International financial multiplier

Foreign trade multiplier was viewed as an international business cycle that involved the linkages through the flow of goods and services. Imports for one country are exports to another country implying that a recession in one country would be felt by the rest of the world as slumping demand, thus leading to an export plunge internationally (Krugman 1).
Currently, the world is experiencing a global crisis with different linkages. This crisis is the international financial multiplier which works via balance sheets of highly leveraged financial institutions that carry out cross-border investment. Incase these institutions lose in one market they become undercapitalized and are forced to sell off their assets to other countries. This reduces prices and put pressure on the balance sheet of other HLIs. This leads to the spread of crisis worldwide (Krugman 2).
Mortgages should be made easier to pay and thus create a functioning market for securities thus boosting the role of government. This will help to restore confidence in mortgage investment. In addition, reducing mortgage rate to 4% would regain confidence leading to mortgage repayment. A well diversified portfolio has a positive growth globally. In addition, increasing the returns is attained by leveraging investments in the sectors bound to grow. This would lead to higher profit expectation (Krugman 2).
The value based of future expected growth is complex this is because of uncertainty of changes in prices of commodities such us oil. High oil, commodity prices and global population imply that such growth cannot be attained in terms of a real person per growth. Government interventions cannot change this real value. There is an oversupply of human and an undersupply of natural resources. Average prices of human labor and the average price of investment has to be reduced. Government helps deleverage bank and institution when leveraging the government with the same amount (Krugman 3).
Banks pose danger, and it is less critical for the government to deleverage. This lack of value, however, has to be distributed to the people through taxes, inflation or via pay cuts. This incidence happened in Swedish, Icelandic where banks became responsible and transformed the government into an owner. When the assets were sold, profit went to taxpayers and the government recouped more money by selling its shares in the companies. Cross border contagion is happening there have been a lot of bubbles besides US housing. Other bubbles are evident in China and Europe especially in the real estates, bubbles in the auto loans, retails and Anglo countries. These collapses happen from lagging markets expecting to lead markets. Many European banks are expecting these losses (Krugman 3).
International official who are conversant with these crises have not been consulted. USA should take advantage of these officials who have experienced this problem from the past. Bursting of these bubbles affects Europe financial institutions by lowering the interest rates globally. However, lowering of interest rate is a necessary cost of borrowing. There is great disjuncture between local information that is set about various investment opportunities.
Leveraging works in ratios. The systems rely on continued appreciation of base assets. The republican argue that this crisis was initiated by the Democrats. They argued that minorities be given loan they could not be able to afford. This led to default in repayment. Housing based derivatives usually relied on incomes from profit. Reduced interest rate kills the financial institutions. The G7 would not print money to expand the monetary base because this would cause inflation increasing the price of gold and devalue all debts (Krugman 5).
Works Cited
Krugman, Paul. The International Financial Multiplier, 2008. Web. 11 Nov. 2013.
http://nyti.ms/HMcBC5

Close Menu