The Causes of Global Financial Crisis - Example

Student Name: Tutor: Title: Economic Assignment 2 Course: Economic Assignment 2 Introduction Chapter one of Henry Hazlitt’s “Economics in One Lesson” looks at the fallacies that people use in addressing problems without looking at the secondary consequences of what the policies formulated. People only look at the immediate consequence of a policy ignoring the long run impact of the act especially to other groups of people who have interest in the matter (Hazlitt, 2012). Although a policy formulated may benefit the entire society, there will always be an interest group that will benefit more than the others. Precaution has to be taken to look at all the possible consequences of a policy. There are many forms of indulgences that are very appealing but disastrous in the end. In the current world, there are many issues that echo the sentiments expressed by Henry in the first chapter. Man has always to envision the bigger picture of consequences prior to implementing any policy. One interest group should not lobby for something that may be disastrous to other interest groups. Discussion In the recent times, the causes of Global financial crisis points to the vital lessons that Hazlitt has expressed in the first chapter on his book. The events that precipitated to the famous global financial crisis were unprecedented and the triggers could not ascertain that the almost the entire world from the poor to the rich will be affected. Whatever had began simply in the real estate in the United States, spread to other parts of the world leading to a global recession. The European Union was hardest hit as many of its members like Spain, Turkey, Poland, and currently Cyprus, experienced some of their worst financial problems occasion by credit crisis. Following the financial collapse in the USA that commenced in 1929, it was universally believed that began in 1929, it was almost agreed universally that unregulated financial markets are inherently unstable, subject to manipulation and fraud by insiders, and have the capacity of triggering deep economic crises and social and political unrest. No one could predict that almost similar situation would occur in 2007 beginning from the real estate market in the United States. This is considered as the worst economic crisis since the infamous Great Depression. The Global Financial Crisis begun in 2007 with the credit crunch (Crotty, 2009). US investors lost confidence in the value of sub-prime mortgages leading to liquidity crisis. The US Federal Bank injected a huge amount of capital in the financial markets. The crisis worsened by September 2007 as stock market in the world crashed and turned to be highly volatile. Confidence of consumers hit rock bottom as everyone saved anything he had for fear of what could develop in future. Risky mortgages were packaged together with more traditionally secure mortgages and sold to other banks and corporate investors as secure products of investment. This packaging mortgage masked the underlying real risks that were linked with such products. Bankers are entirely to blame for risk lending in their greed to reap interest from home owners. This referred to as predatory lending where unscrupulous lenders enter into unsound and unsafe secured loans for inappropriate purposes. Bankers cannot be excused. Many bankers were motivated by what other people are motivated within the market economy. They took enormous gamble by using money belonging to other investors in the belief that they could largely enrich themselves in the process. Many experts have pointed to the collapse of housing in United States as the common trigger of the global financial crisis. The real estate market in the United States suffered when many home owners who had taken out sub-prime loans were unable to meet mortgage repayments. The value of homes plummeted and the borrowers found themselves having negative equity. There were a huge number of borrowers defaulting on loans and banks were faced with a situation whereby the repossessed land and house was worth less in the current market that what had been originally borrowed. Many banks which were affected began to collapse. Some companies like Lehman Brothers in the United States collapsed. Governments came in to try and rescue financial institutions with bail up plans. The United States government set aside $700bilion in the rescue plan but it was not passed by Congress. European countries were adversely affected as the stock markets plummeted (Gelinas, 2009). Poland, Spain, Turkey, and Cyprus have all depended on the European Union bailout plan to rescue their financial institutions. Cyprus is even considering pulling out of the European Union. Conclusion The case of the global financial crisis demonstrates clearly the lesson that Henry Hazlitt discusses in chapter one of his book. There are groups of people out to look after their own interest without thinking about the consequences to third parties (Hazlitt, 2012). At first the issue involved the home owners and the bankers who lend them money to buy the houses. The clients wanted to own a house they could call home and that is why they took the mortgage. The bankers were attracted to the high interest rates that they were charging but they forgot to verify the documentation on the repayment of the loan. Many companies stalked in their performance and many employees lost their jobs (Ferguson, 2012). Huge losses were incurred and any company had to reduce its spending particularly on the workforce. The issue that had begun in the real estate market affected the financial markets leading to loss of confidence by the consumers. Government debts in European countries are enormous as they borrow to rescue financial institutions from collapsing. The precaution that Hazlitt proposes concerning consequences of actions was not adhered to and risky lending brought about a credit crunch. Investors were unwilling to spend their money due to the poor performance of stocks in the stock market. Many bailout plans by Central Banks across the world did not go well. There is a great lesson to learn in any set up where different groups of interests exist. The greed of one interest group can affect the welfare of the entire society as was the case of the global financial market. References Crotty, J., 2009, Profound structural flaws in the U.S. financial system helped cause the current global financial crisis, Political and Economic Weekly, 44 (13): 127-35. Ferguson, C.H., 2012, Predator Nation: Corporate criminals, political corruption and hijacking of America, Crown Business, New York, p.104. Gelinas, N., 2009, After the Fall: Saving Capitalism from Wall Street and Washington. New York: Encounter. p. 250 Hazlitt, H., 2012, Economics in One Lesson, retrieved from: http://www.fee.org/files/doclib/20121116_EconomicsInOneLesson.pdf on 4th May, 2013. Read More