Brenan admitted similar fears n interviews with David Weasel, economics editor of The Wall Street Journal and author of In Fed We Trust. The fact that the global economy is no longer uncontrollably spiraling downward (for 2010, the Economist Intelligence Unit predicts growth of 2. 7 percent for the world and 1. 8 percent for the United States) was no foregone conclusion. Nor was it ordained that the panic gripping financial markets just six months ago would subside. From recent lows in March, the US stock market is now up roughly 50 percent.
It is not that Bracken’s performance was flawless. Far from it. He made two blunders. First, he didn’t see he crisis coming. Even after the collapse of the investment bank Bear Stearns in March 2008, he didn’t foresee a widespread financial panic or a savage recession. In the summer of 2008, the economy was weakening but seemed-to Brenan and most economists-to be suffering from inflationary overheating. Consumer prices were raising at a 5 per cent annual rate, oil was peaking at 7 a barrel.
Second, along with the then- treasury secretary Henry Paulson, Brenan allowed Lehman Brothers to go bankrupt in September. Both have said they lacked the legal power to rescue Lehman and that no one wanted to buy it. If Brenan and Paulson had fully anticipated the consequences of Layman’s failure, they almost certainly would have found a way to save it. Once Lehman collapsed, the crisis got much worse. Banks retreated from lending to each other, investors wouldn’t buy new bonds, banks, consumers and businesses hoarded cash.
The economy contracted at an annual rate of 5 per cent to 6 per cent. Here is where Brenan distinguished himself. A student of the Great depression, and especially of the disastrous effects of bank failures, he went well beyond the standard response of lowering interest rates (the overnight Fed funds rate dropped effectively to ere by December). The Fed created of a dizzying array of liquidity facilities to substitute more than $SSI trillion of Fed credit for retreating private credit. It supported markets for mortgages, money market funds, commercial paper, auto loans and students loan .
The strategy was, as Weasel says, to do whatever it took to avoid a completed loss of credit and confidence-a loss causing continuous drops in spending and asset prices (for stocks, bonds, homes) and ending in depression. Although there were other actors, the Feud’s interventions were decisive in halting the panic. It is an open question whether any other Fed Harriman-someone without Bracken’s detailed knowledge of the Depression- would have been so bold in supporting credit markets. Moreover, Bracken’s approach inspired similar moves abroad.
But this is also Bracken’s burden. If the Fed doesn’t withdraw all that extra credit quickly enough, it may spawn inflation. If it withdraws it too quickly, it may subvert recovery. Source: Excerpts from the Australian Financial Review, 27 August 2009, www. Far. Com Questions 1 . The article describes how a particular theoretical approach has been replaced by another. Explain why one theory replaces another, and who, or what, determines whether an existing theory survives. 2. Does the reintroduction of a theory mean that it should not have been replaced in the first place? . Should a theory be discarded if it does not specify the means of achieving a stated objective? Explain your answer. Case Study-2 Intergovernmental working group of experts on international standards of accounting and reporting As this Group of Exports has underscored on many occasions, principles- based, high quality financial reporting standards are critical for the coherence and efficient functioning of the international financial architectures. A rapidly globalization world economy needs global accounting, reporting and auditing standards.
In a world economy that has been growing increasingly interdependent, resource inflammation and allocation has been taking place across borders. In the second half of this decade, we have witnessed the transformation of the financial reporting landscape. An unprecedented number of enterprises adopted International Financial Reporting Standards as the basis for the preparation of their financial statements. The centrality of reliable and comparable information for financial stability and investor’s ability to assess risk and allocate recourse to different investment opportunities has been painfully demonstrated by recent events.
The global financial crisis has shown how in a world of unprecedented financial interdependence?in transparent financial market products and financial accounts can wreak havoc not only with investor’s profits, butt more importantly with the development prospects of innocent by standers, including some of the most vulnerable populations. At the heart of this crises are problems with opacity and complexity, while financial institutions may have been reporting a lot of information, the question as whether or not those reports provided any meaningful insight or useful understanding of the company’s inherent risk.
With hindsight, the answer a clearly no. It is now evident that even the boards of leading banks and their own accounts and internal auditors did not fully understand the risks of their own products. Ultimately, regaining investors’ confidence will once again require full transparency, better accounting , reporting and auditing standards and practices, the current crisis has prompted a re-examination of several accounting , reporting and auditing requirements—- including consolidation of if-balance sheet entities, fair value or mark-to- market valuation of financial instruments and related uncertainties’.
I understand that in light of the current crisis, standard setters have taken action to amend relevant standards…….. Questions Q. 1 . What are international financial reporting standards (FIRS)? Q. 2. Many concerns are expressed in this trial. List three factors that you think are causing concern about the impact of adoption of FIRS. Q. 3. Is the analysis leading from the factor to the concerns about adoption of FIRS scientific or naturalistic in its approach? Explain your answer. Q. 5. What role can normative theory play in resolving the issue(s) described in the article?
Case Study-3 Objectives to crackdown By: Steven Scott (with Marsh Jacobs) The Rude government’s proposed crackdown on employee share schemes could drive up executive cash bonuses and lead to further tax volatility, human resources professionals have warned. And caps on executive payouts proposed by Prime Minister Kevin Rude would only force companies to beef up other parts of remuneration packages. The warning from the Australian Human Resources Institute is contained in a submission in the Productivity Commission’s inquiry onto executive remuneration.
The submission—-based on a survey of members and focus group interviews of HRS directors from 20 leading ASS companies- argued any regulations of executives’ golden handshake payments WOUld merely drive up senior salaries. Mr.. Rude has criticized executive termination payments and ordered the commission to inquire into possible regulation to limit excessive risk-taking. Companies surveyed by the Institute said that, if there was a termination pay cap, they would be forced “to find some other way of spreading the present value of the forgone benefits into other remuneration elements, either pre or post termination”.
The Institute also called on the government to scrap its proposal to tax employee share schemes up front, taxing instead at the point at which shares or rights could be sold, or risk a “policy push back to a ‘cash and cash bonus’ only structure [which] would lead to potentially higher GAP and tax volatility in the long term”. In a separate submission, the Australian Compliance Institute called for tighter controls of executive bonus payments via the introduction of key performance indicators directly linked to industry- benchmark frameworks. Questions 1 .
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