Lehman Brothers was one of the main robust banks in the United States of America. Its formidability was second to none. This made it one of the most successful banks in the United States of America. However, it did not take long before this bank started assuming a negative trend. A few negative steps taken by the bank management ultimately caused a disaster to the entire bank. This led to the ultimate collapse of the bank. One of the major causes of the bank’s failure was the large interest rates charged on loans. This led to a series of defaults since clients did not manage to service such loans. Numerous defaults weakened the bank’s lending ability which further brought the bank in disrepute. As a result, the bank faced a massive exodus of clients within a short period of time. This was a monumental blow which left the bank ranked by Credit Rating Agencies among the worst. As the situation went out of hand, Lehman Brothers bank was declared bankrupt. This led to an unprecedented volatility in the economy which was already fragile. In the long run, the collapse of this bank served as a big blow to the entire economy of the United States of America. Lehman Brothers is one of the epitomes of the problems faced by the United States and European countries. This essay, therefore, focuses on the measures that have been put in place to avoid future financial failures. In addition, the paper examines the effectiveness of these measures.
Government Bailout Programs
One of the major problems faced by the financial system in Europe and the United States is the escalating rate of unemployment. This is a clear problem that has left many heads of states scratching their heads with no viable solution for their populous countries. Many governments have put forth efforts to create jobs for their people but it did not bring success. This is attributable to the extremely high populations which swallow up any employment chance which crops up. As a result, most states have been forced to harbour a population whose consumption rate is unquestionably higher than the generation rate. It is factual that in order for the economy of a state to thrive, there should be an adequate generation of the GDP. Apart from that, a state’s economy depends on the level of production of its population. For instance, if a state has got a high rate of employment, there shall be an adequate market for industrial goods. This is ascribed to the fact that people shall have the power to purchase goods. As a result, the state’s industries shall have appropriate market for the goods and services rendered. With such a smooth flow of funds, the economy of the state is able to grow with less ado. In contrast, many European industries have had to struggle to survive due to low purchasing power which is accrued from the escalating unemployment rate.
It is factual that every state is trying its best to reduce the rate of unemployment. This is through the establishment of government policies which strive to end this major problem that is eating into most economies. States are advocating for self-employment. People are being urged to come up with money making projects that would not only create jobs for individuals but also create employment opportunities for other citizens. To bolster this up, most states have set aside funds to promote entrepreneurship projects whose course is to ameliorate the economy of the nations. In addition, most European governments are decentralizing services across various regions within their jurisdictions. This is aimed at creating jobs for people at the grass-roots. The United States, for instance, has seen 875,000 jobs created in the past year.
Despite the fact that much has been done to create jobs, it must be noted that too little has been achieved as far as the fight against unemployment is concerned. Inasmuch as there is little gain, it is worth noting that unemployment remains a great problem to most European nations as well as the United States of America. According to Kreinath, J, et al (2008), the major aspect pegging down the fight against unemployment is inadequate funding. It is upon the governments to locate adequate funds to agencies that fight against unemployment. This is achieved through allocating them enough funds during every financial year. Otherwise, the fight against unemployment should be intensified if at all there are plans of ending unemployment in Europe.
Consumer-Protection Mechanisms for Mortgage and Credit-Card Products
Aside from the unemployment rate, the banking sector of many nations has wrecked havoc to the financial systems of European nations. It is unfortunate to underscore that a good number of banks in most states have taken the route which was plied by Lehman Brothers Bank. This implies that their fall is indeed impending. There have been massive exoduses in many banks due to their extremely high lending rates. As a result, banks have been unable to sustain their services. In this article, much attention shall be focused on the banking sector of Spain. A whistle has been blowing with regard to the Spanish banking sector. It has been warned that the expeditious fall of the Spanish sector could not only affect the economy of Spain but Europe as a whole. For instance, it is on record that the Central Bank of Spain experiences a financial debt of more than three hundred billion Euros in loans. As if that is not enough, Spain’s fourth largest bank known as Bankia was forced to ask the central bank for nineteen billion Euros that would help the bank recapitalize itself. The request was made one month after the bank was nationalized. The banking problem has not affected only the two stated banks. Basically, almost all Spanish banks have been impinged upon the same problem. This explains why Standard and Poor’s downgraded ten major banks in Spain. Among them is Spanish bank Bankia.
European nations and the United States of America have attempted to salvage their banking sector by cajoling most banks to lower their lending rates. This would later enable clients to repay their loans with less ado. In consequence, the rate of defaults shall significantly go down. Apart from that, governments have contemplated nationalisation of some banking sectors that have failed to propagate their private services. It is factual that one of the main reasons of such a failure is poor management. Most directors of such institutions assume many affairs regarding activities of the banks. As a result, the accruing errors arising from assumptions lead to the general crumbling of the bank. To avoid this kind of failure, most governments have implemented different measures, one of which is vetting banking directors. This is a viable way of ascertaining the ability of a director to manage a banking sector. With regard to the case of the Spanish banking sector, the government has urged many banks to reinforce their precluded real estate loans into independent companies. With the threat that the Spanish banking sector poses to Europe as a whole, it has been suggested that Spanish banks have no otherwise but to ask for a bailout from other European nations.
Most states are experiencing a similar problem as Spain. The only difference is that there is a slight variation in magnitude. Inasmuch as every effort to stabilise the banking sector is being put in place, there are some features that have relentlessly pegged down the processes. Among them is corruption. Many leaders of various states are colluding with banking managements in order to attain personal gains as opposed to the national ones. These corrupt activities have served as a deterrent to amelioration of the banking sector. The corrupt cartels should be eliminated outright, as the first step towards bettering the banking sector. As far as the banking sector of Spain is concerned, an expeditious solution must be found. Spain is fourth in terms of economic power in Europe. This means that failure of its banking system would cause jitters in most European nations. As a result, nations would freeze their lending, and that could spark another recession that may affect the entire globe. Basically, the banking sector of Spain requires an approximate bailout of one hundred billion Euros. As a resort to salvaging the useful Spanish banking sector, European nations should provide insurance services to this sector. This shall avoid massive withdrawals by customers who may lose faith in the sector. In any case, such withdrawals would further cripple the banking sector.
Regulated Competition in the Banking Sector
This is the third problem that states are facing within their financial systems. When the Berlin Wall collapsed, Europe had leeway to development. There was no competitor as far as the economic aspect was concerned. In any case, the then only Far East state that seemed to be a competitor was Russia and it had been weakened. Thus, European nations had a perception of being the best in the economic realm. To solidify further, European nations established the European Union which culminated into the formation of the Euro, a unit of currency. During this time, competition among countries was highly encouraged by all states. Unfortunately, today portrays a totally different picture. The European Union no longer enjoys the tag as the most formidable union as far as socio-economic aspects are concerned. Instead, Far Eastern states have taken the driving seat of the economy. States such as China and Japan have thrived well in the recent past. Gifford attributes this to their increased technological developments. Apart from that, they have established a wide range of markets across India and Africa. This is ascribed to their top notch foreign policies. Thornton claims that European nations are on the brink of deterioration.
There have been efforts made by most European states to restore the past favours with regard to financial systems and economy. For instance, the United Kingdom has clung onto its commonwealth relations. This has maintained the UK allies. France has also used the same approach by cementing its cordial relations with Africa. Spain and Portugal have propagated their interdependent relationship with Latin America. To restore the market for their goods, most European governments have established policies which cajole industries to step up in their efforts to develop quality products. Apart from that, industries have been urged to provide quality but affordable products. This is the only way they can effectively compete with such states as China and Japan.
According to Lorcasusino, China and Japan have overtaken European nations economically. This process occurred in a discreet manner whereby the European nations were caught napping. Thus, the East has finally taken away the market which was essential for European industries. It is an explanation as to why Europe has lost control of the economy. While European nations have strived to keep their heads above the water, the fact remains that it may take quite an effort to restore their control over the world’s economy. The only viable way to meet this target is change in policies. European nations should embrace competition as it were in the past. Furthermore, they should establish better foreign policies that shall appease other nations who are instrumental in economic growth.
The United States of America and European nations have experienced a great change in their financial systems. This is ascribed to three main aspects highlighted in the article. While these problems seem common, neglecting them could easily cause another recession. Despite the fact that measures to eradicate these problems have been put in place, it takes another important step to put a stop to these problems. The major problem lies on the political class. Without this class acting accordingly, there can be no positive change. In any case, the economy is controlled by big undertakings within the state. They include well established industries in the economy. The managements of such industries have the power to control the political class. Thus, if the political class has got no vision for its people, it is likely to be compromised to make decisions that favour a few. The political class has a mandate to establish viable policies that shall promote the general welfare of the nation. Unfortunately, most leaders of these nations have used wrongful means to convince their people that everything is on the right track. This has been a political strategy that has ultimately turned suicidal to the nations. By consequent, people should be told the truth regarding the financial systems of their state as opposed to twisting information that could have a fleeting assurance.
About the Author
Nancy Bauman is a financial analyst and accounting expert. She is also an expert on business ethics and is constantly participating in university conferences as a member of the Educated Youth Movement. She regularly contributes articles related to business and loans at advanced-writer.com