Corporation tax and tax avoidance essay

Corporation tax and tax avoidance essay After the financial crises, the public has started to raise their attentions to the tax avoidance of some of the Global firms, such as Starbucks, Google and Amazon. These companies have a huge business turnover in UK, but they just pay a few or even no corporation tax to the government. Since that, the public has labeled this tax avoidance action as â€Å"immoral†. Before discussing the â€Å"immoral† behavior, I would like to briefly explain the rules of HMRC on corporation tax. The government levies the corporation tax on the limited companies incorporated in the UK and the foreign-based companies with a permanent place of business in the UK and the amount of corporation tax is based on the amount of profit that the company has made. However some of the global companies just pay a small amount of corporation tax comparing with their profits, and it is due to the loophole of the rules. These companies transfer their profits to the tax heaven countries, therefore they can reduce the tax liabilities to the minimum. Google, a multinational corporation which provides Internet searching service, declared a profit of  £3 billion for 2012, but the company paid UK corporation tax of  £11.2 million, which is around 0.37% of its profit. This unbalance tax-profit ratio is because of the loophole of the rules. Although Google has set up offices in UK, and the advertisements of the business have made in the same country, the company does not close up the offers in UK, and the transactions are made in Ireland, which is a tax heaven. Since the profit of the business is not made in UK, it is not obligated to pay the corporation tax for their business profit. Due to the tax avoidance of Google, UK has lost a huge amount of taxation revenue. Someone has been suggested that the behavior of Google tax avoidance is â€Å"immoral†. First, it is unfair to the hardworking, honest UK taxpayer and the public. Taxation revenue is one of the main revenue of the government. It is the source of fund of supporting the public benefits, such as child benefit, carers and disability benefits, etc. For the taxpayer in UK, they pay different taxes to the governments, based on the requirement of the UK tax law. Since they have fulfilled their responsibilities of paying the taxes, they should have the right of enjoying the benefits which provided by the government. However, Google paid just around  £11 million for the corporation tax, in spite of making a profit of  £5.5 billion in the UK business, and it is because of the tax avoidance scheme used by the company. One of the former employees from Google said that his former employer has â€Å"cheated† British taxpayers out of hundreds of millions of pounds. (The independent, Sunday 19th May 2013) Due to the behavior of â€Å"cheating†, the revenue of UK govern ment has been reduced, and some of the public benefits have been taken away, such as children’s centers, legal aid, etc. It will be unfair to the public as they have fulfilled their responsibilities, but they cannot enjoy their benefits that provided by the government due to the tax avoidance of those companies. Secondly, Google has an unfair competitive advantage to the UK companies. According to the rules of HMRC, limited companies incorporated in UK is required to pay corporation tax. In 2013, the small profits rate is 20%[1] and the main rate of corporation tax is 23%[2], which means that if the company is making a profit that exceed  £1,500,000 after deduct the allowance, it will require to pay 23% of its profit as a corporation tax. However, Google just paid less than 1 % of its profit by using a tax avoidance scheme. It developed a system that able to transfer the profit of UK business through Ireland to the tax heaven. Since the tax rate in tax heaven is lower than UK, therefore Google is able to reduce its tax liabilities to a low level even it has a great turnover in the UK business. This behavior helps Google to gain a huge but unfair advantage over UK companies. Since Google develop the tax avoidance system, it able to lower the company’s tax liabilities, as well as rema ins more profits in the company. Also, it has a higher opportunity to optimize its business than other UK companies, as other UK companies may not have enough resources focusing on optimizing the business after paying the corporation tax. These unfair advantages makes Google more attractive to be invested than other companies and the investors may not be willing to invest in other UK companies. Finally, someone suggested that the behavior of Google is immoral as it is bad for the economic growth. Google claimed that they did pay tax on profits generated from the services that they provided, but the profit on sales to UK business were transacted in Ireland. These actions have caused a great tax gap[3] in UK, and it has affected on the development of the economy. Since government will plan to develop and improve its economy, and the budget is supported by the tax revenue of the government. If there is a huge tax gap in the country, there may be insufficient finance to support the plan and therefore the budget may need to postpone or cancelled. Referring to the case of Google, Google has avoided part of the corporation tax by using transferring the profit to Ireland, it has caused a tax gap in UK. Due to the tax gap in UK, the development of the country has been delayed and leads to a decreasing competitive to other countries. Therefore someone said the behavior of Google is i mmoral as it is taking advantages by damaging the development of the country. However, someone argued that it is the responsibility of Google to maximize the profit of the company. The main goal of every company is to act on the shareholders’ interest and help them to maximize their wealth. Therefore, Google will try their best to reduce the expenses of the company, as well as keeping the tax cost at a minimum level within the realms of what is legal. Since if Google is being â€Å"moral† and does not reduce the tax liabilities to the lowest level, the profit of the company will decrease, which means that the earning of each shareholder will decrease too, and they may not continue to invest in the company. Also, Google may not distribute a high level of dividends to the shareholders as the profit has decreased and Google may decide to reserve more profit in the company instead paying dividends to the shareholders. Investors then may not continue to invest in Google as the company will not maximize their wealth and they may think investing in othe r companies will be better than investing in Google. It may lead to lack of extra financial from new investors, and therefore the business cannot improve or expand, and its competitive will decrease in the long term, leading to a potential risk of bankrupt. Hence that it is the responsibility of Google to reduce the tax cost to the minimum level in order to reach the company’s goal—maximize the shareholders’ wealth. Moreover, there are arguments that it is not the fault of Google avoid to pay part of the corporation tax, it is the fault of the lawmakers that making the companies too easy to avoid tax. UK tax system is huge and complicated, and most of the tax laws are introduced in an early time by the lawmakers. Since the commercial society when the laws are introduced is different from the present commercial society, therefore the laws may not suitable for the present commercial society or there are loopholes which the company can take advantage of. Hence Google able to avoid a huge amount of corporation tax legally through these loopholes. Since the loophole of the tax laws has caused a great tax gap in the country, the lawmakers has introduced different strategies to seal the loopholes and therefore company will not able avoid the tax easier and the tax gap can be reduced. Thus it is the responsibility of the lawmakers to seal the loophole of the laws so the corporate company like Google can not avoid the tax easily. Finally, even if Google has used some â€Å"evil† systems to reduce its tax liabilities, but the company has â€Å"compensated† the public with different moral activities. The public complained because of the immoral behavior of Google, it has affected the government to reduce the public benefits, and it did not fulfill its moral obligation to contribute to the public. However, Google has contributed to the society by using different methods. For example, Google has provided free training and tools for the charities in UK, and helped them to increase their fundraising and popularity through the Internet. Also Google has offered grants to the charity in the UK through the Google AdWords Grant Account, so those charities can raise more funds from Google and use the account to reach more donors, volunteers and consumers. Besides that, Google provides different products with a discount rate or for free to the non-profit making organizations, so the organizations can manage with cost effective and high flexibility. Therefore, Google has compensated the public with different methods even if it is immoral for Google to use the system to avoid the corporation tax. Lastly, even if the loophole of the tax law has been sealed and the companies are paying the expected amount of corporation tax, it may solve the moral problem of those companies, but it may have negative impact on the economy of UK. Once the loopholes are sealed, the tax gap of UK will narrow down since the companies are difficult to avoid the tax. However, the foreign companies may think the tax laws will be too strict and it is difficult to making profits in UK, therefore these companies may set up businesses in the countries that have low tax rates instead of investing in UK. Decreasing investment from foreign investors may affect the economic growth of the country, since less business is set up in the country, the gross domestic product (GDP) may have a negative impact and it may decrease the competitive of the country comparing with the tax heaven. To conclude, there is always a conflict between the main goal of a company and the morality and since morality is very subjective, there is no exact answer for the discussion. In the case of Google, they have developed a system to divert the business profit to the tax heaven, someone suggested that the behavior of Google is immoral because it is unfair to the UK taxpayers, as they have fulfilled their responsibility to pay the tax, but they can’t enjoy the public benefits provided by the government as the behavior of Google has reduced the revenue of the government. Secondly, Google has taken unfair advantages over the UK local companies, as Google is paying an extremely low corporation tax rate comparing the tax rate of the local UK companies due the tax avoidance system, it allows to remain more profit in the company, therefore it will have higher opportunity to optimize and improve the quality of business by using the profit effectively. Finally, the behavior of Google is b ad for economic growth. A tax gap has caused in UK as the tax avoidance of Google, therefore the development plan of the country may need to be postponed or cancelled and it may caused a navigate effect on the economic growth in the long term. On the other side, someone argued that it is the responsibility for Google to reduce the tax cost of the company, since the main goal of a company is to maximize the business profit and the shareholders’ wealth. Fail to fulfill the goal may affect the future development of the company and the benefits of the shareholders. Moreover, it is not the fault of Google to avoid the tax, but it is the fault of the lawmaker to let the company can avoid the tax easily through the loophole. Last but not least, even if the behavior of Google is immoral, the company has contributed to the society through different activities, for example: providing free tools and training to the charities, offering grants to the charities and providing products with a discount rate or for free to the non-profit making organizations. Even if sealing the loopholes of the tax laws solves the moral problem, it may affect the economy of the country, as the strict tax law may discourage the investors to set up businesses in the country, leading to low competitive by comparing with other countries. [1] Small profits rate applies when augmented profit is less than  £300,000 [2] Main rate applies when augmented profit exceeds  £1,500,000 [3] The different between the actual amount of corporation tax that have received and the amount that should be received without tax avoidance

“A Modest Proposal” Essay Essay

Word choice gives Swift artillery to create satire in â€Å"A Modest Proposal†. In â€Å"A Modest Proposal†, Swift uses several different words to create satire, one of which is the word ‘breeders’. He uses the term breeders in reference to the women. In several paragraphs he talks about these breeders and their role. â€Å"I calculate there may be about 200,000 couples whose wives are breeders;†(Swift 2) The way that he refers to the women as breeders instead of mothers, wives or women creates satire. Instead of talking about them he talks about what they do. Or what they are supposed to do. This makes good artillery because referring to the women as breeders gives them a significant role and satire is created because instead of being known as women and mothers they are now breeders. In beginning his proposal Swift uses the word ‘scheme’ before he gets into too much detail about what he has in mind. This word is an excellent word to use to start off. â€Å"As to my own part, having turned my thoughts for many years upon this important subject, and maturely weighed the several schemes of our projectors†(Swift 1) Scheme meaning â€Å"A systematic plan of action† very well describes the plan that is later laid out by swift to solve the issues he talks about. â€Å"There is likewise another great advantage in my scheme†.(Swift 1) He immediately explains how his scheme will â€Å"prevent voluntary abortions, and that horrid practice of women murdering their bastard children†.(Swift 1,2) It’s ironic how he says that then a little bit further down he says: â€Å"I have been assured by a very knowing American of my acquaintance in London, that a young healthy child well nursed is at a year old a most delicious, nourishing, and wholesome food, whether stewed, roasted, baked, or broiled†.(Swift 2) It’s pure satire to not abort the child so that they can be eaten at the age of one, don’t murder them before they’re born, wait a year. The word scheme makes excellent artillery as it is used to signify that the plan that Swift has is a clever plan and wasn’t just thought up over night. He also uses the word advantage throughout the text. â€Å"There is likewise another great advantage in my scheme†.(Swift 1) â€Å"Many other advantages might be enumerated.†(Swift 3) The word disadvantage cannot be found. Therefore  everyone has something to gain from the proposal and nothing will be lost. The word advantage is definite artillery, especially if you’re one of the wealthy people. They have nothing to loose and Swifts’ Proposal would benefit them entirely. It also creates satire; as for those who are not wealthy there is not an advantage except for only having to live in poverty for a shorter period of time, being able to contribute to society and for the general public, less beggars and homeless on the streets. Therefore the streets are cleaner, less hectic, not as crowded and just plain better. Works Cited Swift, Jonathon â€Å"A Modest Proposal† 75 Reading plue ed. Santi V. Buscemi, Charlotte Smith. McGraw-Hill. USA, 2000. www.dictionary.com

Junk food advertising

Subject 1: Because of the alarming rate of childhood obesity and the power of advertising to attract children, a growing number of people think that junk food advertising should be banned or limited in some way. Would you be for or against such a ban? Write a persuasive paragraph in which you develop and support your position on this issue. I strongly believe that junk food advertising should not be banned because it will not resolve the childhood obesity issue and this measure will go against the customers’ right to be informed about new products and discounts prices.First, junk food advertising should not be banned to reduce the childhood obesity. People who support this new measure think that it is the perfect solution. However the reality is different. Although a ban will probably decrease of childhood obesity at first. In the long term it will certainly not last. It is the parents’ responsibility to educate their children concerning the methods companies use to att ract them to their products. It’s the parents’ duty to teach them that even if they are shown something that they desire, they can't always get what they want.Junk food commercials are not the problem. However, over permissive parents who allow their kids to have and eat anything they want are the culprits. For instance, I remember when I was younger I used to watch my favorite cartoons every weekend. In Between two cartoons most of the time there were some junk foods commercials shown, which had an effect on me because after seeing these advertisement I really wanted to go to MacDonald’s. I also remember that my parents told me that it was not healthy. They taught me good eating habits and they also allowed me to eat junk food only once or twice a month.This example show that junk food advertisement have very little impact on children. On the other hand the parents play a major role in the fight against obesity. Second, consumers have the right to be informed a bout new products and discount prices. Banning junk food commercials will contradict this right. That is inconceivable. In 1962, President John F Kennedy presented a speech to the United States Congress that mentioned the right to be informed. This right states that businesses should always provide consumers enough appropriate information to make intelligent and informed product choices.For example one night I did not know what to eat and I saw on TV that Domino’s pizza was offering good deals. So, I decided to buy pizzas for dinner. Without this commercial I would not have been informed about this special price. In addition banning junk food advertisement would interfere too much with the right of companies to sell legal products, and would require a cumbersome bureaucracy to determine what junk food was and which programs were intended for children. Third, banning junk advertising will have deleterious effects on the economy.According to The Federal Trade Commission food co rporations spend at least $1. billion in the US every year to advertise their products. If the government bans specific commercial advertising enterprises. Advertisement companies as well as the makers of the products advertised will see a decrease in their revenue. Disney channel estimated that the ban will cost them 7 millions of dollars. In conclusion banning junk food advertising is not a solution because it will not resolve the child obesity problem. Also, consumers will no longer be aware of new products and services. Finally it will have negative effects on the economy.

What Are The Challenges Posed To Financial Stability Finance Essay - Free Essay Example

Sample details Pages: 14 Words: 4088 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Cause and effect essay Did you like this example? Critically discuss the issues at stake with reference to actual case studies stressing their similarities and differences in the recent Bear and Sterns and Lehman case, the law and any policy guidelines available Introduction Over the past decade international financial conglomerates have become an increasingly important feature of the financial landscape. Universal banking countries have long integrated the securities business with traditional commercial banking, but over the last decade most regulatory obstacles to combining banking and the securities business have fallen in Japan and the United States as well. More broadly financial liberalization has removed most statutory barriers that once prevented banking, securities and insurance firms from operating within the same financial conglomerate  [1]  (Joint Forum, 2001, p.69). Increasingly these combinations have included banking and insurance operations. Allianz in Germany, ING and Fortis in the Netherlands, Credit Suisse in Switzerland, and Citigroup in the US have all made important cross-sector acquisitions in recent years to combine banking and insurance activities  [2]  . Indeed, virtually all of the lar ge, international financial institutions are to some extent financial conglomerates combining at least two of the three formerly distinct functions of banks, securities firms or insurance companies. In this paper we shall focus on international financial conglomerates that combine banking with financial activity in at least one other sector In recent years, the subject of financial stability has been a cause of extensive debate for policy makers and the indeed the world at large. One of the main reasons for this spur was the East Asian financial crisis of the late 1990s. Following that turmoil, the World Bank and the International Monetary Fund (IMF) introduced the Financial Sector Assessment Program (FSAP) in 1999, aimed at assessing regularly the strengths and weaknesses of financial systems in their member countries.  Ãƒâ€šÃ‚  Ãƒâ€šÃ‚  Despite this increased focus on financial stability issues, it is notable that a widely accepted definition of financial sta bility does not exist and the concept has generated a considerable amount of debate among academics, market participants and policy makers  [3]  .    Crocket defines1 financial stability as requiring that the key institutions in the financial system are stable, in that there is a high degree of confidence that they continue to meet their contractual obligations without interruption or outside assistance; and that the key markets are stable, in that participants can confidently transact in them at prices that reflect the fundamental forces and do not vary substantially over short periods when there have been no changes in the fundamentals  [4]  . Don’t waste time! Our writers will create an original "What Are The Challenges Posed To Financial Stability Finance Essay" essay for you Create order BODY In the dealings of market economies firms go bankrupt incessantly. The procedure of bankruptcy is dealt with speedily by bankruptcy courts, which follows that there is little or no attention given except where there are outrageous claims. So the question that beckons is: what makes the bankruptcy if financial firms different? The common reply to this question by economists is that the collapse of a financial firm or conglomerate poses risks to the financial stability of an economy. A collapse of such an institution can often lurk a contagion risk, giving that manner with which banks operate. The implicit effect of this is that other banks that might not necessarily have a direct relationship with the collapsing company might be affected.  [5] This follows through to the issue of payments systems. There is a very likely chance that investments failures can affect payment systems through contagions. There is the possibility of narrow banking where all cash checking accounts i s either explicitly on hand or backed by investment in completely safe easy-to-liquidate Treasury bills. And all other savings and investments are at risk and not eligible for government assistance in a narrow banking system.  [6] There is however a second possibility, currently in use, is a marriage between the payments system and investment regulated and guaranteed by the federal government through the Federal Deposit Insurance Corporation (FDIC). In theory government monitoring allows banks to operate until their net worth is near zero. They then are taken over by the FDIC but no payments-system contag`1ion occurs. The advantage of the current system is that total investment can increase because all the money in checking accounts is invested rather than just sitting in the vault or in Treasury bills. The disadvantage is that customers no longer pay attention to what banks do with their money and assume that bank regulators and the FDIC figure everything out and prevent syste mic risk.  [7] With regards to banks like Lehman Brothers and Bear Stearns, some economists argue that because investment banks are not explicitly involved in the payments system their bankruptcy is no different from that of Enron or your local hardware store. There is no possibility of contagion and the government should not become involved. On the other hand others argue that the investment banks are integrally involved with each other through over-the-counter markets in financial derivatives, which are essentially insurance contracts tied to interest rates, currency exchange rates, and credit defaults. This is the investment bank equivalent of the checking account relationships between commercial banks. The central role Bear Stearns played in the over-the-counter derivative market is invoked by some economists as necessitating the federal guarantee of assets to facilitate the takeover of Bear Stearns by JP Morgan rather than bankruptcy.  [8]  This argument prompts the thought of the too big to fail syndrome. Why can banks not be allowed to fail when they have taken wrong steps? Why were some banks like American International Group (AIG), Bear and Stearns, Northern Rock bailed out while a similar bank like Lehman Brothers allowed to fail? Why was Lehman treated differently by the fed (Federal Reserve Bank)? Are some banks really too big to fail? The fed took a treacherous risk and establish a fallacious pattern in March when it concocted the takeover of Bear and Stearns by JPMorgan Chase and pledged $29 billion in potential losses. The argument to justify this act by the fed and chief Ben Bernanke (chairman of the federal reserve) is that Bear and Stearns was just too big to fail and the consequence of allowing it to so would have been nothing short of a calamity on the economy of the United States (US), tax payers and indeed the world.  [9] It follows that if Bear was too big to fail and deserved a bail out, why then was Lehman which was the forth largest bank, a big player in backed securities and mortgages in comparison to Bear which was the fifth allowed to fail. The writer goes further by refuting support for the big bank that have made reckless decisions therefore should be allowed to enjoy the consequences. More so, the US runs a free market economy where companies should be allowed to fail.  [10] . By all standards, AIG qualified as a Too big to fail candidate. What made Fed and Treasury officials apprehensive was not simply the prospect of another giant bankruptcy on Wall Street, but AIGs role as an extensive provider of esoteric financial insurance contracts to investors who wanted to hedge potential losses on complex debt securities they bought. The problem insurance contracts take the form of credit-default swaps (CDS), which effectively required AIG to cover losses suffered by the buyers in the event of counterparty default. AIG was potentially liable for billions of dollars of risky securities that were considered safe in normal time. An AIG collapse would cause it to default on all of its insurance claims. Institutional investors around the world would instantly be forced to reappraise the value of securities insured by AIG against counterparty losses. This would require them to increase their capital to maintain their credit ratings. Small investors, including anyone who owned money market funds or pension funds that hold AIG issued securities, could suffer losses. On the day before the AIG bailout became news after market closing, the New York money market firm Reserve Primary Fund, with $62 billion under management, announced that it broke the buck, meaning that its net asset fell below the standard $1 per share, a development all mutual funds normally would do everything to avoid. During a day of emergency meetings at the New York Fed, the Treasury and Fed reversed initial reluctance to bail out another financial institution. Though unspoken, the underlying conclusion was that this was not a takeover, not a bail out. If anyone is being bailed out, it is the central bank, which is desperately trying to create a fire break to prevent a global capital market collapse that it may not have enough financial resources on its balance sheet to support. The Treasury had to announce that it is issuing $40 billion of 45-day Treasu ry Bills to help buttress the Feds balance sheet. More will be issued as needed by the Fed. There are signs that the governments fire fighting measures are less than effective. Market sentiment suggests that more financial firms can be expected to fail before the crisis crests. Mark-to-market requirements for valuing structured finance instruments and portfolios that are structured to appear safe in long-term probability models reduce the prospect of disaster to a very short fuse. A hedge that would be considered safe over a period of a year can suddenly be reduced to a position of high risk in a matter of days or even hours by market volatility. In such a market environment, the Fed, rather than its traditional role of market stabilizer over the long term, is often reduced to an emergency fire fighter in raging forest fires in a financial landscape infested with elements that practice arson for profit. David Wessel  [11]  defends the too big to fail, saying ther e are financial institutions that are too big to fail and they cannot be allowed to fail because the country fall in trouble. George Sholts (former Treasury Secretary) says that if they are too big to fail, they are too big  [12]  . The current thinking of the fed and treasury is that we are stuck with this situation because it not feasibly possible or indeed logical to make these organisations shrink to prevent them from putting the economy at risk. And forcing banks to resize would be putting the economy at a disadvantage because the global organisations do need big banks, having small banks in the US and big ones in other countries would not benefit the US economy. Wessel reiterated the fact that there are bank that are too big to fail but they should be regulated to reduce risk. The regulation should however not categorise some bank as being too big and some others not because this will cause big companies to be $2 shy of being too big to fail thereby defeating the purpos e of the regulation. The regulation should be done by means of taxation that is taxing on size, so they hold more capital thus more durable to shock.  [13]  Being too encourages recklessness by bank as they would believe that government would bail them out therefore take reckless risks. A too big to fail company is a company that the government is afraid to let fail because of the economic consequence to the people outside the institution.  [14] The financial crisis showed the world the extent of power the fed has in relation to liquid cash and the sort. The president of the US does not have the ammunition to fight a financial crisis, he only spends money allocated to him by the congress (the congress is not very reliable with rapid response due to its structure). The only system that can possible provide an enormous amount of cash rapidly at short notice is the fed and that essentially what they did. When AIG asked for help with regards a bailout, they were quick to see th at Morgan Stanley, Goldman Sax would be next to fall if they did not do anything to help. Wessel also brought up an argument against Ben Bernanke and the fed on reasons AIG, Bear and Stearns could be bailed out but Lehman could not. Bernanke claimed not to have had the legal authority to safe Lehman. This begs the questions that why was the law stretched to save one but not the other? Wessel also believes that Bernanke made a lot of wrong decision, Bernanke like Roosevelt did what they thought was right in the situation they found their selves, Some of they were trial and error, which numerous people suffered the consequences and might suffer more in the future. However there are some decisions that did work, which is evident in the very slow revival of the economy. We see an unemployment rate of 10% as opposed to 20 or 25%, which is considered progress.  [15] In their book 13 Bankers  [16]  , Simon and James, discussed extensively about the financial crisis, its caus es, too big to fail and so on. They say in Obamas attempt to resolve a financial crisis he puts in place a reform which they think is rather weak and does not tackle the too big to fail problem. However they Simon and James are in support of the fact that there should be new consumer agency vis-a-vie financial products. However the problem of banks being so big that their collapse creates an economic pandemonium such that they force the fed to rescue them, this problem is not solved. Simon further suggests that if banks are too big to fail, they are too big to exist. No bank or financial institution should exist if its collapse can cause economic disruption. Any such bank should simply be made smaller, which has no economic detriment to the economy. This implies that if an economy allows for financial aristocracy, there would be adverse consequences. Financial concentration will bring collapse as seen through Andrew Jackson in the 1830s, Thomas Jefferson, Theodore Roosevelt (end of 19th century), Franklin Delano Roosevelt (1920s boom and burst)  [17]  . If Obama does not the big banks, the future holds another great crisis. This is not to say that there would not be bumps in the financial system but the existence of these banks at that size is more detrimental to the economy. If these underlying core financial, political and economic issues that brought the country into the present financial crisis are not dealt with, the next financial meltdown is not far off. Challenge  The financial systems in developing economies however, have remained resilient to the financial woes in the US because business has still been done in the tradition way where individuals or companies need to have a good track record to be given credit or loans in these countries as a result the risk levels are very minimal. However, the impact would be felt in the real economy as a result of reduced demand for imports. This is likely to affect international market prices of such products. Banks in the developing economies will likely see their credit lines from foreign banks squeezed and the increasing financial flows that these economies have been experiencing are going to dry up. Dr Huang pointed towards the observed asymmetry in the speed of replacing positions after termination with Lehman and argued that this asymmetry caused the dislocations in the swap and repo markets. Dr. Huang noted that the market turmoil was avoidable, as there had been precedence for succes sful regulator intervention. The New York Federal Reserve could have minimized systemic risk by transferring Lehmans matched books to another derivatives dealer as had occurred when Dresdner Bank and Refco Inc failed. Impact on Swap Markets In an interest rate swap (IRS), two counterparties exchange a fixed interest rate for a floating interest rate at regular time intervals. The floating rate is usually set to be equal to a short-term benchmark rate, like the USD LIBOR rate, while the fixed rate is set when the swap is initiated and reflects the market expectation of the level of the floating rate throughout the life of the swap. By convention, an IRS receiver is the counterparty that receives fixed and pays floating, and the IRS payer is the counterparty that pays fixed and receives floating. While the Federal Reserve did not immediately cut the target Fed Funds rate after the collapse of Lehman, cutting this rate was widely anticipated as a necessary measure to ensure liquidity in the markets. Counterparties to Lehman who were IRS receivers rushed to replace their long duration positions in the markets immediately, since such positions would likely increase in value, receiving the same fixed rate for an anticipa ted lower floating rate. The increase in value could then be used to hedge losses from other short duration positions in their portfolio. However, the converse was true for counterparties who were IRS payers. Due to bankruptcy regulations, the payers had already closed their positions with Lehman at a single closing price, regardless of the contract size. Since the short duration positions that IRS payers owned were probably used to hedge their long duration exposures, and long duration exposures were likely to rise in value, there was no incentive for the IRS payers to replace their loss-making hedges immediately. Under the Expectations Theory of interest rates, forward interest rates are what the market expects future interest rates to be. However, a few weeks after Lehman filed for bankruptcy on September 15, 2008, the long end of the term structure of the USD interest rates fell sharply. Between September 15, 2008 and October 17, 2008, the 30-year end of the two- week USD forward curve fell by about 30 basis points. While the rates at 30-years could be distorted by market expectations of future economic conditions, such as long-term inflation rates, Dr. Huang believed it was unreasonable for the markets to have such strong opinions on interest rates movement 20 to 30 years into the future that could affect 30-year forward rates so strongly. The more plausible reason for the drop in 30-year rates was the massive influx of IRS receivers looking to immediately replace their terminated Lehman swap positions, and the shortfall of IRS payers who were willing to wait to replace their loss-making swap positions. Since swaps are usually long-dated contracts, the demand and supply imbalance depressed the longer maturity end of the term structure. To illustrate the demand and supply imbalances, Dr. Huang utilized a quantitative model to generate an estimation of the fair value for the 30 year rates based on a linear combination of interest rate s at four other standard maturities. The swap rate from the model is then compared to the 30 year USD swap rates. Since the market and model rates are supposed to track the value of each other over time, if the market rate is greater than the model rates, market participants would profit from entering an IRS as a receiver. The converse is true when the market rate is lower than the model rate. The results implied by the quantitative model are consistent with stylized facts, with market rates above model rates during periods of distress, such as the Russian default, with government cutting interest rates to prevent recession and market rates below model rates during times of stability, like before the Dotcom crash, with governments increasing interest rates to curb inflation. However, in contrast to previous crises, the market swap rates were below model rates in the case of Lehmans collapse. This means that interest rates were too low relative to the model predict ions due to IRS receivers rushing into the market to replace their long duration positions. The dislocation in the fixed income market was not limited to the U.S. Europe also experienced low 30-year EUR swap rates relative to the model, as defined benefits pension funds replaced their long dated receiver IRS in the market to hedge their liabilities. On the other hand, parties on the other side of the matched book, such as the economies with lower credit ratings including Greece and Italy, other banks and hedge funds postponed the issuance of new debt. Impact on Repo Markets In a repo, a borrower sells a security to a lender for cash and agrees to buy back the same security from the lender at a fixed price at a later date. This is essentially a collateralized loan. However, when Lehman filed for bankruptcy, all repos transacted through Lehman were terminated, and the lenders were left with the borrowers assets while the borrowers were left with cash. If the borrower posted collateral consisting of an asset that is desirable in distress environments, they would likely try to replace the asset from the market immediately. If the asset that was posted as collateral would not perform well in a distressed environment, the borrower can choose not to replace their exposures and simply keep the cash that was borrowed. However, the lender in a repo is probably looking to generate some short-term interest and is not likely to have the expertise or an economic interest in managing the asset for the long-term. Hence, the lender will likely sell any collate ral it owns from the termination of the repo to replace its cash position. As a result, the supply of all collateral assets would increase, but there would only be a flight to quality to the desirable assets. According to Dr. Huang, the above phenomena would be observable via the price of the undesirable assets falling relative to the price of the desirable asset. During periods of distress, both interest rates and the inflation rate are likely to fall. Hence, inflation-linked bonds are likely to be undesirable assets while fixed interest bond are likely be desirable. An inflation-linked bond can be converted into a synthetic nominal bond by shorting inflation rates using inflation-linked swaps. This synthetic yield should not have a significant spread over the nominal yield of a similar nominal bond under normal circumstances. However, when Dr. Huang charted the spread between the synthetic yield from U.K. inflation-linkers and the yield from nominal bonds, he discovered that the synthetic yield of the inflation-linkers traded at between 40 to 120 basis points above the yield of a nominal bond from the collapse of Lehman to December 5, 2008. This meant that the price of inflation-linkers fell relative to the price of nominal bonds, even after converting their real yields into synthetic yields. This observation lends credit to the hypothesis that the collapse of Lehman led to indiscriminate selling of collateral by lenders to recover their cash but only selective replacement of desirable assets by the borrowers. Dr. Huang added by saying that although matched book operations are risk-free for derivative dealers, sudden termination of matched book positions can lead to significant market dislocations as market participants replace long duration positions ahead of short duration positions in distress scenarios. Regulators trying to lower systemic risks should also be mindful of this fact when dealing with collapsing financial entities in the f uture. Furthermore, assets that are normally highly correlated with very similar cash flows, such as stripped inflation-linked bonds and nominal bonds, also diverged significantly in value. This has important implications for market risk management as regulators and arbitrageurs can make the markets more allocatively efficient and less volatile by buying up the undervalued assets and making price a better signal of value.  Ã‚  [18] In a credit crisis there is generally a ripple effect to the financial system of the country affected and indeed the world. This instigates that if there is a breakdown or a collapse of a financial conglomerate, which naturally has branches in major parts of the world, it will affect those parts. To ensure that other countries who suffer the punishment of reckless Banks do not suffer unjustly, there should be an information trickle system where updates about the goings on and major transactions of those companies are given to these branches. Thi s ensure they have a say in the make or break of the company that its collapse can potentially disrupt their economy. Furthermore, the fed needs put a holt on they bailouts in order to allow the economy got through its natural cause. Crisis should be allowed to occur and collapse of any company should be accepted as the US runs a free market. This is implicit to the fact that any company that has been reckless should be left to fact the consequences so other can learn. In addition, a limit of 4% of GDP or $600 in assets should a implemented as this will return banks to where they are in the 1900s when it can be said that the financial state of the country was fairly stable. This reduces or eliminates that too big to fail theory and provide more competition. At the moment there are about five organisations that dominate the derivatives market. If the number increase there could be more competition which would induce lower margins and better prices for customers.