rebecca, Mazin and Shawn, Smith. The Human Resource Book: An indispensible Guide for Managers and Human Resource. New York: AMACOM, 2011. Print.
Rosen, Lester. Credit Reports and Job Hunting. Employers can request credit reports before making a hiring decision, but applicants should be aware of their rights in this regard. Employment Screening Resources, 2011. Web.
Steingold, Fred. The Employers Legal Handbook: Manage Your Employees & Workplace Effectively, 10th Ed. Berkeley, California: Nolo Press, 2011.
Recession is a period in an economy that is characterized by general economic downturn or decline. Typically, recession is defined as the general decline in the gross domestic product (GDP) for a period of two or more than two quarters consecutively. Recession will in most cases be witnessed through significant decline in stock markets, downturn in the housing market and great increase of people who are not employed.
When recession takes a long period in an economy it is referred to as depression. There has never been agreement on what causes recession but those to blame in more than one time are the people in the positions of leadership and power and in this regard the president or the governor of central bank or the whole administration at the time in question.
On the other hand, credit crunch is described as the economic situation where capital for investment is hard to get and lenders such as banks and other investors become cautious of lending their money to organizations. This in turn results to an upward surge on the prices of the products with debts on borrowers side.
Credit crunches can also be taken as extensions of a period of recession. During credit crunches companies cannot be able to make any borrowings since the lenders are wary of defaulters or bankruptcies. When there is contraction in credit supply, it leads to long period of recession and economic recovery becomes very slow (Stilwell 1983).
Bulgaria and Greece are some of the countries in the world that have been faced by recession and credit crunches in the recent past. Bulgarian gross domestic product (GDP) shrieked to 3.5% in 2009 first quarter. The countries economic growth went down to 5% in the period from January to end of March 2009 and contracted further to 1.6% in the last quarter of the same year.
That marked the first time Bulgarian economy was dropping annually after 1997 when it experienced similar shocks. That significant drop in GDP was clear evidence that Bulgaria had an economic crisis with imports and exports shrinking by about one third in the first three months of 2009.
Exports in Bulgaria had shrunk by almost 17.4% whilst the imports had contracted by a significant 21.1%. What the data obtained showed was that industrial production had shrank by 12.4%, 5.4% was witnessed in the consumption sector with the service sector of the economy slowing by 2.5% in the first quarter of 2009(Mudida 2003).
In Greece, the countries output in economy for the year 2010 dropped by 2% down from what the government had predicted to be the drop of 1.2% to around 1.7%. The central bank in Greece announced that recession in the country would be worse because of what the government had put in place to cut on public spending.
Greece economic down turn had to be discussed in a summit for the European Union so as the union could come up with ways of mitigating the effects in the country belonging to the euro zone. The budget deficit in Greece was 12.9% of the Gross Domestic Product in the year 2010. In the same year, pressure had been intensified on Greece government by the financial markets for refinance to a tune of 50 billion Euros (Hallwood and Mac 1986).
The credit crunch/recession in the two countries have significantly affected the political economic decisions in that both governments have to incur huge expenditure in the process of boosting demand in a situation where there is great reduction in income brought about by less revenues due to low tax collections. The deficit generated in both Greece and Bulgaria w as tackled with many implications in the long term.
In the early 2010, the Greece government had to announce a series of measures aimed at reducing the huge deficit that was surpassing 13% of the gross domestic product making it four times the range allowed by the eorozone membership rules.
This made it had to make political economic decision in Greece because pressure had developed on the countries currency. In both Greece and Bulgaria, credit crunch lend to decisions aimed at freezing the salaries of the civil servants and other public officers.
The governments also reduced salaries for the public servants. Employment in both countries was freezed leading to little or no employment in the public service and the civil service. In Greece, there was a decision to increase retirement age by latest 2015 to 63 years. In both cases, taxes on key products like alcohol, petrol and tobacco was increased significantly (Killick 1981).
These political economic decisions to resuscitate the economies were not as popular with the masses and due to ensuing pressure, people went into strikes as they tried to resist the changes the government was considering for implementation. People protested the announcement s on various measures the government was taking which were not going down well with them stopped.
These measures were pushing them to further financial meltdown but the governments could not stop the economic decisions. In Greece, the forecast on national debt for 2010 was going up to 125% of the gross domestic product and unemployment rate projections reaching an all time high at 9.7 %( Hyman1989).
The situation in Bulgaria was hard for political economic decisions due to migrations which were witnessed during the credit crunch period. This migration was not affecting the skilled laborers who previously migrated but also the unskilled laborers due to lack of jobs and others losing the available ones. Note that many Bulgarians lost jobs during the period of recession and went to Spain, which is a nation with many immigrants from the country.
This even led to the creation of the ministry for Bulgarians living abroad by the regime elected to power in summer 2009 due to the mass exodus by the Bulgarian nationals to other neighboring countries looking for jobs and better salaries. Economic growth in both countries was very slow and actually declining during the period in question (Hardwick, Khan and Langmead 1994).
Recession in both Greece and Bulgaria affected every sector of the economy and called for sustainable decisions to be made in establishing and supporting policies geared at an economic advancement and growth. This is a critical rule in mitigating the effects of credit crunch. There is need to compare policy decisions experiences between the various political economic decision makers.
There is also the need to make decisions which are sustainable in boosting the rate of employment in the countries and in so doing reduce the effects of the recession on the nationals. Other effects of recession were seen in the low living standards of the people in both countries.
The political decision makers were to make apt decisions to raise the living standard of the people by providing them with quality food and other basics, which they required. Due to the fact that there is economic decline when recession hits a country the following effects are witnessed in the political economic decision making (Gatheru and Shaw 1998).
The economies experienced major set backs which slumped product and service market. It become hard for those goods and services to be sold as the power of the people to purchase came down due to salaries, which were at the lower end and the consequent insufficiency of funds or income.
This distorted the market with goods and services not being available to those who need them. During recession, political economic decisions become difficult as production of goods and services comes down and this results in prices hiking making manufacturing firms result to selling the products available at low prices and at times for prices, which are throw- away.
This leads to great losses on the part of the firms. If the consumers of products lack the power to purchase then businesses suffer. Credit crunch is really dreaded by consumers and the producers at equal measure. The less the level of production in a firm, then the less the amount of profits for those who produce, and this translates to difficulties in trying to run the businesses (Wood 1995).
During recession, political economic decisions are affected by the shrinkage of the stock prices. Investment is more affected and industries involved in production suffer because investors try to avoid the companies that seem vulnerable during the recession time.
Companies that manage to withstand the period are the large one with the small ones having to withstand the tough times at that period and may even end up closing down the business all together. Credit crunches in both countries could have resulted to depression if it had persisted for long. The situation got a boost through the intervention of the countries who are members of the euro zone and the European Union.
During a state of depression, negative effects are felt in stock markets and the high levels of people unemployed. During this time, the government spends a lot of money in bailing out the affected companies with public expenditure suffering major down turns.
Faced with recession, the national debts were very high and especially for the Greece economy which was at 120%, this meant that there was less money for the government to budget on spending for major development and so the recession brought about less development in both Bulgaria and Greece. No economic decisions could be made to spend due to the huge national debt (Golfield and Chandler 1981).
Lack of employment cannot be over-emphasized in the two countries, as many are the people who were kicked out from their jobs. When left without jobs then they are unable to make ends meet because the goods and the services they need to support themselves are out of their reach. Banks also suffered major set backs in both countries and they had to depend on the governments to survive the tough times.
The governments had to result in using public money to boost the banking institutions. Definitely, recession has pronounced effects on any economy for both development and growth. Those who want to invest are hesitant, those who do the production of goods are not in a position to do so and consumers cannot purchase what they want due to lack of income resulting from unemployment.
It is also important that government boost each other by comparing notes on policy matters and experiences. They also can find the solutions to the problems, which are common in fighting recession. They also are supposed to identify the economic practices that enable development and more importantly supervise and coordinate international and domestic policies (Sardoni 1987).
During recession the inflations rates are very high and this as the case was in Bulgaria in 2009 going to 2010 and in Greece in 2010. The prices of goods and services, which were way above most peoples reach. Income distribution in many sectors at primary, secondary and tertiary level was also very poor due to fears of possible losses during credit crunch.
In conclusion, countries have to come together in aiding each other for the sake of economic development and in mitigating the effects of economic climb-down as witnessed in both Greece and Bulgaria in the recent past. The two countries were able to start recovering after they were helped do so by there neighbors since if a countries economy declines, then it affects the whole region where that country involves itself in trade or otherwise (Stilwel 1983).
References
Gatheru, W and Shaw, R. 1998. Our Problems, Our Solutions: An Economic and Public Policy Agenda for Kenya. Nairobi, Institute of Economic Affairs.
Golfield, S and Chandler, L. 1981.The Economics of Money and Banking.8th Edition. New York, Harper and Row.
Hallwood, P and Mac Donald, R.1986. International Money: Theory Evidence and Institutions. New York, Basil Blackwell.
Hardwick, P, Khan, B and Langmead, J. 1994. An introduction to Modern Economics. 4th Edition. Essex, Longman.
Hyman, D. 1989. Modern Macroeconomics: Analysis and Applications. 2ndEdition. Homewood, Irwin.
Killick, T. 1981. Policy Economics: A textbook of Applied Economics in Developing Countries. London, Heine man.
Mudida, R. 2003. Modern Economics: principles of macro and micro-economics. Nairobi, NRB: English press.
Sardoni, C. 1987. Marx and Keynes on economic recession: the theory of unemployment and effective demand. University of Michigan, Wheat sheaf Books.
Stilwell, F. 1983. Economic recession: impacts and policy responses. Australia, Sixth National Conference of Labor Economists.
Wood, J. 1995.The critical assessments: critical assessments of leading economists. New York, Routledge.
Most banks have very explicit credit score policies. Presently, most employees including interns, struggle with high financial debts. This situation affects their likelihood of acquiring employment within most institutions (Mays 11). There is a clear indication that certain category of employees that lacks adequate knowledge about the concept of credit scores.
Employees within the human resources department have critical responsibilities. Some of these include creating a comprehensive awareness on issues about credit scores. This business memo targets the student interns within a local bank. The memo contains general information about the credit scores. Apart from this, it also explains the importance of credit scores. Lastly, it outlines the various measures required to increase the points for the credit scores.
Credit Scores
A special number is normally attached to an individuals credit score. The number is generated from an algorithm system. The data obtained from a persons credit report is very critical. It is applicable in the mathematical computation of the credit score. There are several considerations in the development and setting of the credit score.
For instance, it has an important ability to predict risks. The risk approximation period usually extends to about two years (Weston 20). The system is designed to help in the prediction of an individuals likelihood to become severely delinquent. Principally, the system is applied in the scrutiny of a persons credit obligations within a specified time interval. Several models are applicable in the credit-scoring process. However, competitive models such as the FICO credit score model are widely applicable.
The system dominates the domestic and global environments. The US is one of the leading nations in which the FICO scoring model is in current use. All employees must be aware of the modes of operation and impacts of the credit score (Fair Isaac Corporation 2012). Most organizations have different policies and operational frameworks regarding the credit score.
According to the FICO scores, there are various ranges provided in the system. The ranges vary from three-hundred to 850. Therefore, it is upon the individuals to be aware of the most suitable credit score. Nonetheless, most systems indicate that the higher numbers depict very low risks. Most individuals have three of the FICO scores.
These scores are provided by three different agencies. These include the Equifax, Experian and TransUnion (Mays 36). It is important to note that most individuals may only access the scores generated from Equifax and TransUnion FICO. This follows the exclusion of the third firm from the credit-scoring scheme by myFICO.com.
The exclusion of Experian occurred in 2009. The creditors apply this concept in the determination of an individuals level of creditworthiness. On the other hand, there are different institutions and employment agencies that apply the credit scoring method within their recruitment processes (Fair Isaac Corporation 2012).
The system contains all relevant financial information concerning an individual. These might include an individuals record of paying bills. In addition, the system portrays all the types of accounts managed by persons. Other valuable information available in the system includes the debts, age of the accounts, and the debt clearance system. All this critical information is found within the credit report.
The creditors apply empirical processes in the comparison of basic information. This concerns information pertinent to the credit history of an individual. Statistical programs are used in these initiatives.
The scoring system is critical in the prediction of the capacity of people to submit their debts (Weston 34). Different agencies use the credit system in achieving various goals. Some of these include the insurance companies. The information is applicable in the determination of the possibility of providing certain insurance cover. The pie chart below indicates some elements in the credit score:
(From: myFICO.com)
The Importance of Credit Scores
The credit scores have great significance to individuals and institutions. However, these vary within different environments. Specifically, in the US all persons must have the credit score. However, this is only applicable to persons of a particular age. There is a special security number assigned to all persons under this age category (Weston 61).
This number is connected with an individuals history of credit. The number is very crucial. For example, the relevant agencies seek the security number in the process of assessing the persons credit worthiness. The name of the person is also important in the process. All these are significant during the identification of the various credit scores.
Most banks use the credit scores in defaulter tracing processes. These initiatives occur within the loan departments. They are also important in security systems. Specifically, these relate to the major economic crimes. It is also a process of monitoring and evaluating the historical financial undertakings of individuals.
The process helps recruitment operations of the company. The credit scores may also be applicable in the validation of a persons level of integrity. It is also applicable in assessing the financial responsibility of different personalities. The credit score provides crucial information whether certain individuals deserve credit cards (Weston 76). Presently, most employers inquire about the credit score of all their prospective employees.
The trend is observable within jobs that involve handling large sums of money. These might include banks and other institutions dealing in finances. In such cases, the hiring certain employees usually depends on the level of their credit score. Those with high credit scores are more likely to access employment (Mays 91). Property owners have also applied the credit score system to assess the credit worthiness of their potential tenants. This process gauges the competency of various prospective tenants in meeting the monthly costs such as rent.
Measures for Raising the Credit Scores
There are diverse strategies for increasing the credit scores. Foremost, it is advisable for individuals to settle down their bills promptly because the delinquent payments may cause a detrimental effect on the average score (Weston 88). The process leads to a consequent rise in the level of credit score.
The balance in the credit cards must also be kept at very low levels. Generally, a high level of debt balances may have negative impacts on the credit score. Individuals must also restrain from opening many unnecessary credit cards. Additionally, there is need for responsible management of all the credit cards. Most people operate without credit cards. This is dangerous for the effective operation of the credit score.
However, an adequate financial management system is necessary (Weston 94). This explains why individuals require proper fiscal training. It is upon the employers to launch effective capacity building initiatives based on the credit system. In general, personal financial responsibility is a key factor. It helps in the development of an efficient credit score.
Works Cited
Fair Isaac Corporation. Credit scores. 2012. Web. Web.
Mays, Elizabeth. Handbook of Credit Scoring. S.l: Publishers Group UK, 2005. Print.
Weston, Liz P. Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future. Upper Saddle River, N.J: FT Press, 2012. Print.
The Human Resource Department would like to notify all the college interns in this organization to raise their credit scores so as to enhance their chances of being hired as regular employees (on permanent basis). There are credible measures that individuals can take to augment their credit scores. This is a vital provision when considered critically.
About Credit Scores
Contextually, a credit score is an arithmetical expression based on a statistical examination of an individuals credit files. It is used to unveil the credit worthiness of a person. Additionally, banks and other financial institutions use credit scores to access loan applicants. The importance of positive credit score cannot be assumed in this context. It is advisable to repay loans promptly so as to enhance your credit score as mentioned earlier.
Basically, a credit score is based on credit report characteristically provided by credit bureaus. Concurrently, credit bureaus have the capacity to investigate the credit history of every citizen, both nationally and internationally. The data collected is analyzed and transcribed as a numerical figure.
The higher it is the better for the applicant. This indicates the significance of the mentioned credit score. Everybody possesses a particular credit history, which he or she can use to source financial aids from banks and other financial institutions.
It is crucial to understand the provisions of credit score and how they operate so as to avert future victimizations. Notably, the application of credit score is not only limited to banks but also other corporations. Organizations including insurance corporations, Credit card companies, landlords of real estates, mobile phone institutions, and government sectors employ the credit score phenomenon to evaluate their prospected debtors.
There are potential risks associated with lending money to bad debtors. However, it is possible to know a bad debtor through his or her credit score values. This indicates the need to have a positive credit score among the interns as the prospected employees of this organization. Precisely, lenders utilize credit score to decide on who qualifies for a credit. It is also used to determine interest rates as well as credit limits.
The importance of Credit Scores
High credit score is advantageous in numerous contexts. This organization, like other firms, requires high credit scores before it hires an employee on a permanent basis. Thus, it is advisable for the concerned interns to monitor their credit scores so as to enhance their chances of ceasing available job opportunities in this organization and also access loan facilities.
No financial institution will risk employing interns with low credit scores. Interns must ensure that they pay their student loans in time to raise their credit scores. Nevertheless, credit scores are important for both lenders and borrowers. Most financial organizations use credit score to determine potential borrowers and the interest rates, which can be charged on credits given to them.
For borrowers, high credit scores allow them to access viable loan facilities. Credit scores help in building a mutual trust between the lenders and borrowers. It also allows employers to trust their employees. It shows the levels of financial integrity of a borrower. This shows that all interns engaged in this organization must boost their credit scores. This will further their employment opportunities not only in this organization but also beyond.
Good credit score allows for considerable interest rates on credit cards as well as loans. As indicated before, this will allow the interns to qualify for superlative interest rates, and pay minimal charges on credit card balances as well as loans. Another advantage of high credit score includes more negotiation powers.
For instance, with a viable credit score, it is possible for a client to negotiate for a lower interest rate on credit cards and loans with reference to statistical credit scores. Other benefits include prompt consent for rental houses and apartments, better car insurance rates, higher credit limits, and aversion of security deposits on utilities. These are vital provisions when considered critically.
How to raise credit scores
To all interns, it is crucial to raise your credit scores as required by the credit bureaus. This is possible through numerous ways. Try to pay your college/university loans in time as required by the law. Additionally, it is vital to keep off from unnecessary debts that might taint your credit history.
Those who own credit cards should use them wisely and considerably. You expenditures should not exceed your credit limits. Additionally, it is important to check your credit score regularly so as to strategize on how to improve it. You should also setup payment reminders and lessen the amount of your unpaid debts.
Pay all your credit card bills before executing additional purchases using the card. It is also advisable to guard your credit information from scam and identity burglary. Precisely, try to minimize your outstanding debts and refrain from overextending yourself. Do not apply for a credit needlessly; it can be disastrous in case you fail to pay. This is a critical advice in the context of credit scores.
Nearly four years after the collapse of the Lehman Brothers and the subsequent financial downturn that followed, and which most financial commentators blamed on the housing bumble and subprime lending (Mills, 2009), the economic environment of the United States continue to struggle as markets continue to be embraced by fears of new setbacks, defaults and the prospect of experiencing a new double-dip recession (Gibson, 2011).
This paper purposes to critically evaluate the underlying causes of the current credit crisis sweeping through the United States.
Behind the current credit crisis lie many factors, including the free fall of the U.S. stocks, the obstinately high employment rate in the U.S., the politically-oriented scuffle in Washington over the federal debt ceiling, and the decision by credit rating firms, particularly Standard & Poors, to demote the governments AAA rating after its aftermath (Inman, 2011; Gibson, 2011; Morales & Mendes, 2011).
Perhaps one of the most overbearing causes of the current credit crisis is the just-ended political scuffle over hiking the U.S. debt ceiling by $2.1 trillion, while reducing future government spending by $2.4 trillion (Gibson, 2011; Rowley & Dodge, 2011).
Financial analysts observe that although the raised debt ceiling made significant strides in avoiding massive default, it also rattled investors just coming to terms with a shaky U.S. economy, precipitating the current credit crisis (Gibson, 2011).
It is true that a political compromise was found before the U.S. Treasury missed interest payments on U.S. debt (Peauler, 2011), but the damage had already been done in terms of low investor confidence, hence low credit flow.
The cumulative effect of political indecisiveness witnessed between the Republicans and the Democrats got the investors nervous, a fact that is so well demonstrated by the dipping U.S. stocks as investors attempt to sell them off (Peauler, 2011). This is precisely the second cause that has occasioned the current credit crisis.
On the 1st of August 2011, one day before the presumed deadline to raise the U.S. debt ceiling or risk missing out on interest payments (Peauler, 2011), the Dow Jones Industrial Average shed off 265.87 points, or 2.2 percent, to 11,866.62, its worst day of trading since June 1, while the S&P 500 projected a new closing low for 2011 and turned negative for the year (Gibson, 2011).
Such a dip in stocks, according to this author, only serves to precipitate a cloud of uncertainty over the market, thereby contributing to a further loss of confidence among investors and, consequently, triggering the credit crisis because financial institutions lack the capacity to offer credit to businesses (Peauler, 2011).
The decision by credit rating firm Standard & Poor to downgrade the governments AAA rating cannot be said to have augured well with the United States continuously shaky economic environment by virtue of the fact that such a decision, by its very nature and scope, is enough to put investors into frenzy of disposing whatever they might have held in U.S.
Treasury securities (Peauler, 2011). Once again, available evidence have demonstrated that when investors dispose off U.S. Treasury securities, the cumulative effect is that banks will no longer have the capacity to provide credit to businesses (Levinson, 2009), triggering a spontaneous credit crisis.
Lastly, it can be argued that the high level of underemployment and unemployment witnessed in the U.S. is partly to blame for the weak economic outlook in general and the ensuing credit crisis in particular. A recent Gallup study revealed that 18.5 percent (approximately 1 in every 4) of workers in the U.S. are underemployed, including 9.1 percent unemployed (Morales & Mendes, 2011).
The high level of underemployment and unemployment translates into lower consumer spending a fact collaborated by these authors when they argue that Americans spending has remained fundamentally dormant since it plummeted dramatically in January 2009.
The overall effect of these two variables unemployment and low consumer spending is seen in plummeting property prices, low business volumes, and sustained uncertainty in the financial markets as people are not spending and industries are not growing (Yerex, 2011). These factors are adequate to serve as a toxic trigger to a new credit crisis.
Levinson, M. (2009). Guide to financial markets. New York, NY: Bloomberg Press
Mills, D.Q. (2009). The world financial crisis of 2008-2010: What happened, who is to blame, and how to protect your money? Evanston, IL: Northwestern University Press.
Morales, L., & Mendes, E. (2011). Three years after crisis, little sign of economic relief in U.S. Web.
Peauler, R. (2011). Another credit crisis looming for business if debt ceiling is not raised. Web.
