Current Financial Market Events and their Implications

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

Table of Contents

Event one
Event Two
Event Three
Event Four
Analysis
Reference List

Event one

The recent global financial crisis has dealt a heavy blow on the American International Group, leading to loss of mortgage-backed securities. Following this loss, AIG has filed a suit against Bank of America in a bid to recover over $ 10 billion USD (Story and Morgenson 2011).

AIG maintains that Bank of America, along with its Countrywide Financial units and Merrily Lynch sold to investors misrepresented mortgages that had been placed as securities. AIG is blaming banks for this historic loss and maintains that it was misled into purchasing risky securities while the property market was still faced with a housing boom.

Other large financial institutions that IAG plans to sue on similar grounds include JPMorgan, Goldman Sachs, and Deutche Bank. The US Justice Department has also received a number of credit crisis cases but because none has yet been prosecuted, consumers and investors are now apportioning blame on financial institutions for the loss (Story and Morgenson 2011).

Nonetheless, the Justice Department is pushing for the prosecution of these cases, albeit at a slow pace. For example, a former chairman of Taylor, Bean & Whitaker, a mortgage company, has been handed a jail sentence. Requests by investors and consumers for the Justice Department to hold investment banks accountable for the losses occasioned by the global financial crisis are being weighed in by State attorney-general.

These cases mainly involve foreclosures and mortgage servicing. This is despite the fact that the government is yet to start following up on the most fundamental of these practices.

Event Two

President Obama is pushing a strategy to create more jobs and at the same time, ensure larger long-term deficit cuts. The proposed tax cuts are aimed at combating long-term unemployment. Therefore, new spending on the construction industry is anticipated, as well as extending tax cuts to firms hiring workers.

The president is also proposing for a new deficit reduction (Calmes 2011). These moves are aimed at stimulating economic growth by encouraging consumers to spend and businesses to hire. However, the Republicans are opposed to additional stimulus proposal, blaming President Obama for lacking a detailed debt-reduction plan. They are also opposed to higher tax revenue.

The pledge by the central bank to maintain interest rates at a near zero for a minimum period of two years has received opposition from two policymakers with the US Federal Reserve. They argue that such a move is an indication that the government intends to support the stock market. The decision to reduce interest rates up to mid-2013 has also been criticized, with opponents terming the policy as inappropriate.

Event Three

A strong Australian dollar in 2011 has resulted in low domestic travel and this has prompted Wotif.com, an Australian based online travel company to consider expanding its business to the Asian market. In 2009, domestic leisure travel business, which also happens to be Wotif.com’s core business, was stronger because the Australian dollar was getting weaker against the major currencies (LaFrenz 2011, p. 39). Now, a lot of Australians are opting for overseas trips, at the expense of domestic travel.

This has helped to strengthen the international accommodation booking. Wotif.com has enjoyed tremendous growth since 2006, when the company was listed on the ASE (Australian Securities Exchange). However, in 2011, its growth slowed significantly.

As part of its growth strategy, the company has focused on the Asian market with the adoption of novel-phone-based initiatives, a move that the company sees as helping to facilitate its growth (LaFrenz 2011, p. 39). Already, the company does 15 percent of its bookings in Asia.

Besides mobile bookings, the company also plans to enter into joint ventures with a number of travel firms in Asia in order to get a share of the expanding domestic travel market. The Asian local market boasts of a growing middle class who are not only eager to travel, but also have more disposable income.

Event Four

In the second quarter of 2011, the US economic expansion was below what had been forecasted, and this is a pointer to the weakness of the economy. This has forced the Federal Reserve to revise its growth forecast downwards (Willis 2011, p. 56). Between April and June, the GDP of the US is estimated to have increased at an average rate of 1 percent per annum.

The previous estimates had been pegged at 1.3 percent. At the same time, the month of August recorded the lowest level of consumer sentiments since November 2008, in the face of political wrangling and financial-market turmoil regarding the budget deficit (Willis 2011, p. 56). The country’s GDP stands at USD 13.26 trillion, and it is still below its peak before the recession.

On a lighter note, there has been an upward revision of salaries and wages, thereby revealing the highest gain in over 4 years. At the same time, corporate profits have grown. Following the recent downgrading of US debt by S & P amid concerns of a default in the euro-zone, coupled with deficit-cut measures, economists have been forced to reduce growth forecasts.

Analysis

The fact that the Justice Department has been slow to prosecute the culprits who initiated the recent global financial crisis has only acted to reduce investor and consumer confidence. As a result, the economy has been growing at a slower rate than anticipated, and this has prompted the Federal Reserve Bank to revise the country’s growth rate downwards.

When the economy fails to attain the predicted rate of growth, this results in low consumer sentiments. When consumers are less optimistic about the economic growth rate, their spending and saving rates are likely to decrease (Colin 2008, para. 3). Stimulus packages are therefore a way of stimulating the economy when faced with slow growth.

Other measures that a government can institute to deal with a sow rate of economic growth are to impose tax cuts and facilitate temporary spending. Economists suggest that such moves add to deficits initially. In the long-term though, these measures could lower costs for safety-net programs, increase tax collections and in the end, maintain smaller deficits than would be the case with lowering unemployment and spurring growth (Cooper 2008, p. 208).

Stimulus spending is supported by the Keynesian economic theory which states that when the government seeks to spend a huge chunk of borrowed money, this helps to boost the economy (Davidson 2009 p.18). Economic historians have maintained that the US made it through the Great Depression thanks to Keynesian-style spending.

Besides stimulating the economy, there is the need also to ensure that we reduce deficits especially when faced with shrinking revenues. A stimulus package pumps money into the economy albeit temporarily, thus encouraging consumer spending. Businesses are also encouraged to hire more employees.

Otherwise, businesses may be forced to consider relocating their business to other economies that have not borne the full consequence of a global economic crisis. This is the case with Wotif.com, when it decided to venture into the Asian market when domestic travel in Australia was no longer attractive to help the company maintain its hitherto spectacular growth.

Reference List

Calmes, J., 2011. Obama to push for jobs, tax cuts. The New York Times, Web.

Colin, B., 2008. Consumer confidence- global monitor of consumer sentiment index reports and country update on consumer confidence changes. Marshal Place Associates. Web.

Cooper, G., 2008. The origin of financial crises: central banks, credit bubbles and the efficient market fallacy. Petersfield, Hampshire, U.K.: Harriman House.

Davidson, P., 2009. The Keynes Solution: The Path to Global Economic Prosperity. London: Palgrave=McMillan.

LaFrenz, C., 2011. Dollar drives wotif.com’s Asia focus. The Australian Financial Review. p. 39.

Story, L., & Morgenson, G., 2011. AIG sues bank for GFC losses. The New York Times, Web.

Willis, B., 2011. US growth forecast revised down. The Australian Financial Times. p. 56.

Click Here To Order Now!