The Global Economy Essay Example | Topics and Well Written Essays - 2250 words

The Global Economy - Essay Example (Sriram 2010). Whereas foreign investors to the US are profiting by loaning ‘devalued dollars’ to purchase government bonds and industrial securities and invest in foreign exchange and credit markets, foreign central banks, on the other hand, collect below 1% on the international treasury bills and bank securities (Hudson 2010). In 2011, Bernanke’s recommendation of another quantitative easing (QE II) is an additional $1 trillion liquidity in the Federal Reserve credit, aside from the $2 trillion reserve credits made in 2009 and 2010 would help the financial sector; solve the unemployment crisis and consumer expenditures; and revitalise the US economy. However, this second quantitative easing is not free of associated risks. Federal Reserve, treasury assistance and liquidity have been used by banks to maximise returns and disburse on high wages and bonuses. Capital lending has increased asset costs but decreased the production and employment. Inflation in asset co sts has placed the FIRE sector (finance, insurance and real estate) beyond the true economic status of the country (Hudson 2010). Anchored in the wrong assumption that the QE policy of granting liquidity will be an opening for the banks to profit from loans, thus freeing them from debts, Bernanke failed to consider that almost 80 percent of US bank lendings are mortgage loans and that around 30 percent of the US real estate is experiencing economic inequities due to asset prices that have failed to keep up with mortgage liabilities. The collateral loaned for these mortgages do not cover the principal cost and property titles seem to lose protection as the real estate sector is sometimes managed in fraud (Hudson 2010). US Treasury Secretary Geithner (2010) explains that reviving the credit flow would only create more debts. The credit flow would allow real estate buyers and stock market financiers to employ further control over debts to propose asset costs back up to save the banking system against the previously negative equity it has befallen. Geithner describes it as steadying the failing banking system. The Fed hypothesises that for the country to regain its high economic status, the national banking system would loan out the almost-free limitless liquidity at a markup. Such recuperation would be generating more debts. Bankers, businesses and homeowners would be liberated from their negative equities and the corporate sector and housing market would likely boost again. However, since 2007, the banks have implemented high restriction standards in loaning out to businesses, homeowners and consumers. The increased rate from zero to 3% has been crippling these debtors with liabilities in their credit cards, mortgage and bank loans (Hudson 2010). The US quantitative easing is diminishing the dollar value against foreign currencies with floating trade rates whilst increasing the dollar supply. The impact of the policy on exchange rates between the US currency and the floating-rate currencies is not surprising. It is the obvious outcome of the dollar devaluation from the excess flow of dollars. Moreover, foreign investors tend to purchase other currencies not prone to volatility and inflation (Feldstein 2011). One of the objectives of Bernanke’s QE schema is the encouragement of domestic activity within the US and the lessening of further depreciation, however, the generated surpluses on