Economic deregulation in quite a few industrialized economies that occurred in the 1980s, the capital movement liberalization within the European Union (EU) in the 1990, and the institution of the single market for financial services have drastically revolutionized the regulatory framework of the financial markets of the European Union.
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One of the primary objectives of the single market program that was introduced in the year 1985 was the opening of national markets for establishing a European financial area with the free provision for financial services. The implementation of the same was initiated in the year 1993 with the application of the second banking directive. With this particular background, monetary union is often seen as the achievement of the financial integration process of the European Union. The most significant development was the introduction of a single currency for the participants of the EMU – the euro. As there will be a single European currency and hence no fluctuation of exchange rates, the introduction of euro is expected to result in a more efficient single market and stimulate trade, growth and employment in the region. The single currency results in elimination of transaction costs, which result from the need to convert one currency into another. Since the start of the 1980s, the regulatory framework that governed the European consumer credit was revolutionized radically, both at the domestic as well as, at the European level. At the domestic level, this process has developed in a totally different manner and pace from one region to another in the European Union. “Studies on household credit have generally concluded that there is a cultural division between the United States and the United Kingdom, which are historically open to credit and continental European countries. (Balaguy, 1998)” Studies in consumer credit mainly focused on single country, especially countries like the USA and the UK, because of the lack of available data at the individual and household level. Therefore, in this paper, we particularly address the imbalance in the existing research using recently available data etc. We also give a comprehensive literature review in household finance and consumer credit levels in various global economies.
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Household finance has become a highly interesting topic for researchers these days. This particular topic has gained increasing attention in the past decade and it is conducted more like a normative study of how household consumers use the financial markets to accomplish their individual objectives. This paper is a literature review of the international comparison of Consumer Debts in relation to the study of Consumer Credit of Households in Europe: a country comparison. This paper reviews numerous studies conducted by various researchers in the past with relation to the topic in focus and presents the opinions along with determining the shortcomings of those studies.
In their working paper named Household Finance: An Emerging Field, written in the year March 2012, authors Luigi Guiso and Paolo Sodini review the evolution and development of Household finance (Sodini, March, 2012). It was in the year 2006, that the President of the American Financial Association, John Campbell, for the first time used the phrase ‘Household Finance’, covering financial economics of households, which used financial instruments as well as the markets that achieve this objective.
Despite the fact that, even at that time, this field was attracting good academic attention, it has today, developed and matured into a highly happening industry. Typically, households depend on a variety of financial instruments in different situations. They typically pay for household goods and service requirements, using a variety of instruments like credit cards, cheques, and cash. They manage available resources and deploy them in durable goods, human capital and also to finance current or later consumption.
Consumers also need to face and manage a variety of risks concerning their health and possessions. All such economic activity, involves decisions about payment choices, debt financing, savings, insurance contracts, and also require adequate knowledge to be used.
Usually, households collect the required information in a variety of ways. The financial services and products used by consumers at a household level constitute an enormous part of the financial industry in all developing and developed countries. It was estimated that, by the end of 2010, FED flow of funds, the net value of assets in the US households was little more than $72 trillion of which more than 71% of it were financial assets and the balance distributed among a variety of tangible assets, predominantly real estates (Sodini, March, 2012). While on the liability side, the household consumers had $14 trillion in debt, out of which mortgages were the largest contributors.
Comparing the above with Corporations, they have $28 trillion in assets, equally distributed in tangible and financial assets and an outstanding liability of $13 trillion. This makes it an interesting comparison that the consumer households hold double the assets and also as much debt as the Corporations, thus creating an enormous market potential. A predominant theme in the consumer household finance is that they follow optimal behavior as envisaged by normative models. In certain dimensions, household consumers on average, behave more or less as per the normative model. A clear cut challenge in the household consumer finance is the identification of errors which tended to harm the household consumer finance. The learning from these kinds of mistakes usually creates possible dispersion of losses across households and impacts the financial risk appetite (Sodini, March, 2012).
Quite a few economists often name the recent recession of 2007 - 2010 which shook not just the United States but the entire global economy as the “Great Recession” (Metrolic) The United States of America and numerous other international economies are still recuperating from the 2008 global economic meltdown which indeed was highly shocking and shattering. Catastrophes are known to occur without any warning signal and also are inevitable. However, for the United States economy, devastating risks came by the end of the year 2012 which were regarded as a consequence of two potential self-indicted injuries, one being the “fiscal cliff” and the “deficit ceiling” (Milesi-Ferretti, U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds, 2012). The US and all the Americans have watched rigorousness swing the European Continent with a certain Schadenfreude (The Economist, 2012). By the time the year 2012 ended, Americans went through a similar kind of experience yet again. The political discussions that shaped much of the US deficit of 8% of GDP are stipulated to go into a reverse as the days pass. The origin of the current economic crisis is mostly seen in the peaking of the housing bubble in the year 2006. The Great Recession led to the instant and melodramatic fall in the prices of the real estate securities. This in turn resulted in extensive damages to the global financial organizations (Chicago Public Radio, 2009). Accordingly the surplus liquidity in the market clubbed with the low interest rates allowed the banks and various other financial institutions to tap the regions where there is tremendously high rate of return. The obtainability of easy credit due to a variety of reasons and higher money influx essentially resulted in the housing bubble.
“This general rise in public indebtedness stands in stark contrast to the 2003-2006 period of public deleveraging in many countries and owes to direct bailout costs in some countries, the adoption of stimulus packages to deal with the global recession in many countries, and marked declines in government revenues that have hit advanced and emerging market economies alike (Rogoff, May 2010)”. The effect of the credit policy upon the banks and financial institutions is so prodigious that the consequences of this activity are very vital and crucial for the endurance and victory of these institutions, but also for the nation’s economic stability. At the functional level, the combined operations of the Banks and financial institutions have a serious effect on the debt capital that is available in the industry while the spreads ensuing from the credit operations of the bank will certainly have a bearing on its long-term sustainability.
The current study examined the economies of 44 different nations that were impacted due to the Great recession by using the method of comparable central government debt data. Initially, the researchers categorized the 44 nations into advanced nations and emerging economies. Though surprising, the results of the study indicated that the figures pertaining to government debt, inflation, and growth for both advanced nations and the emerging economies were identical. It was concluded from the study that the sharp run-up in the public sector debt eventually prove to be one of the most long-lasting legacies of the recent economic recession both in the United States and other global economies as well. The findings indicated that for all the 44 nations, both advanced and emerging nations were a result of high debt or GDP levels which were in turn associated with apparently lower outcomes of growth (Rogoff, May 2010).
The United States of America and many of the global economies are still recovering from the 2008 global economic recession which was highly devastating. Crises are known to happen without any indication and also are unavoidable. Yet, for the American economy, debilitating risks might come probably by the end of the year 2012 as a result of two prospective self-indicted injuries namely the “fiscal cliff” and the “deficit ceiling” (Milesi-Ferretti, U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds, 2012).
The origin of the Fiscal cliff has its roots in President Barack Obamas’ failure and the Congress in reaching a consensus about taxes and spending during 2011. The fiscal cliff is believed to have been intentionally designed for increasing the taxes as well as decreases the spending. Sometime in the middle of the year 2009 there was a review of the deficit figures and it was estimated (then) that the deficit would be much lower than what was expected in 2009 and 2010. Figures for later years were not calculated at that point. Political opportunists at that point in time took it as an opportunity to go hammer and tongs at the Obama administration. However a deeper look at it by the economists actually paints a radically different picture. What really was, that it was a spill over effect of the previous Bush administration that had its impact on the budgetary deficit. The flawed policies of the Bush administration of tax cuts during a very expensive war and a shaky economy had its effect not only then but also continued much deeper and much later in time. An analysis of the factors of factors contributing to deficits in 2009 and 2010 indicates that the policies of President Bush contributed to the maximum. There were surpluses in the budgets of 2000 and there was total deterioration in 2009 and 2010.
It is to be highlighted that they 2009 was a serious recession year for the American economy and it had its impact on global economy also. The recession was much worse than most economists had predicted. What happens in a weak economy is that the tax collections reduce and there is a significant increase in the safety net expenditure. The loss in tax collections has its highest impact on deficit. “The effects of a deeper recession have a long-lasting impact. Even as growth is restored, it is growth from a reduced starting point — a smaller economy in 2009 usually means a smaller economy than previously predicted for several years hence (Michael Ettlinger, 2009).”
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As a result of the legislation that was passed in the year 2011 August, automatic spending cuts were programmed to cut $55 billion from various domestic initiatives like for instance, infrastructure and education as well as an additional $55 billion from military funding that was scheduled to start from the year 2013 from January on. However, after negotiations and discussions, the cuts were put off till March 2013, as policymakers in the US decided to postpone the delay in these spending cuts through discretionary spending. The budget for the fiscal year 2013 is yet to be enacted by the Congress. Essentially, the legislation pertaining to the fiscal cliff was never part of the budget for the year 2013.
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