The Banks Never Seem To Get It Right

Whether one feels it is justified to blame the banks for the financial turmoil we are all having to suffer at the moment or not, it seems to be a fact that the banks are always targets of criticism.

Of course, this is not completely unjustified given the fact that they have lent money in a completely irresponsible and reprehensible manner, but we should also bear in mind that they can't do it unless there is a demand from the likes of you and me.

Whatever, the banks are in an incredibly difficult position trying to satisfy everybody all the time.

Away from retail banking, the Fed has been under fire recently for printing more money, a process known as "quantitative easing".

Quantitative easing is a process whereby money is printed to buy government bonds. It also increases the money supply in the system, but one of the drawbacks is that it tends to push the value of the home currency down, if it is a floating currency. Given that interestingly rates are so low at the moment, short-term rates being almost 0, is aiming to keep rates low in the long-term by buying long-term government bonds.

The Chinese are particularly concerned about the Feds actions feeling that the US is deliberately lowering the value of its currency. However it should be pointed out, that China has in recent years built up a $2.65 trillion reserve with the sole intent of preventing its currency and inflation rising.

Many people feel that quantitative easing simply increases inflation and doesn't really work. However this is not entirely true, because simply holding bonds has no real effect on the economy, it is only when money is used from these bonds that inflation can rise. However, this particular circle is squared by the fact that the money used would in fact have a positive effect boosting the economy, showing the quantative easing was in fact working.

One of the problems at the present time is the fact that companies are watching their spending and are unwilling to commit to more borrowing. Therefore, loosening of monetary policy is not that effective, and attention should be perhaps turned on a method of cutting the deficit.

The problem with taking direct action to reduce the economic deficit is it necessitates many unpopular political decisions. This can be seen in the UK, where union unrest is being stirred to levels not seen for many years on account of the UK government's deficit reduction policies.

What is important is that some action is taken rather than doing nothing. However, whatever direction the US economy takes, and however it gets there, is likely to be unpopular with certain sections of society.


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