Determine if banks should be allowed to fail
The failure of banks can cause many consequences to the economy as banks are the central element. The failure of banks can cause firms to go bankrupt because they rely on banks to get their investments and loans. Consumers will suffer as well as their savings and money will be unsecure. Therefore the government should prioritise the banks and try their best to save them.
Justify using Keynesianism and Monetarianism
Keynesians believe that the government should engage in fiscal policies to stimulate the economy whereas Monetarists believe there should be minimal government intervention (Johnston 2010).
Reference : Johnston, M. (2010) Keynesians VS Monetarists. [Online] Available from:
Keynesians believe that if banks fail firms and consumers will have difficulty getting credit. Unemployment will also increase because failure of banks will affect firms as they will be low on funds, this can cause to the company to make workers redundant which will increase unemployment. Due to this the governments debts will increase as they may have to provide benefits for the unemployed and they will also spend a significant amount of money to try and save the banks. Monetarists believe that we should let the banks crash. if the banks fail then firms and consumers will lose money, consumers will also be unable to get credit to finance their purchases. Firms will be unable to secure investments or finance exports which will cause further losses for them. All this will lead to an increase in unemployment. They believe that eventually the economy would recover.
Effects of the banking crisis on the global economy, money supply, employment and inflation
The recession that had occurred had resulted in a ‘domino effect’. That is, the failure of the banks had affected other countries who have a major role in operating the banking systems around the world. The US were majorly affected as they lost their triple A credit rating. France and Germany also faced the consequences, to name a few.
Money supply had decreased (although in a recession where it is most likely to increase), because this time the banks were the sole reason of the recession. Banks could not lend out any more money as the risk had become greater due to the downfall in the economy.
Thus this meant that inflation had increased, as there was no money being injected into the economy. Consumer confidence had also decreased as saving overpowered the will to spend, resulting in a restricted economy as consumers held onto their money.
The failure within these banks meant that they could not afford to employ or rather keep on their employers, which had increased the number of redundancies.
Restructuring the regulations surrounding the banking industry is key in order to allow for a full recovery and in order to decrease the chances of there being another banking crisis in the future.
As one of the reasons behind the crisis is due to the deregulation that took place, allowing these toxic assets to be legally formed, the regulations that are to be set in place should be aimed at improving the legal aspects of CDS’, CDO’s, etc.
On the other hand, it is important for government to assist in economic…