Contemporary Business Analysis - Essay Example

All major assets, even land, lost their values overnight. The entire world seemed at a loss about what to do. The major financial heads all over the world started thinking about he steps that should be taken to avoid such an incident to occur again. When the matter was observed, the major reason that was seen which led to the recession was found to be too mush lending done by the banks all over the world, particularly US. The question of the day was what to do to avoid this kind of crisis. One of the popular suggestions given was the requirement by central banks to private banks to increase their reserves that are held at the central bank.

The suggestion was given much thought because it held many positives. Firstly, even if private banks again engross themselves in over lending in the future, the reserves held at the central bank would be more than enough to bail out the economy before the stage of recession is reached. The reserves would not only provide stability to the monetary system, but would also stop inflation from reaching massive heights, and would also allow banks and other major financial institutions, which are affected first in case of recession, to remains stable and in power to control the situation.

Secondly, the major advantage of increasing reserves would be to save the common man from the repercussions of recession. We saw the examples of how people are affected. They lose their jobs, can't afford a lot of thing due to high prices, find their major assets like homes and investments losing value, and have to face the harsh life of bankruptcy. This eventually leads to fall out of entire economies. If federal reserves are in place then this whole scenario can be avoided by injecting liquid money in the economy at regular intervals so that inflation does not rise rapidly.

Also the monetary base will help in keeping the value of assets intact over longer period of time. Thirdly, for private banks, let us first study all the positive implications. In the recession, the institutions most adversely hit are private banks, as they do not have the backing of governments like central banks; and also they are the ones that have all their assts as loans to individuals (Ganley). So when the value of assets fall or when people declare bankruptcy, they are the ones who take the hit as now they don't have any way to regain their money.

By increasing the federal reserve base, the banks also have more security against their loans getting defaulted. Also, it was seen in many examples that banks have to declare insolvency or even bankruptcy, observing that the collateral on their bad debts have now lost all of its value. In such a case, the reserve base could be helpful to the banks such that they can maintain their base and have even a small amount of that base to have as liquid strength. Now let us discuss the negative implications of such a requirement.

First of all, the private banks may be reluctant to go for such a measure. A bank is an institution that has to keep its profits high and its shareholders happy. If the reserves were to rise, then the banks will have less money to lend (Harrington, 2009). This would mean less money to gain interest from, which directly says less income earned by the banks (Harrington, 2009). As we know now that retail banking has become the key aspect in a bank's operations, therefore such a measure can hurt the profits of the bank tremendously.Second, as