Tuesday, February 11, 2020

Was the financial crisis of 2007-8 caused by failures inherent within Essay

Was the financial crisis of 2007-8 caused by failures inherent within capitalism or the changing global system - Essay Example Following the economic crisis, the International Labour Organization forecasted unemployment grew from approximately 20 million to 50 million people by the end of 2009. The Food and Agriculture Organization also painted a grim picture of the years following the crisis in their report where the incomes of the poor was falling due to the crisis while the international prices of food commodities was also high. The high food prices coupled with a reduced income for the poor means the number of undernourished people in the world rose to more than one billion for the first time in history in 2009 (Bresser-Pereira 2009, p.1). The magnitude of the 2007-8 financial crisis raises many patient questions based on why it happened, why institutions and theories put in place after previous crises failed to forestall this one, was the crisis predictable based on what many see as a lack of stability of capitalism? This essay argues that it was in fact the changing global system especially in financia l markets after the 1970s that caused the financial crisis of 2007-8 and should not therefore be taken as a failure in capitalism. Consequently the 2007-8 financial crisis associates are associated with financialization and neoliberalism. Financialization as used in this essay is a distortion of financial systems that is characterized by creation of artificial financial wealth, which is financial wealth that has no relation with the mechanisms of production of goods and services. On the other hand, neoliberalism from this perspective not only a fundamental economic liberalism but should be perceived as an ideology that is unsympathetic to the proletariats, to poor and to the welfare state (Epstein 2005, p.3). As with previous global financial crises, the global crisis of 2007-8 began as financial crises in first world countries which was caused by the deregulation of financial markets in developed countries which was followed by widespread speculation that such deregulation made pos sible. Accordingly, these deregulation policies was the historical additional fact that allowed the crisis to take place due to the behavior exhibited by the banking and other financial institutions can be blamed on the deregulation policies of the government. The state failed to undertake a supervisory role that would have identified and forestall the situation (Bresser-Pereira 2009, p.3). Gradual deregulation not only in the US but globally in addition to fragmented financial authorities and the absence of international cooperation encouraged and legitimized the thinking that financial sector had to be free in order to flourish. Both â€Å"macroprudential† and â€Å"microprudential† supervision would have proven effective in regulating the banks given that even if all banks had proper financial practices, unforeseen risks as result of small changes on a broad scale at the macro level could have occurred. Therefore macroprudential supervision would be an innovative ty pe of regulation that is suitable for central banks (Dullien, Kotte, Marquez and Priewe 2010, p.23). Part of the deregulation policies for the period before the crisis was the US Federal Reserve Bank’s monetary policy decision which saw interest rates kept at an all-time low for a long time after the 2001/2 financial period. Such measure resulted in a major increase in the credit supply that was a catalyst for the production of high leverage levels related with the crisis. Financial stability

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