Main factors contributing to the financial crisis

1. The fiscal crisis of 2007-2009 has been called the worst fiscal crisis since the one related to the Great Depression by taking economic experts.

Discuss the chief factors that have contributed to the crisis. ( 20 Markss )

The fiscal crisis was due to the bankruptcy of Bankss and utmost market volatility. One of the factors taking to the fiscal crisis was the growing of the lodging bubble which happened in 2005 to 2006. Real house monetary values surged greatly, doing residential existent estate great and really safe investing. This lodging bubble resulted in legion householders refinancing their places at lower involvement rates. Therefore, it was really easy to borrow money, particularly for buying a place. This caused the high default rates on “ subprime ” and adjustable rate mortgages ( ARM ) to increase rapidly.

Cheap and easy recognition footings ( low involvement rates ) and a long-run tendency of lifting lodging monetary values encourage borrowing since the Federal Reserve slashed the involvement rates to get by with recession and September 11 terrorist onslaughts. This affects ingestion and investing to increase as people and houses will borrow more.

Loans such as mortgages and recognition cards were easy to obtain and consumers feel that they have the ability to refund within the stated recognition period. Banks repackage the mortgages as mortgage-backed securities ( MBS ) and collateralized debt duties ( CDO ) and these fiscal instruments greatly increased as borrowers want higher returns.

There is besides a deficiency of transparence and apprehension by the investors. Therefore, the hazard in puting regular mortgage backed securities was considered low and it was sold to establishments and investors all around the universe. In add-on, investors invested more than they really had capital for as they considered such securities low hazard. This in bend contributed to the deflating of the lodging bubble as plus monetary values move reciprocally to involvement rates and it is hazardous to theorize in lodging. USA lodging and fiscal assets decreased in value after the lodging bubble explosion. Even so, many Bankss and houses still continued roll uping the mortgages despite many of them had bad loans, and Wall Street kept purchasing and selling them to investors. Agencies that regulate the U.S. fiscal sector were besides non paying attending.

Besides easy recognition conditions, both authorities and competitory force per unit areas led to an addition in the sum of subprime loaning. Major U.S. investing Bankss and authorities sponsored endeavors like Fannie Mae contributed in the enlargement of higher-risk loaning. Some Bankss and establishments were willing to impart money to homebuyers with hapless recognition.

U.S. Securities and Exchange Commission ( SEC ) relaxes the net capital regulation and this encouraged the largest five investing Bankss to increase their fiscal purchase and sharply spread out their issue of mortgage-backed securities. Fannie Mae and Freddie Mac farther expanded their riskier loaning.

The subprime loaning increased United States ‘ homeownership rate significantly. Therefore, rents lessening and house monetary values addition. The addition in lodging monetary values stopped in 2006 and many subprime borrowers faced troubles paying their mortgage and some was on the brink of bankruptcy. The losingss in the subprime mortgage markets triggered uproar throughout the international fiscal system in mid 2007.

Assurance in many fiscal establishments and stock market were besides affected. When shareholders found out about the bad loans these houses were transporting, they withdraw their money instantly. The stock markets tumbled around the universe. Besides that, there was a deficiency in trust in Bankss and interbank loaning was disrupted. Defaults and losingss on other loan types besides increased significantly as the crisis expanded to other parts of the economic system.

Death of Bear Stearns happened in March. In July, IndyMac Bank went into receivership, but the worse of all was the bankruptcy of Lehman Brothers in September 2008. In decision, all this happened due to greed, deficiency of ordinance and originative invention in the fiscal industry.

B ) Assess the impact of the US fiscal crisis on the Singapore economic system. ( 20 Markss )

Singapore was the first East Asiatic state to endure a recession from the US fiscal crisis after July 2008. As Singapore is a little state, we have to trust to a great extent on exports and about 66 per centum of its domestic production is exported. Singapore ‘s economic system will therefore be affected since its export spouses are affected by economic crisis.

The recession arises due to the decrease of non-oil exports in manufactured goods caused by the impairment of economic conditions in the US and Europe. The lag is caused by the weak planetary demand for high engineering equipments, an industry on which Singapore is to a great extent reliant. As a consequence, Singapore exports decline drastically. In the first one-fourth of 2009, trade fell by a crisp 24 per cent. Fluctuations in Singapore ‘s existent GDP are closely related to alterations in trade figures because Singapore is an unfastened economic system. Hence, with the lessening in trade, Singapore existent GDP diminutions.

Labour productiveness in the economic system has besides been worsening due to recession. Cyclic unemployment rate additions due to recession as workers are unable to procure similar paying occupations. Companies are encouraged to do cut rewards alternatively of retrenchment. Consumption will diminish as people have less income due to pay cut or retrenchment.

The industries that were adversely affected by occupation losingss are fabricating, conveyance, touristry and sweeping trade since these sectors are most exposed to the external economic environment. The fabrication industry, which accounts for a one-fourth of the economic system, contracted 11.5 per centum in 2009 last one-fourth, compared with a revised 4.9 per centum bead in the old three months, chiefly due to the relentless failing in planetary demand for electronics, chemicals and biomedical merchandises.

Due to this fiscal crisis, Monetary Authority of Singapore ( MAS ) eases its pecuniary policy to battle decelerating growing. In order to hike export, MAS shifted Singapore dollar to a impersonal stance, doing it cheaper in relation to other major currencies and doing domestic exports competitory. The Singapore currency has declined 8.1 per centum against the U.S. dollar in that period. However, this besides implies that import of necessities will be more expensive which will impact the buying power of people, i.e. people will pass less. There will be lesser concern for companies and they will be fighting to remain afloat.

Inflation in 2008 was 6.5 % , higher than expected owing to lifting oil and trade good monetary values. Hence, we can see supermarkets like NTUC selling many family trade names to assist the poor/middle aged households to last this fiscal crisis. Due to outlooks that rising prices will acquire worse, consumers will control their disbursement and ingestion lessening as a consequence.

The exposure of Singapore ‘s Bankss to sub-prime mortgage is limited. Economic conditions in Singapore have been affected by the monolithic loss in wealth from the prostration of the stock market. This in bend reduces ingestion and investing in assets. Businesss might non hold the operating capital and some concerns can non run into their operating disbursals.

The authorities plays an of import function to battle recession. They tapped its militias to present Job Credits Scheme and Special Risk-Sharing Initiative to undertake this crisis and implemented ways to hike substructure disbursement and public assistance in its Budget.

2 ) The Singapore authorities ‘s year-long strategy to assist companies avoid retrenchments and maintain unemployment Numberss down has been extended for another six months till June 2010.

Explain the likely causes of unemployment in Singapore.

The causes of unemployment in Singapore can be described under 3 classs viz. , frictional unemployment, structural unemployment and cyclical unemployment.

Frictional unemployment is short term unemployment associated with the procedure of fiting workers with occupations. This is normally seen in Singapore as people will ever pass clip to look for better occupations e.g. higher wage, higher satisfaction based on their competence. One illustration will be university alumnuss who may necessitate more clip to seek for occupations at an acceptable wage.

Structural unemployment is long term and chronic unemployment which happens due to regular and predictable alterations in labor demand.A Due to the revolving universe, everything is altering which might take to a lessening in demand for certain goods/services. Hence, structural unemployment may originate due to rapid alterations in engineering. Besides that, it could besides be due to miss of relevant accomplishments which are in demand by the employers, linguistic communication barriers, favoritism on the footing of age, ethnicity and race and long-run mismatch as employees need clip to larn new accomplishments. Major displacements of ingestion gustatory sensation and a assortment of other factors can cut down the demand for certain accomplishments and increase that of others, therefore doing structural unemployment occur.

Structural unemployment besides exists where there is a mismatch between the accomplishments of the work force and the demands of occupation chances or the workers live excessively far from the demanding country. For illustration, many unemployed workers from fabricating industry found it hard to happen new occupations without re-training.

Cyclic unemployment depends on the concern rhythm. It will originate when there is a recession ( lowest extremum of the concern rhythm ) as the concern rhythm is low and many houses will cut down the demand for inputs, including labour in recessional periods when production diminutions. On the other manus, cyclical unemployment will diminish when there is economic growing ( highest extremum of the concern rhythm ) because entire economic end product is being maximized.

Describe the assorted policies implemented by the Singapore authorities to work out the job of increasing unemployment.

PM New Year message 2010 mentioned that the authorities will go on to concentrate on continuing occupations, and assisting workers who are unemployed to happen new occupations. In December 2008, the three-party spouses launched the Skills Programme for Upgrading and Resilience ( SPUR ) . SPUR was included in the Resilience Package in an early Budget 2009.

SPUR offers developing programmes to assist workers upgrade their accomplishments or get new accomplishments for seeking re-employment. Through SPUR, workers have an chance to derive a competitory border in the occupation market while employers are able to pull off manpower, save work force costs and retain workers by affecting them in accomplishments upgrading and development. This allows workers to remain employed, salvage occupations and beef up their single abilities during the recent economic downswing.

Furthermore, the authorities besides introduces a Jobs Credit strategy to assist employers to retain their workers. This enables concerns to salvage occupations every bit much as possible, without the demand to retrench workers. The Jobs Credit provides every employer with a hard currency grant to cut down their costs of using Singaporean workers during the crisis. Hence, more Singaporeans will be employed.

Workers have to do necessary alterations in this economic downswing such as acquiring lower rewards etc to stay competitory and salvage occupations. Businesss besides have to happen ways to cut unneeded costs in their operations to salvage occupations.

Furthermore, there is besides a Skill Development Fund ( SDF ) to subsidize preparation fees and its chief aim is to give fiscal aid to employers in order to promote them to train/upgrade the accomplishments of their workers.

Continuing Education and Training ( CET ) Masterplan is another program to fix Singaporean workers for the hereafter and develop a beginning of competitory advantage for Singapore. Workers can acquire aid and advices on occupations and preparation that are suited for them. Government is puting in this program so that approximately 60 % of occupants can hold a sheepskin making by 2010 and this helps to fit Singaporeans with the necessary accomplishments when they are fixing to exchange callings. It besides forms a womb-to-tomb acquisition system to assist workers happen their potencies and prehend new chances.

Furthermore, the authorities increased the compulsory retirement age to 62 to assist workers remain employed longer.

Measure the effectivity of the Jobs Credit Scheme in cut downing unemployment.

Jobs Credit Scheme is implemented to promote concerns to prolong occupations for Singaporeans in the economic downswing. This will supply every employer with a 12 % hard currency grant ( on the first $ 2,500 of monthly rewards of each local employee on their CPF paysheet ) to cut down their costs of using Singaporean workers during the crisis. Hence, it is encouraged that employers would engage Singaporean labour alternatively of engaging foreign labour ( as they are cheaper ) so as to heighten the fight of Singaporean labor in the occupation market. This will be effectual in cut downing the unemployment rate for Singaporeans.

However, a disadvantage of this strategy is that unprofitable companies would instead retrench workers than receive hard currency grant from the authorities. Hence, companies which will profit from this strategy are normally large and stable companies which are able to last through the recession. This is compared to smaller companies because they have to fall back to steps such as retrenchments or cutting down costs in order to remain afloat. As such, higher unemployment and more occupation losingss will still be inevitable.

This strategy will besides connote that companies would be more willing to engage local alumnuss. In contrast, aliens need non lend to CPF, unless they become Permanent Residents ( PR ) or Citizens. Without employee ‘s part, there would be no employer ‘s part and therefore, engaging a alien is cheaper and many companies will still engage aliens despite the benefits of the Job Credit Scheme.

This strategy may besides halt as it is a impermanent step and employer would no longer have hard currency grants for his part to the local alumnus ‘s CPF history. As a consequence, employers would prefer to engage foreign alumnuss than local alumnuss due to the fact that it would be cheaper in the long tally. Hence, the chief issue is how long this occupation recognition will run. It is impractical that it lasts for merely a short term within this economic crisis because employability should be considered on a long-run graduated table.

3. Explain and measure the effectivity of the other assorted financial policies which the authorities implemented in 2009 to cover with the economic crisis. ( 20 Markss )

The authorities has implemented the Resilience Package of $ 20.5 billion, to get by with an economic downswing. It includes steps to forestall loss of occupations, enhance concern hard currency flow and supply support for Singaporeans every bit good as investings in substructure for the long term.

The Resilience Package consists of five constituents:

Jobs for Singaporeans. $ 5.1 billion would be spent to assist continue occupations through Job Credits Scheme and related programmes like SPUR. This allows concerns to get by with hard currency flow. The Government will give low-income workers a impermanent workfare income addendum ( WIS ) Particular Payment to supplement their wage and promote them to remain employed. The authorities will besides make more occupations.

Stimulating bank loaning. The Government will establish the Particular Risk-Sharing Initiative ( SRI ) to enable companies to hold entree to recognition to go on their operations and preserve occupations. The Government will besides heighten bing loan strategies e.g. local endeavor finance strategy and they have dipped into militias to fund both SRI and Jobs Credits.

Enhancing concern cash-flow and fight. Assorted revenue enhancement steps and grants bing $ 2.6 billion would be implemented to assist concerns with cash-flow and enhance fight. Taxes work as an automatic stabilizer and this is apparent in old ages of low GDP growing where, revenue enhancements would be reduced to promote investings.

Supporting households. $ 2.6 billion would be used to back up Singaporean families particularly lower-income families. The authorities will supply aid to households i.e. increasing goods and services revenue enhancement ( GST ) credits and senior citizens ‘ fillip, concentrate more on the most vulnerable groups by supplying fiscal aid strategies for instruction and supply support for charitable administrations and the community i.e. increasing citizens ‘ advisory commissions ( CCCs ) ComCare fund and self-help groups ( SHGs ) .

Constructing a place for the hereafter. The Government will perpetrate $ 4.4 billion to substructure development as it is an of import characteristic of Singapore ‘s financial scheme. Hence, the authorities will convey frontward substructure undertakings and pass on speed uping public sector substructure, developing our vicinities and passing more on instruction and wellness substructure ( due to aging population ) .

I will state that the Resilience Package is effectual because it has helped to cut down the unemployment rate in Singapore during an economic crisis. One illustration is NTUC which had work closely with employers to salvage occupations, alternatively of retrenchment to salvage costs. They have besides sent workers for SPUR preparation and accomplishments upgrading.

Furthermore, this is apparent that the Resilience Package helped Singaporeans from the economic crisis. Despite crisp diminutions in our GDP, foreign worker Numberss fell 21,000, but local employment really went up by 7,000 in the first half of 2009 which shows that Jobs Credit Scheme is effectual.

However, the Resilience Package is uneffective as it contains impermanent steps such as the Jobs Credit for all concerns and Particular Risk-Sharing Initiative which non be built into on-going authorities programmes.

Our authorities uses the discretional financial policy ( running a larger shortage in a twelvemonth of low growing ) which provides revenue enhancement discounts to cut down revenue enhancement aggregations, and pass more on goods and services, grants or revenue enhancement credits to increase incomes.

The effectivity of discretional financial policy is enhanced by the short execution slowdowns in Singapore due to our efficient revenue enhancement and CPF systems that enable the Government to administer transportations rapidly. Fiscal policy in Singapore is financed from accrued budget excesss i.e. past militias instead than from borrowing. This enhances the impact of impermanent steps.

However, discretional financial policy has its restrictions. Singapore is an unfastened state. Hence, utilizing it as a tool for macroeconomic stabilization is more limited due to escapes of imports. Fiscal transportations on aggregative demand would non be effectual because a part of injections into households/businesses are kept as nest eggs.

On financial policy, militias built up during the past old ages of strong economic growing cut down authorities charges and hike disbursement. Multiplier of discretional financial steps is undistinguished. Targeted transportations at the lower income such as GST Credits tend to hold a higher multiplier. However, revenue enhancements and investings tend to hold a lower multiplier which provide a longer term period to economic growing.

It is a fact that the Singapore economic system can non be left to retrieve on its ain unless alterations in policy are made. The authorities has already taken some steps to cut down costs and revenue enhancements over the last few months. These were stairss in the right way, but they were non the complete solutions to the job. These alterations should be implemented with the longer term developmental demands of the economic system.

4. Some economic experts have warned about the possibility of a “ double-dip recession, ” with economic contraction following the current recovery. In your sentiment, what is the likeliness of this occurrence?

Give your grounds. ( 10 Markss )

I feel that Singapore is improbable to drop back into recession as our fiscal sector is retrieving, with assets of the 20 largest fund directors in Singapore turning 23 per cent in the first half of 2009.

A ground why Singapore is improbable to drop back into recession is because of the planetary competiveness. The universe is collaborating on several undertakings which include Asia-Pacific Economic Cooperation ( APEC ) and G20.

APEC is a forum which facilitates economic growing, cooperation, trade and investing in the Asia-Pacific part. APEC creates efficient domestic economic systems and increasing exports. Free and unfastened trade and investing enables economic systems to turn, creates occupations and provides new chances for international trade and investing. Singapore will work with like-minded economic systems and international fiscal establishments like the IMF, World Bank and Asian Development Bank to progress free trade. G20 is an UN clime alteration conference where states will come together to work out the job of clime alteration and work towards an ambitious result in Copenhagen.

From here, we can see that protectionism, which could impact planetary trade and growing, has been closely monitored. Singapore is working towards closer regional economic integrating and prosecuting different free-trade enterprises to spread out our economic web. We are reconstituting our economic system so that it remains agile and competitory.

The authorities has taken a few steps to revive demand in the system through stimulus bundle. They guarantee that concerns will hold sufficient financess for their day-to-day operations. Give our strong economic basicss, the authorities is able to take rational steps. Furthermore, the nest eggs we have put away ( by constructing militias ) during good times, Singaporeans undertaking challenges together and societal coherence will convey us through the hard times.

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