How to Respond to Global Financial Crisis - Article Example

HOW TO RESPOND TO GLOBAL FINACIAL CRISIS al Affiliation) The Global Financial Crisis would be considered as the most significant or worst crisis ever occurred since the Great Depression of 1930s (Nanto 2009, p.4). It affected the capitalism of the American and the world at large where the lives of people around the globe could be wreaked. The pundits declared crisis over the world economy as people lost jobs, houses and pension savings due to global credit crunch. The effect of this global financial crisis would be experienced by different economic commissions in the world. These includes in Africa, United States, Europe, Caribbean and Latin America as well as Asia and regions around the Pacific (Nanto 2009, p.11). The classical economic school of thought could be based on the factors of production which include capital, labor and land that contribute to national wealth. According to this school of thought responding to global financial crisis would entails emphasis on the production of income by individuals in order to raise the global economic market (Berber 2010, p.10). The school of thought regards economy as a self sustaining market system that would automatically readjust itself. The Marxist economic school of thought regards capitalism as economic development that would be developed through evolutionary phases. This school of thought was introduced by Karl Marx in 19th century as a challenge to the classical theory. It entails that all production resulting to the global market economy belongs to labor since workers would be responsible for all the produce within a society (Berber 2010, p.13). According to this school of thought capitalist, who would be the owner of machines and factories, exploits workers and deny them fair salary from their produce. This results to unemployment which would be a core element in causing the financial crisis (Berber 2010, p.15). The neoclassical school of thought comprises of various idea from the economic theory. It employs scientific method with the assumption and attempts to define principles and general rules about the behavior of consumers and firms. According to this school of thought, response to global financial crises would entail maximizing by the firms as well as a utility to form the basis of supply and demand theory (Berber 2010, p.19). This economic theory also takes into consideration the marginal utility and marginal cost in solving issues of the global market systems. The crisis of the world economy according to the article on Global Financial Crisis resulted in the weakening of the most venerable world financial institutions, declining of stock markets, the capital markets and international money became frozen. At this time, economic growth halted, and companies had no other choice than to lay off workers. This resulted to the increase of the rate of unemployment where some of the mortgages would be foreclosed (Nanto 2009, p.12). The commentators had to consider the possibility of protracted economic downturn which was a threat to the baseline of the capitalist order. The establishment of Global financial architecture, according to the article Financial Regulation after the Crisis, was to provide an institution that acted as the lender of the last resort for other financial institutions especially in time of crisis. The debate for its inception would be tabled at the international policy agenda. The state governments together with their central banks propose that the financial architectures should be linked and integrated with the national system. This would be to provide international financial architecture that would be sustainable (Bustillo 2009, p.23). The article also proposes the idea of Tobin tax that would be established by the Financial Stability Board as a response to the global financial crisis and also to serve as a framework for financial regulation. Application of the tax model would be an indication of regulatory havens that would offer lax for financial regulation. This process would be slow in addressing financial crisis but the mechanisms employed would ensure that ignorance of financial regulation would be prevented (Bustillo 2009, p.32). The avoidance usually occurred through the use of offshore transaction. The idea of small tax placed on the financial transaction was for a long time resisted as well as advocated. This idea, also known as the Tobin tax could effective if implemented as it ensures that all the exchange rates would reflect the features of long-term capitals and trade rather than the components of financial markets. The effectiveness of the Tobin tax could be improved by considering including the domestic transactions in final financial transactions (Savona 2011, p.25). This would encourage integration of international financial transactions with domestic transactions such as revenue. In this case, national governments would collect and retain revenues which could be used in financing global projects such as the international development goals. The problem of offshore transaction could be addressed through the imposition of punitive tax. The noncompliant jurisdiction would be entitled to a rate of ten percent of a penalty to eliminate them from the global financial markets (Savona 2011, p.28). The article on Financial Regulation after the Crisis also talks about narrow banking. It entails the postcrisis financial regulation with a number of institutions that would be clearly defined. The institutions may be insurance companies of the banks (Savona 2011, p.29). The financial institutions should have financial instruments, which should be thoroughly tested. This would provide the pubic guarantee for solvency and the client where nationalization would be considered as a last resort option. (Shiller 2008, p.13). The narrow banking system would require employing effective measures for it to become effective in the financial sector. Some of these measures include a prohibition of unregulated financial products, for example, hedge fund and shared investments, prohibition of linkages between the protected and the unprotected institution (Shiller 2008, p.18). The other measure would include limitations to moderate levels where the banks offer credits to the unregulated financial businesses. This would ensure that the solvency of regulated financial system would not be threatened by large scale failure of unprotected financial institutions (Savona 2011, p.37). The comparison of the various articles discussed would all be regarded as objected toward achieving stabilization of international capital flow and the financial markets. The articles propose the establishment of regional commission that would act as action centers in addressing financial problems encountered to their regional areas. Some of the key actions performed by the regional commission may entail promotion of joint debate at the international community on financial crisis (Bustillo 2009, p.13). Examples of these regional commissions include African Union Commission which operates in Africa and the Biennial Commission in Europe. References Barber, W. J. 2010, A history of economic thought, Penguin, Hammondsworth. Bustillo, I., & Velloso, H. 2009, The global financial crisis: what happened and whats next, United Nations, ECLAC, Washington, D.C. Nanto, D. K. 2009, The Global Financial and Economic Crisis: Analysis and Policy Implications, Defense Technical Information Center, Ft. Belvoir. Savona, P., Kirton, J. J., & Oldani, C. 2011, Global financial crisis: global impact and solutions, Ashgate, Farnham, Surrey. Shiller, R. J. 2008, The subprime solution: how todays global financial crisis happened and what to do about it, Princeton University Press, Princeton, N.J. Read More