What direct global impact did bailing out the U. S. banks have on the world economy - Essay Example

of the Business of the Concerned July 7, Bail Out of the US Banks and the World Economy It was on October 3, 2008 that the Senate passed the bailout package amounting to $700 billion. The government premise was that it was imperative to extend the bailout package as it intended to save the economy and the credit crunch was really making things worse at a global level. On the one side a section of the society was really concerned about the fact that those financial institutions that were responsible for the economic debacle were being bailed out.

Yet, it was also a fact that the economic meltdown was impacting the economies at a global level and threatened the livelihood of many in a world that is increasingly interconnected (Scott, 2008, p. 57). In that context it would be true to say that the US bank bailout was necessary to save the world economy and such a drastic approach was indeed ethical in its approach and ramifications. The turmoil in the world economies in the past decade was largely linked to the collapse of the financial institutions in the United States of America.

Considering the economic boom preceding the credit crunch, this led to an expansionary monetary policy in the US giving way to a soaring of prices in the equity and real estate markets (Fried, 2012, p. 161). However, the housing bubble eventually burst and gave rise to a sore situation. Going by the enormity and complexity of the US economic system that is intricately linked to the world credit markets, the insolvency of the US banks threatened the stability of the associated economies the world over that were linked to the US financial markets (Fried, 2012, p. 162). Thereby, the incumbent financial crises not only shrunk the credit capacity of the financial institutions the world over, but it indeed spread with an increasing capacity in the European and Asian credit markets, resulting in varied effects like a slowing down of the global economic activity, the influx of ample uncertainty in the world economies regarding the extent and nature of this economic slowdown, the adoption of stringent credit policies by the global financial institutions, the increase in unemployment rates the world over and a global scarcity of the credit much required by the new ventures.

In that context it was not only the US that decided to bail out its banks and financial institutions, but the nations around the world tried to rescue their banks and financial institutions by pumping money into them (Duffie, 2011, p. 48). Thereby the US bailout of banks not only softened the economic and financial risks faced by the world economies, but also stabilized the US banking system and credit markets and thereby the foreign banks and financial institutions linked to the US credit markets (Scherer, 2008, p. 2). The other thing that needs to be kept in mind is that the US bailout of banks sent a strong message to the political systems around the world that the global availability of credit was poised to revert to a relative normalcy in the times to come (Steiner & Steiner, 2012).

This not only had a positive financial impact on the world economies, but also had a large psychological impact on European and Asian economies closely linked to the US credit market (Steiner & Steiner, 2012). That is why most of the salient global lenders indeed welcomed the US bailout measures. The bailout package helped a lot in restoring the trust and confidence in the credit markets around the world. The other thing is that the US bailout of banks was indeed successful in relatively diluting the consumer led recession in the US that had the capacity to mar the world economy, starting from the foreign firms that exported goods and services to the US.

The US bailout of banks was not only imperative but ethical in the sense that it somewhat restored liquidity the world over and brought the world economy back on the track (The Telegraph, 2008). This bailout package also prevented the collapse of the US banks and financial institutions that would have resulted in a loss of a number of jobs not merely in the US, but also in Europe and Asia (The Telegraph, 2008). Also, this bailout may not turn out to be that costly as it is thought to be as if the economy improves, the price of toxic assets may rise and the bailout may turn out to be profitable for the government (The Telegraph, 2008).

Also, to a large extent the bank bailout cleansed the US and the world economic and financial institutions and allowed them to make a fresh start (The Telegraph, 2008). Thereby, the US bailout of banks was not only a must, but also happened to be an ethical economic measure taken well in time. References Duffie, D. (2011). How Big Banks Fail and What to do about it. Princeton, NJ: Princeton University Press. Financial Crisis: Good Points and Bad Points of US Bailout. (2008, September 26). The Telegraph.

Retrieved from http://www.telegraph.co.uk/news/3087027/Financial-crisis-Good-points-and-bad-points-of-US-bail-out.html Fried, J. (2012). What Really Drove the Economy into the Ditch? New York: Algora. Scherer, R. (2008, September 29). Will Bank Bailout Revive Growth? The Christian Science Monitor, pp. 1-2. Scott, A. (2008). Is it Recession? It doesn’t Matter, the Impact is the same. ABA Banking Journal, 100(3), 56-57. Steiner, J.H, & Steiner, G.A. (2012). Business, Government and Society. (13th ed.). New York: McGraw-Hill Irwin.