The global financial crisis has demonstrated already that it is no respecter of persons, nor of particular industries, nor of national boundaries. It is a crisis which is simultaneously individual, national and global. It is a crisis of both the developed and the developing world.
It is a crisis which is at once institutional, intellectual and ideological. It has called into question the prevailing neo-liberal economic orthodoxy of the past 30 years — the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us. Not for the first time in history, the international challenge for social democrats is to save capitalism from itself: It fell also to the American Democrats, strongly influenced by John Maynard Keynes, to rebuild postwar domestic demand, to engineer the Marshall Plan to rebuild Europe and to set in place the Bretton Woods system to govern international economic engagement.
The common thread uniting all three of these episodes is a reliance on the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand. The second challenge for social democrats is not to throw the baby out with the bathwater.
As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Protectionism has already begun to make itself felt, albeit in softer and more subtle forms than the crudity of the Smoot-Hawley Tariff Act of Soft or hard, protectionism is a sure-fire way of turning recession into depression, as it exacerbates the collapse in global demand.
That philosophy once again speaks with clarity and cogency to the challenges of our time. Social-democratic governments across the world must rise to the further challenge of developing a practical policy response to the crisis that rebuilds shattered economic growth, while also devising a new regulatory regime for the financial markets of the future.
This is our immediate challenge. But if we fail, there is a grave danger that new political voices of the extreme Left and the nationalist Right will begin to achieve a legitimacy hitherto denied them. Again, history is replete with the most disturbing of precedents. We therefore need a frank analysis of the central role of neo-liberalism in the underlying causes of the current economic crisis.
We also need a robust analysis of the social-democratic approach to properly regulated markets and the proper role of the state, in a new contract for the future that eschews the extremism of both the Left and the Right. And we must integrate this analysis with the unprecedented imperative for global co-operation if governments are to prevail in their task. Around the world today, there is understandable public bewilderment at the speed, severity and scope of the unfolding crisis.
While the causes of the global financial crisis are complex, a small number of simple metrics are capable of conveying its magnitude and the havoc it has wrought in financial markets, the real economy and government finances. Financial markets have suffered the greatest dislocation in our lifetime. Credit markets have all but dried up, with credit growth at its lowest level since World War II.
And, at the core of the crisis, house prices are plummeting in many countries, with American prices falling at their fastest rate since modern records began.
The real economy is facing one of its toughest periods on record, with the IMF predicting that advanced economies will contract for the first time in 60 years, causing the number of unemployed to rise by 8 million across the OECD. In developing countries, the International Labour Organization predicts that the financial and economic crisis could push more than million people into poverty. Furthermore, the crisis is producing unprecedented costs and debts for governments which will be felt for decades to come.
It is estimated that the deficit in the United States will be as high as What this means for future American international borrowing is equally unprecedented. Bewilderment, however, rapidly turns to anger when the economic crisis touches the lives of families through rising unemployment, reduced wage growth and collapsing asset values — while executive remuneration in the financial sector continues to go through the roof, apparently disconnected from the reality of recent events.
These are epic numbers, generated by a greed of epic proportions. For a bewildered and increasingly enraged public, they raise the following questions: How was this allowed to happen? What ideology, what policy, what abuses made this possible? Were there any warnings? And if so, why were they ignored? The current crisis is the culmination of a year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus.
The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces. In the past year, we have seen how unchecked market forces have brought capitalism to the precipice. The banking systems of the Western world have come close to collapse. Almost overnight, policymakers and economists have torn up the neo-liberal playbook and governments have made unprecedented and extraordinary interventions to stop the panic and bring the global financial system back from the brink.
To understand the failure of neo-liberalism, it is necessary to consider its central elements. The ideology of the unrestrained free market, discredited by the Great Depression, re-emerged in the s amid a widespread belief that the prevailing economic woes of high inflation and low growth were exclusively the result of excessive government intervention in the market.
Neo-liberal policy prescriptions flow from the core theoretical belief in the superiority of unregulated markets — particularly unregulated financial markets.
It follows, therefore, that if markets are fully efficient and prices fully informed, there is no reason to believe that asset-price bubbles are probable; and if these do occur, markets will self-correct; and that there is therefore no justification for government intervention to stop them occurring.
Indeed, in the neo-liberal view, deviations from market efficiency must be attributable to external causes. This theory justifies the belief that individual self-interest should be given free rein and that the income distribution generated by markets should be regarded as natural and inherently just.
In the neo-liberal view, markets are spontaneous and self-regulating products of civil society, while governments are alien and coercive intruders. Ideally, the role of governments is simply to enforce contracts and protect the allocation of property rights. The advocates of neo-liberalism have sought, wherever possible, to dismantle all aspects of the social-democratic state.
The idea of social solidarity, reflected in the collective provision of social goods, is dismissed as statist nonsense. Neo-liberalism progressively became the economic orthodoxy. It was reflected in wave after wave of tax cuts.
Governments bragged about their success in reducing measured levels of debt, while refusing to acknowledge the long-term economic cost of non-investment in education, skills and training which increase productivity , and repudiating an appropriate role for public debt in financing investment in the infrastructure that underpins long-term economic growth.
Neo-liberals have also exhibited a passionate commitment to the total deregulation of the labour market. Labour is routinely regarded by neo-liberals as no different from any other economic commodity. In the ideal neo-liberal system, labour-market protections should be restricted to physical safety rather than appropriate remuneration or minimum negotiation standards.
Again, contract law, rather than any wider concept of a social contract, should prevail. Neo-liberals in government also become notoriously reluctant to identify and respond to instances of market failure.
Climate change is a potent example. What Sir Nicholas Stern legitimately describes as the greatest market failure in human history is dismissed by neo-liberals as a prescription for wanton interference in market forces.
The neo-liberal deregulation mantra has been even more evident in the management of financial markets. In the United States, the pursuit of financial deregulation crossed the Rubicon with the repeal of the Glass-Steagall Act, which had been established in the wake of the Great Depression.
In the heady bubble years of the s, American commercial banks, whose traditional function was simply to take deposits and make loans, plunged into the roaring bull market, trading on their own account, underwriting new stock issues and participating in reckless speculation.
When the stock-market bubble burst in , it took commercial banks with it, causing a devastating chain reaction which affected the entire economy for a decade. President Roosevelt implemented Glass-Steagall in to prevent Main Street commercial banks from being exposed to the vagaries of Wall Street in the future.
As Keynes, himself a successful speculator, observed: The door was now open for the creation of huge financial-services conglomerates. One of the first to take advantage of the new regime was Citigroup, formed from the regular bank Citicorp and Travelers Group, which had previously incorporated the investment bank Salomon Smith Barney. The problem was that such combined entities became too systemically important to fail, yet their investment-banking arms were allowed to engage in speculation on a massive scale — so great as to imperil the finances of any government that had to bail them out.
It is ironic and — given the anti-government orthodoxy of neo-liberals — grossly hypocritical that the massive exposure to risk of these private financial conglomerates has resulted in a parallel exposure of the government, given the scale of possible government intervention in the event of bank failure. During the bubble, however, no account was taken of this, as massive profits were privatised and prospective losses socialised through the operation of implicit banking guarantees.
At the international level, bank risk is regulated by the Basel Accord. Even then, the Basel rules were easily circumvented using innovative financial structures: Instead, the crucial risk-assessment function was passed, in large part, to the ratings agencies. Dependent as they were on the banks for their revenue, the agencies were hopelessly conflicted by the lure of big profits in return for easy ratings.
Financial liberalisation also gave rise to a plethora of new, unregulated financial institutions in what is now broadly defined as the bank-intermediation market: Investment banks with debt-to-equity ratios of A series of major national and international financial crises over the past decade should have begun to give pause for reflection, intervention and action.
But these calls were always smugly discounted by the advanced economies as being primarily for the benefit of the Asian and other developing economies that had been caught up in the crisis. Further warning signs came, including the bailout of the hedge fund Long-Term Capital Management LTCM in and the spectacular dotcom bubble and bust of Each time a crisis arose, the US Federal Reserve came to the rescue by significantly lowering the federal funds rate, in order to pump liquidity back into the market and avert any further deterioration.
Easy monetary policy was seen as an elixir that could cure any market instability that arose. In fact, it added yet more fuel to the fire, in the form of cheap money available for lending. Low interest rates brought forth a new class of borrowers in the US who were encouraged by mortgage brokers to buy their own home. As a result, a huge amount of capital rushed into the sub-prime mortgage market, where it was directed towards borrowers with weak credit histories. At the same time, the prevailing anti-regulation culture in financial markets fostered a new banking model — the so-called originate-and-distribute model.
Mortgage brokers originated loans that were then sold on to others, including hedge funds and structured investment vehicles, thereby severing the link between the assessor of credit worthiness and the ultimate holder of the loan. This is where the two worlds met: The combination was toxic: This is the essence of the neo-liberal legacy now left to taxpayers — both today and into the future.
The rest, of course, is history. Low interest rates and high demand for housing caused house prices to soar. In comparison to the 1. Indications of financial instability slowly became apparent to all who cared to look.
The Bank for International Settlements, always more sceptical than most, was the first official institution to sound the alarm. Despite three crises in a decade, despite the clear warnings that came with them and after them, the neo-liberals were so convinced of the ideological righteousness of their cause, and so blinded by their unquestioning belief that markets were inherently self-correcting, that they refused even to recognise the severity of the problems that emerged.
The problems did not fit the model, so the evidence was simply discarded. Hardline neo-liberals were not interested, because they knew in their hearts they were right.
The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy.
And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself. With the demise of neo-liberalism, the role of the state has once more been recognised as fundamental.
The state has been the primary actor in responding to three clear areas of the current crisis: The challenge for social democrats today is to recast the role of the state and its associated political economy of social democracy as a comprehensive philosophical framework for the future — tempered both for times of crisis and for times of prosperity. In doing so, social democrats will draw in part on a long-standing Keynesian tradition.
Instead, social democrats maintain robust support for the market economy but posit that markets can only work in a mixed economy, with a role for the state as regulator and as a funder and provider of public goods.
Transparency and competitive neutrality, ensured by a regime of competition and consumer-protection law, are essential. Social justice is also viewed as an essential component of the social-democratic project. The social-democratic pursuit of social justice is founded on a belief in the self-evident value of equality, rather than, for example, an exclusively utilitarian argument that a particular investment in education is justified because it yields increases in productivity growth although, happily, from the point of view of modern social democrats, both things happen to be true.
Expressed more broadly, the pursuit of social justice is founded on the argument that all human beings have an intrinsic right to human dignity, equality of opportunity and the ability to lead a fulfilling life. In a similar vein, Amartya Sen writes of freedom as the means to achieve economic stability and growth, but also as an end in itself. Accordingly, government has a clear role in the provision of such public goods as universal education, health, unemployment insurance, disabilities insurance and retirement income.
Social-democratic governments face the continuing challenge of harnessing the power of the market to increase innovation, investment and productivity growth — while combining this with an effective regulatory framework which manages risk, corrects market failures, funds and provides public goods, and pursues social equity. Hawke and Keating pursued an ambitious and unapologetic program of economic modernisation.
Their reforms internationalised the Australian economy, removed protectionist barriers and opened it up to greater competition. They were able dramatically to improve the productivity of the Australian private economy, while simultaneously expanding the role of the state in the provision of equity-enhancing public services in health and education. In the current crisis, social democrats therefore have the great advantage of a consistent position on the central role of the state — in contrast to neo-liberals, who now find themselves tied in ideological knots, in being forced to rely on the state they fundamentally despise to save financial markets from collapse.
This enables social-democratic governments to undertake such current practical tasks as credit-market regulation, intervention, and demand-side stimulus in the economy. The uncomfortable truth for neo-liberals is that they have not been able to turn to non-state actors or non-state mechanisms to defray risk and restore confidence, rebuild balance sheets and unlock global capital flows.
This is only possible through the agency of the state. In the early stages of the global financial collapse, the centrality of the state was reaffirmed by governments of both the classical Left and Right as they acted to guarantee the integrity of the banking system. The state thought that this would bring a restoration in the banking system only with the small set back of low or no growth. But this was not the case. At this point of time banks were more concerned about bringing stability rather than providing credit.
The central bank then opted to lower the Libor rate interbank lending rate in a hope to overcome the problem of credit availability. But at the year end it was declining. This created a situation where the Libor rate were falling due to increased liquidity but as per the then existing scenario there was not much of inter bank lending.
This meant that the central bank had become more than the lenders of last resort, they were actually the sole lenders. The financial banking crisis developed from August through to July and then exploded into the global real economy: This is a combination of a demand crisis, brought on by a credit crisis linked with a liquidity and solvency crisis in the financial sector related to a housing slump in the US, UK and several other major economies.
It was controversial as people believed that the culprits were being bailed out while the common man would be left to suffer. On the other hand in Europe, major financial institutions failed while few other needed bailouts by the government.
Starting with Britain, a number of nations decided to nationalize some failing banks to try and restore confidence. This in itself shows how serious the issue of recession as the US initially was never in favour of helping the troubled banks as they always believed in free market ideologies.
In Iceland, where the economy was very dependent on the finance sector, economic problems had hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy.
In the end, public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell. The impact on the banks in European countries was not very different compared to the banks in the US.
Many institutions had to refinance there balance sheets very quarter. During market uncertainties banks were reluctant to finance other institutions and this problem led to the economic crisis become a global phenomenon. Britain's economy in the third quarter , quashes hopes that the downturn was ending and instead marking the longest recession on record.
The Office for National Statistics said British gross domestic product fell by 0. UK may be the only major economy to have contracted in the third quarter. In the UK, the jobless rate is expected to rise from 7. So a lot has to be done on the Governments part to tackle the issue.
Governments have a key role to play in providing a stable economic environment in which people and businesses can plan for the future, and growth can prosper. ACCA has played a full part, regarding the causes of the crisis, including the roles of global macro-economic imbalances and financial innovation, failures in regulation, supervision, and corporate governance.
This time ACCA has come out with the steps that the government should follow so that the UK does not fall in such a crisis again. The first step that they want to take is to separate retail - or at the very least depositors - from other forms of banking will have taken place.
This will ensure that the banks return in Private sector in a profitable way and all the ethics and risk training are well dealt with. They suggest that the government should build an environment where the credit cards can be rejected for the piggy banks; thereby building the savings culture. The other important thing is the formulation of tax policies which is often politicized; leaving the country with only short termist approach.
They also suggest that the Small and Medium sized enterprises should be elevated to Cabinet level and continuity in small business policy will be assured.
The 'Think Small First' principle will not be considered as an exception but as a norm. As the global recession has demonstrated, the financial problems of a globalized world are too big to be tackled by individual countries. The G20 offers a framework for co-ordinated action. And therefore, they suggest that the current rotating secretariat should be replaced by a new and permanent one so that in situations like these action can be taken at the earliest.
Global Financial Crisis Essay Words | 9 Pages The Global Financial Crisis that occurred in and crippled every major economy was not an accident; it was caused by an unregulated and uncontrolled financial industry.
The essay will first place the possible causes that led to the downturn in the financial position of the various economies across the world and finally it will talk about the methods that UK government can adopt to prevent itself from the hazards of next financial crisis.
Essays. Kevin Rudd. The global financial crisis As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Neo-liberalism. The Global Financial Crisis: Causes, Remedies and Discourses The Global Financial Crisis of is widely considered to be second in severity to only the Great Depression of the s.
The taxation policies under the Global Financial Crisis in UK Outline of essay Introduction Since the beginning of , because of the wake of the financial crisis, the global economy has been suffering the severe damage. In October , the WORLD ECONOMIC OUTLOOK published by the International Monetary Fund (IMF) illustrated that suffering the financial crisis, the world economy was. Global solutions for the crisis Our essay about global financial crisis will contain the same parts. Each part will present current information about the topic stated in the subtitle. Outline of global financial crisis Financial crisis which.