Free A Century Of US Central Banking; Goals, Frameworks, Accountability Article Review Example
The US central banking faces many events with name Great in the start in this century like a great experiment, a great depression, a great inflation, a great depression, great modernization and the great recession of recent times. In the light of all these great greats, the US policy-making in the context of goals, framework and accountability is discussed. The great experiment of founding the FED was to attain the financial stability. The US experienced that when the agriculture was in the sowing period or plantation, the demand for the liquid funds was to be exceeding the supply of the funds. To make the funds stabilize at an equilibrium level, the Fed was founded. The FED was to control the flow of funds and sustain the availability. However, soon after the FED deviated from the main purpose and starting funds advancement to the warfare’s (Bernanke 3-16). The framework of the FED was it relied on the real bills doctrine because it was meeting with the goal of providing the elastic currency. The gold standard was used for the currency, as the 40% of the notes will be kept to advance.
The Fed was headed by the federally appointed board of governors and was accountable to the mixture of 12 Reserve banks to be part of the policy making to make care of their districts. The next great challenge for the FED was the great depression of the 1930 is when the world economy was collapse (Bernanke 3-16). The FED washighlysuffered from the great depression because of the lack of intellectual policy framework instead of the lack of the leadership. Because they were, fail to identify that what going on and should be in these situations. The real bills doctrine was failed, and the Fed was act was amended to work in the open market operation instead of control system. The goal of the FED policy was turned to emphasize more on the unemployment reduction at it is required for the macroeconomic stability (Bernanke 3-16).
They set the double mandate of the sustainable employment and stable prices. For accountability matters, they amended the banking acts to do the legislation in the favor of preventing such shocks. The fed amended and decrease the role of the secretary treasury in the days of wars and keep low-interest rate for war financing. The great inflation and deflation was another experience for fed. After the Second World War, the monetary policy once again became independent. The great inflation period occurred due to two reasons. First, the less response to the inflationary trend in the 1950 is because they were in the misunderstanding that they would sustain the higher growth with the low inflation. Secondly, the policy makers consider the inflation as cost-push and seek for the wage and prices setting. The FED authority was contradicting with Friedman's statement that inflation is always monetary phenomena, and they start to control it by the wage and price settings. However, later on in 1970 they accept the Friedman has thought of inflation (Bernanke 3-16). As accountability matters, they include the price stability as the policy goal of the FED. After the great inflation period, the Fed had achieved the mandatory goal and enjoyed the financial stability regime. However, the crash of the stock market and 2001 terrorist attacks once again backed the modernization period.
In the modernization regime, they emphasize on the communication, which leads monetary policy to effective regime. Now the financial crisis of the 2007 leads US to a worse condition, which is still not recovered. According to Bernanke, the lessons we learned from the 20th-century experiences and now the 21st century is that the severe financial instability can do damage to the great economies (Bernanke 3-16). The policy proposition is that the Central Bank should consider the establishment of monetary funds while making decisions, but the question is still how the financial stability should be. One answer is that the central bank should use its power to provide liquidity to ease the market conditions in the period of panic or incipient panic (Bernanke 3-16). The recent crisis suggests that the monetary policy and financial stability should be interlinked and would be the joint goal of the FED and other central banks.
Asset Management Fees and the Growth of Finance
Now a day the financial service sector grows highly in the world. Financial services comprise the large part of the services sector. The asset management price comprises for the large in the financial services sector. This study is conducted to analyze the increase in the financial asset management fees to both individual and institutional investors. It would be considered better for the overall welfare of the society because it reflects the investment efficiency and it means that the investment yields high profits, and the investors pay high asset management fees. However, the data shows that here is no significant increase in the market efficiency since two decades. In addition, the increase of the fees of the asset management shows the deadweight loss for the investors. To avoid the inefficiency, the economies of scale may be required. When the asset management professional works with a large company and make portfolio for the company will not be more expensive than that of for the small company (Malkiel, 97-108).
The increase in the asset management fees is to be considering the value addition to the investors or not? If the mutual funds are producing the high returns for the investors, then it does not matter, and it will be consider as value addition to the investors. The data shows that the low-cost strategy is optimal for the investors. The data also shows that the active management of the asset really does not produce the high returns for the investors but the increase in the fees make the socially optimal outcome and the market became efficient, but the study lacks the before increased fees information about the market efficiency we cannot say that the markets were inefficient before the fees increases. However, in fewer efficient markets the managed funds yields greater returns than the unmanaged funds (Malkiel, 97-108).
The active management costs high in the liquid money business and but the scale economies has never showed that the industry has grown up. The fees increase just show the high share of the financial services sector in the GDP. So in the light of this critical information the asset fees increase is to be only justified by the benefits of boosting up the price discovery and the market efficiency (Mallkiel, 97-108). Why do the people pay higher amount for the asset management and other financial services? It wholly depends of the consumer behavior. The consumer of the financial services thought that the quality of the investment advice by the financial experts would be higher in returns than of our own decisions. Therefore, the mutual funds companies are highly attraction for the consumers. Secondly the mutual funds companies advertising that the investment decision is very difficult task and the consumer of the service realize that we can go for the risky decision about our investment if we invest itself, and they go for the mutual funds companies and may be many others (Mallkiel, 97-108).
The overconfidence of the investors also playsimportantrole this regard the investors believed that they will select the best manager and hence the best investment opportunities. The investors will consider the fees charged by the investment or funds companies as the risk-adjusted amount or expenses. It is also seen that the investment made by these companies are highly returned decision than the individual made the decision itself and this is the main encouraging factor for the new investors to higher the investment or financial managers and to pay even the higher fees (Mallkiel, 97-108). Today’s the great market inefficiency is due to the lack of investment advice and the investors leads to the higher losses in their investments. Therefore, the high prices are paid to the managers of the investment. In addition, this thing leads to the higher growth of finance.
Fluctuations in Uncertainty
Uncertainty exists at both micro and macro level. The economy as a whole and at the firms' level has uncertainty about the future occurrence. The author asked four questions about the economic uncertainty i.e. facts and patterns about the economic uncertainty, why the uncertainty varies in the economic cycle, how the behavior of economic agents affect from uncertainty and the impact of uncertainty on the recession and recovery in the business cycle. The effects of economic uncertainty vary from country to country and from cycle to cycle. The uncertainty defined by Knight that the uncertainty is the people inability to forecast the future occurrences (Bloom 153-176). The economic uncertainty is broadly and is to. Many proxies are used to estimate the uncertainty like the volatility of stock market and GDP etc. when the data is more volatile it will be difficult to forecast and hence will lead to uncertainty (Bloom 153-176).
The developing countries are because of undiversified economy, and volatile prices of production and political instability are highly uncertain. The theory states that besides the two negative effects i.e. real option and risk aversion and risk premier of uncertainty there are two positive effects i.e. growth option and the firms become risk loving have the uncertainty as well. The empirics are done by using the different models to estimate effects of fluctuations on uncertainty and proposed that it really matters. The final question was that, is the uncertainty worsened the great depression and slowed the recovery? The economists blamed the uncertainty is the main determinant of the great depression of 2008 and the then the slow recovery (Bloom 153-176). However, on the other side, the statistical and econometric estimations are not more supporting to the fact. It is that the uncertainty increases due to the recession on both micro and macro level.
The uncertainty in recession increases because of both the bad news shocks and then uncertainty increase the recession because of the lower growth. The policy implication is that the stabilization policy is required to combat the short period and sharp uncertainty duration by a short period and sharp macroeconomic reforms. Secondly, the root cause of the uncertainty is required to be more emphasized than treating the symptoms of the uncertainty. Further, the public policy should be rule-based or discretionary to avoid the uncertainty factor is required to investigate in the future research (Bloom 153-176).
The Investment Strategies of Sovereign Wealth Funds
The sovereign wealth funds are the large investors in the corporate as well as the real resource sector. The size of these funds is to because it varies from country to country as the rules and regulations are varied, but it remains far high in the global financial assets. These funds are much important for the nations as these are owned by the nations and can be for different missions. Besides all the benefits it also has some issues like the political setup is much involved the management of these funds are associated with the investment strategies which leads to short term boosting economic policies on the cost of long-term real growth and output maximization and the stealing of the investment strategies at international level are highly expected (Shai Bernstein, 219-238).
The sovereign funds are about 40 to 70 because of counted method; however, sovereign funds are growing fast. The goals which can play the sovereign funds are; a source of capital for the future generation where the coming generation feels insecure in the form of commodities consumption because they cannot be spent immediately, it reduces the volatility of government revenues and these funds are like holding companies for the government by which they can manage and hold the stakes of domestic or foreign investment (Shai Bernstein, 219-238). These funds can deal with the sudden accumulation of funds by two ways like it preserve the gains from the natural resources as it cannot be spent immediately and secondly, it avoid these capital gains from the foolish and unwise spending of the political leaders. On the contrary, side, it also has a serious problem as the political leaders have greatly emphasized on spending to subsidize the domestic in industry.
The political involvement in these funds distorts the investment decision, as the free market concept will be flying out. Because when sector is then the other sector loses the attention, the paper used data from the authentic sources to analyze the investment strategy of the sovereign wealth funds. The paper first examines the information about the funds itself then it examines the direct investment made by these funds. At last, it analyzes the climate of investment around the time of the transaction and the investment performance. The outcome of the investment strategy either managed by the external managers or by the politicians shall differ (Shai Bernstein, 219-238). This paper used the legit model to estimate the outcome of these funds either to invest at home or abroad. The results suggest that these funds will be invested at home if the equity market has relatively high price to earnings levels and vice versa.
The valuation of the investment is and shows that if the politicians involved in the investment then they will invest in the high priced sectors and the foreign managers are found involved in the investment decision. The overall estimation shows that the politician will invest the sovereign funds domestically while the foreign managers will invest these funds internationally (Shai Bernstein, 219-238). Secondly, the political setup will invest the funds in the high priced earnings industries while the foreign managers will invest it in both the high price and low priced earning industry. The political leaders spend these funds on making progressive the industries, which are not working well and goes step in the production instead of making long run savings. The objectives of these investment funds are. Some are for the short-term objectives like attracting the companies, and the others are for the longer UN like building a university or another human development institution (Shai Bernstein, 219-238). The investment strategy for these funds to maximize the long-run output will be to invest these funds in the real sector and the sectors, which yields no quick outcome that, outcome to be used by the coming generations too. If these funds will be in the liquid investment opportunities like shares, then they will no longer be productive and may the loss of these funds occur due to the financial and other nominal crisis.
Bernanke, B. S. (2013). A Century of U.S. Central Banking: Goals, Frameworks, Accountability. Journal of Economic Perspectives, 4(27), 3–16. http://doi.org/10.1257/jep.27.4.3
Bloom, N. (2014). Fluctuations in Uncertainty. Journal of Economic Perspectives, 28(2), 153–176. Retrieved from http://www.amazon.co.uk/Titus-Andronicus-Shakespeare-Library-Classic/dp/1599867974
Mallkiel, B. G. (2013). Asset Management Fees and the Growth of Finance. Journal of Economic Perspectives, 27(2), 97–108.
Shai Bernstein, Josh Lerner, and A. (2013). The Investment Strategies of Sovereign Wealth Fund icon. Journal of Economic Perspectives, 27(2), 219–238.