Bus. 341 International Business Case Chapter 4

I. Scenario A: Leaky Pipes
a. Cause was the insufficient and inefficient movement of funds within the financial sector and other markets (such as labor and product markets).
b. After the pipes are fixed a massive infusion of capital is required [i.e. TARP].
i. Nomenclature is a bit “off”. It really sought to get “toxic assets” off corporate balance sheets similar to FNMA during the 1930’s and the Savings and Loan Association problem in the 1980’s. ii. Turns out to be more of a problem than originally thought because the nature of bank lending has changed substantially. Banks no longer hold major positions in loans they originated.
c. Part of the difficulty was the contradictory dilemma (on the part of the financial system) to be both liquid and profitable simultaneously. Long-term bank income has historically been derived from interest on loans. These are traditionally regarded as safe since they are collateralized by the property on which the mortgage is based. Banks would not grant loans if repayment was not reliable.
i. Since interest rate volatility increased, beginning in the 1970’s, banks were forced to respond [from a profit perspective] by selling the property(S/T). Thereby relinquishing liquidity.

II. Scenario B: Broken Pipes
a. One of the biggest problems of analyzing the global financial crisis is the fact that as this crisis was occurring there was [simultaneously] a major recession [unrelated to the crisis].
The difficulty here is that when the massive infusion of capital “didn’t appear to be working”, it should have been realized that it would have been sufficient for a recession alone, but there was also the financial crisis. It was therefore a not a question of an improper tool but rather insufficient amount.

b. Larger structural problems overwhelmed the system
i. In order to combat this The US Congress passed the Dodd-Frank Act which was the largest overhaul of the financial sector since the Depression. The difficulty is that since its passage only 55% of the rules contained in the legislation have actually been finalized.
1. Implementation of possibly the most important part [the Volcker Rule {using deposit to trade on the bank’s own account}] has been postponed until 7/2015
c. Another quandary is the idea of Too Big To Fail
i. The real question is the function of the entity and not its size.
1. Historically, the regulatory mindset concerning US bank regulations has been to protect the depositors. As long as this is sustained, TBTF is not an issue

III. Scenario C: The House is Collapsing
a. This idea faults the ideology rather than circumstances. Unprotected social values, skewn income distribution, severe unemployment and deep economic recession AND traditional answers do not work, therefore everything is to blame.
IV. Incorrect Data
a. US did not lose its AAA credit rating due to economic or financial reasons, rather due to political game-playing resulting in political uncertainty.
b. US did not “print money”. That can only occur