Reading Assingment and Answer the Questions - Article Example

Economics How did politicians contribute to the S&L crisis? Politicians made a contribution to S and L crisis has it did not monitor the financial activity in the country. Politicians did not close down bankrupt and insolvent S and Ls but adapted the approach of regulatory forbearance. Instead, they permitted bankrupt institutions continue with their operations. For instance, allowing insolvent banks meet the floor capital requirements. Moreover, banks were allowed to take goodwill to be an asset hence increasing the net worth of a bank.

Banks which failed were also permitted to operate. How do deregulation of the banking industry contribute to the banking crisis? Please include in your discussion the effects of the following: the lifting of interest rate caps; the permitting of bank investments in commercial real estate; the role played by net worth (owners’ equity), or capital- especially the inclusion of "goodwill" as part of a banks net worth. It was a situation of too little, too late. The restrictions of commodities were let loose but too late.

By this time almost 50% of banks were insolvent and were having a net worth that was negative. There was duration of risk in the rising interest rates that led to both income and balance sheet problems. During the time of deregulation, banks did not make profits as a result of excess regulation as deregulation process was slow. Banks resorted to riskier high returning loans to reinstate profitability. In most cases, this worsened the situation. S and Ls ultimately had up to forty percent of its assets in real estate, 10% in direct investments and junk bonds and 30% in lending consumers.

After excessive regulation, it got itself into problems by expanding finance and credit areas where there were no background, experience or expertise. What effect did government insurance of deposits for up to $100,000 have on depositors and banks? Does it seem fair to you that banks making risky, speculative investments paid the same deposit insurance premiums as those making safer, more conservative loans?Moreover, brokers and depositors exploited how to manipulate the 100000 dollars limit using brokered deposits.

If one had 10 million for investments in banks, he would be insured to an optimum of 100000 dollars. Therefore, a broker would break the amount into a hundred investments if hundred thousand dollars each and will buy $100000 100 CDs with 100 banks. This limit would be 100000 dollars for each account and not each depositor. Consequently, very rich individuals get insured using the tax payers’ money. 4. How did risky commercial real estate loans ultimately cause many S&Ls to become insolvent?

Using a balance sheet, discuss briefly what is meant by insolvency.Riskier speculations in the real estate more so in the states where there was oil that had high demand devastated S and Ls. This is because immediately the prices of oil fell in this region, demand also decreased hence leading to insolvency. Balance sheetDr CrreservesBorrowingsConsumer loansDepositsReal estatecapitalGovernment securitiesCommercial loans Other assetsIn case there is default in payment of loans, there is a foreclosure of S and Ls decreasing loans and increasing assets.

If the asset values drop, it must decrease other assets values and owners equity. Therefore, insolvency is well evident in situation where capital is negative. What percentage of the bailout cost has been linker fraud?Three to ten percent. Describe the process the Resolution Trust Corporation (RTC) went through if it couldnt sell a bank that it took over. How was the loss to the taxpayers calculated?If a bank could not be sold, it was closed down, depositors paid off and attempts selling of the thrift.

The taxpayers loan will be equal to the difference between depositors paid off amount and the value of the asset in case of sale.Please explain the authors statement, "Even currently solvent thrifts teeter on the edge. Capital requirements for thrifts were increased in 1989."It means even presently, solvent banks are shaken to the edge. The requirements in capital for banks were inclined in 1989.. What changes do experts agree need to made to prevent a future banking crisis?To prevent any crisis of banks in future, all banks should be insured in order to act as substitutes for each other.

The more established banks were compelled to measure with weak ones in financial terms and pay high interest rates. How does the I.M.F define hyperinflation? Hyperinflation is an extreme social condition and is as a result of prior failure of market reforms of the economy among 12 commonwealth independent states. How does hyperinflation get started and take on a life of its own?Hyperinflation harbored rent seeking where few gained greatly while the majority suffered hence leading to inequality.

Poor payments, corruption and disorder were highly witnessed and aggravated in the economy. 11 How does a country stop hyperinflation? What is the role of consumer expectations in this process? This is done through making disinflation to be much credible. Therefore, individuals have to regulate their wage and price demands and not raising them in anticipation of future price hike. People should have hopes in the government to finish inflation.