Free Market Economy and Financial Crisis - Essay Example

The companies had come to this point of crisis because free market had allowed them to make investments due to which the institutions were posed to risks. Millions of people in America lost their jobs and had their savings bushed. A number of factors have been blamed for this crisis but economists believe that free market is the very basic factor amongst all. Nobel laureate Joseph Stiglitz wrote in his book Freefall that market fundamentalists and deregulators are responsible for the mess. The situation showed that free-market economists failed and market fundamentalists were responsible for the economic crunch (Sorman 2010).

The economy of United States of America witnessed only a few minor recessions each for a short period of time. Those recessions did not stir the economy enough to cause economists to develop a well descriptive recession model. With no major recessions over a long time, the economists tend to believe that the crisis may not happen. The model derived by free market economists was running a healthy economy from 80s to 2008 making economists believe that the model may not turn the situation upside down (Sorman 2010).

The free market economists argue that it is the recession that prompted the financial crisis and not the other way around. Economists believe that recession began in 2007 when consumer spending decreased, overdue borrowing increased and lack of interest of homeowners in their mortgaged houses increased. They claim that the failure of financial derivatives were not the cause of financial turmoil as they were helping in the stabilization of the economy. Economists assume that due to a sudden economic downfall government faced pressure from political and non political forces to take immediate steps.

This led to government spending and its intervention in the scenario which seemed quite logical at that time. The situation worsened with new public debts and regulations which stumbled upon the recovery of the economy (Sorman 2010; Bordo et al 2010). The economy could be recoiled in a quicker way if government had allowed enterprises to survive on their own by dealing with the crisis with an astute strategic approach. It is also believed that the financial turmoil was brought about by the recession but the initial slump was the result of energy cost as well.

The US expenditure of energy as expressed in percentage of total spending had droppedfrom 8 to 5 percent between 1979 and 2004. The price of gasoline had hit $4 per gallon by June 2008, representing a sharp shift in energy share of total spending back to 7 per cent. The shift was due to the increased demand from evolving economies like China and India which soared up the prices. The price grabbed attention as the spending pattern showing a considerable upward movement was an indication of disruption.

The unit sales of light truck curtailed by 23 per cent in the second quarter of 2008 in comparison to the preceding year’s 2nd quarter.The auto manufacturing industry cut over 125,000 jobs during the same period. The energy prices affected transportation and hence the housing sector as the houses in the suburban region lost their value and attraction. Failure of the mortgage market came up as another blow in 2007, prior to the financial cri