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Are passive industry policies more effective than anticipatory industry policies? Essay Example

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Passive Industrial Policies Are More Effective Than Anticipatory Industrial Policies In Solving Global Market Crisis.

Global financial
crisis is a situation
whereby
the
world
economy is highly
affected by external
factors to the
extent
that
the
whole
experiences a “shock” in finance
and
economy. The global financial
crises are believed to have
started in July 2007 with the
credit
crunch
whereby
the investors in the US did
lose
confidence with the sub-prime mortgages
and
it
led to
liquidity crisis. Consequently, the
federal
bank of the United States injected a large
amount of capital in the
financial
markets. By September 2008, the
crisis
continued to worsen as the
stock
market around the
world
crashed
and
ended up becoming
volatile. The
confidence of the
consumer
continued to hit
the
rock and
people tightened their belts in fear of what
was
coming. Global financial
crisis are dangerous
and
harmful to the
world
and, therefore, control
measure are paramount (Amine, 2012).

There are two main
control
measures which are; passive
industrial
policy
and anticipatory industrial
policy. Passive
industrial
policy
involves
using
passive
policies
just as the
name
suggests. For
instance, in the
stock
market, no
physical
alterations are done or predetermination but
the
policy
asserts
that
issues
they should be solved as they
appear. The
factors
contributing to a global crisis should be allowed to rest
back
rather than applying
any
physical
measures. On the
other
hand, anticipatory industrial
policies
involve
anticipating
what will happen
and
taking
the
right
action to ensure
that global financial
crises will not happen in future
and
also
it
did not happen. For
example, it may involve
actions of pumping
money in the
stock
market to prevent
crashing of the stock market
though
such
action
did not have
the
significant
effect on the
economy. The
case
study will focus on United States and
how
it
contributed to the
current global financial
crisis around seven years
ago (Horowitz, 2011).

The
current
stagnant
growth in the
developed
world
and
the
high
rates of unemployment in the US, the
emerging
markets
have
continued to fuel
the global financial
crisis which began in 2008.The
trends of emerging
has
continued to be an increasing
force in the global politics
and
economics. An investment in emerging
markets by the US in 1985 and 1993 escalated from $138 to around$ 45billion and
it has continued to grow as time
goes
by. The
emerging
market
provides
strong
opportunities
for
the excess returns
and diversification portfolio which exhibits
reduced
correlations
and
developed
markets
hence
offering diversification possibilities
for
the US investors. This
ultimately
reduces
the
portfolio
risk. Such
opportunities will allow
many US investors to maximize the potential of the
emerging
markets through investing in equities
and
the actively managed (anticipated) mutual
funds
or
the
passively
managed
index
funds. The
premise
applied in active
management is that
the
investment in the
management
talent
and
the
analytical
resources
usually
translate to higher
returns as the
skilled
managers
and
powerful analytics and
the
superior
information
concerning
securities. It
primarily
occurs
when
the
average investor with similar
securities are priced
differently in such a way
that
the
informed
managers can end up profiting from the
advantageous
positions (Iqbal, 2008).

Anticipatory industrial
policies are not effective
then
the
passive
industrial
policies in regulating
the global financial
crisis in United States. It
involves
anticipating
what will happen and
the
offering an action that will counter that a challenge
but at times
it
misses
the
mark. Still on anticipatory industrial
policies, it
involves
identifying
the
emerging
issues before they
strike
just like the forecasters may predetermine
the
occurrence of an earthquake. The
people in the
stock
market
and forex traders should be on their toes to ensure
that
any
unique
thing which is happening against the predestined policies
is scrapped in an effort to ensure
the
stock
and Forex remains
standard. However, all these
efforts
have not prevented
the
worst from happening (Jarrett, 2012).

Anticipatory in this
case is crucial since it
helps one to identify
any
emerging
issues which would affect
the
economy
adversely
and
formulating
policies to counter the
above. For
example, one of the
control
factors of the
financial
globe
crisis
was
the securitization and
the subprime crisis
where
banks
went
ahead
and
pooled
all their loans into assets that can be sold
therefore
offloading the
risky
loans to the
other
people (Taylor,2011). For
banks, millions can be turned to money-earning loans
but
tied up in loans
and, therefore, these
were
changed into securities. The
security
buyer
usually
gets
regular
payments from the
mortgages
and
the
banks offloads the
risks
associated. Securitization was
perceived to be one of the
greatest
financial
innovations in the 20th century and
it
alleviated
the
state of the
financial
crisis in one way or
another. However, if
passive
industrial
policy
was
adopted
such
measures would not have
been
adopted
and
the
impeding g dangers behind the
whole
idea would not have been
experienced (Kawai & Prasad, 2011).

However, the
some
banks
misused
the
service and
they
all
rushed
there
for
profit
and
other associated factors. The
banks
even
paid
the
rating
agencies to rate
the
products
therefore
risking
the
conflict of interest
and
invariably
received
sufficient
ratings
and
encouraging
people to take them. They
started in Wall Street and
the
other
people
developed
quickly
even beyond their specific
areas of specialization. The
banks
went
ahead
and
borrowed
more
money
so
that
they could lend out to the
people
and
create
more securitization (Taylor, 2011). Moreover, some
banks
did not rely on the savers anymore only
if
they could borrow from other
banks
and
sell
the
loans on a
basis of securities. However, the
bad
loans would translate to being a problem of whomever who
bought
such
loans. The
banks like the Lehman Brothers got in mortgages
bought them in an attempt to securitize them and
later
on
sell them. Additionally, some
banks
went
ahead
and
gave
loans beyond imagination in pursuit of securitization. The
banks
started
running seeking who could apply
for
the
loans in their banks
and
they
turned to the
poor
and subprime and
the
loans
became
riskier. They
hiked
the
prices of houses
and
the
leaders
thought
it
was
too
risky
and, on the
other
hand, bad
loans
were reprocessed through getting
back
the
high
priced
property (Loser, 2009).

The subprime and
the
self
certified (liar
loans) continued to be popular
and
more
especially in the United States. As a result of the
hefty
pandemonium, some banked opted buying
such
securities from the
other
banks would be a suitable
source of solution. The
situation
continued and
it
made
issues
very
bad to the
extent
that
the
banks would buy
securities from the
other
banks without considering
the
bad
loans. For
example, the
high
street
banks
got in the
form of investment
where
they
buy, sell
and
trading
risks. The
investment
banks
were not contented with buying
and
selling
the
securities, but
they
went
ahead
and
decided to build on the
home
loans (Shiller, 2008).

The
banks
continued to create
more
risks through managing
the
available
risks and
this
continued to worsen the
situation in the global financial
crisis. Any anticipatory action is taken to resolve
the
challenge of the
financial
crisis
only
contributed to more
challenges
and,
therefore, it
meant
that
the anticipatory policies
were not working at all. However, if
passive
policies
were
adopted, it would have
been
easier since the
slight
change would have been
done and
the
business
remains
the
same. Anticipatory policies in as much as they
appear
effective, they are bitter
ultimately
confirming their ineffectiveness and
risks
associated. As
posited
earlier securitization aimed at managing
the
risks
and at the
same
time
mitigating
the
risks
associated with the
latter (Shiller, 2008). The
actions
and
procedures
followed
were
legitimate
but
the
agents that allowed
it to happen are to blame. However, it should be noted
that
they
anticipated
good in everything that
they
ever
did. This
proves
that anticipatory policies are not effective
for
all
they
brought
regrets
and
uncertainty. However, if
passive
policies
were
adopted
and
deter from actions that affect
the
finance
directly, the
world would not have
been
experienced
such
changes (Siegel, 2008).

Conclusion

In conclusion, it is affirmative
that
passive
industrial
policies are more
effective in controlling
the global financial
market
compared to the anticipatory industrial
policies. Steps that have
been
taken
involving
the anticipatory practices
have
been
known to result in chaos
and
devastation
just as in the
case
described
above. However, passive policies do not interfere with the finance business directly and, therefore; they do not affect the business in any way.

References

Amine, M. a. (2012). Global sukūk and Islamic securitization market financial engineering and product innovation. Leiden: Brill.

Horowitz, N. (2011). Art of the deal: contemporary art in a global financial market. Princeton, N.J.: Princeton University Press.

Iqbal, Z. (2008, December 22). Impact of global financial crisis on IDB member countries: the case of Gulf Cooperation Council and Sub-Saharan Africa.(PANEL DISCUSSION—I: GLOBAL FINANCIAL CRISIS). Pakistan Development Review , 3, 12.

Jarrett, J. (2012). On Financial Markets and Financial Regulation. Journal of Business & Financial Affairs, 01(01), 244.

Kawai, M., & Prasad, E. (2011). Financial market regulation and reforms in emerging markets. Washington, D.C.: Brookings Institution Press.

Loser, C. M. (2009). Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth?. Global Journal of Emerging Market Economies, 1(2), 137-158.

Shiller, R. J. (2008). The subprime solution: how today’s global financial crisis happened and what to do about it. Princeton, N.J.: Princeton University Press.

Siegel, J. J. (2008). Stocks for the long run: the definitive guide to financial market returns and long-term investment strategies (4th ed.). New York: McGraw-Hill.

Taylor, F. (2011). Mastering derivatives markets (4. ed.). Harlow: Financial Times Prentice Hall.

Taylor, F. (2011). Mastering derivatives markets: a step-by-step guide to the products, applications and risks. (4. ed.). Harlow: Financial Times Prentice Hall.