Does the Credit Crunch Signal the End, or the Beginning, of Globalisation - Term Paper Example

 Does the so-called "Credit Crunch" Signal the End, or the Beginning, of Globalisation? rooted among the emerging economies is nevertheless beneficial to the emerging developing nations. Less stringent economic measures are also been advocated by the Introduction The British premier Gordon Brown has described it as “the first financial crisis of the new global age” (Young, 2009 p.1). This is the financial crisis that has taken the world economy into an adverse decline. The world has plummeted from an initial housing (mortgage) boom collapse in the United States to a devastating credit crunch affecting the financial sector in almost all corners of the globe. The collapse of various international banking institutions, insurance firms, and other companies has led to virtual meltdown of various other sectors. This include unemployment, loss of homes, and consumer power leading to a global recession as governments instigate diverse financial stimulus packages in efforts to revive or resuscitate their depressed economies. Turner (2008), argues that the existing financial downturn indicate a crisis in globalization which undermines the tenets of the free market economic model. Many countries facing enormous economic challenges are considering reverting to protectionist fiscal measures to cushion their domestic firms from the international trade while others in the more stable Asian countries are prospecting expanding their investments to their vulnerable developed countries. The credit crunch crisis has been atributed to overconsumption in the developed countries especially US and Britain using uncontrolled non-collatilised credit which they wantonly overspent. Poorly supervised mortgages were taken by consumers while the financial instutions recklessly lent out funds they didn’t have. This banks were mere speculators in the volatile secondary market rather than relying on savings backed cash to trade with. The financial instrument assiduously accredited with pricking the credit bubble were the flawed financial products known as collateralised debt obligations (CDOs) used by banks to trade toxic debts to other banks that purchased them as valid investments and then lending more to the unfettered borrowers. These CDOs were bought by many leading banks but eventually collapsed bringing down many reputable financial institutions and almost bankrupting some countries like Iceland. In Britain, the borrowers amassed a massive £1.4 trillion pounds debt and in America over 60 percent of homes were repossessed due to high default rates. According to Morris (2008), the credit crunch was caused by a quarter century of unabated excessive investment banking manipulation of hedge funds and private equity which encouraged asset stripping leading in a shadowy banking system (Morris, 2008). One of the effects of the credit crunch has been a gradual rebuff of globalisation. As governments offer financial stimulus packages to the various sectors of their economies, the tendency has been for the taxpayers to demand a more nationalistic approach to guarantee jobs for their citizenry. In the US, the Congress and the new administration has promised to use domestic steel and workers as it embarks on large infrastructure projects aimed at reviving the economy. In France, the government has invoked a domestic jobs clause to secure employment for local citizens in its car industry stimulus package. This is contrary to the European Union guidelines whereby all the EU states citizens are guaranteed free access to markets and jobs in all the member states. In Britain, the energy industry is facing challenges as the oil workers have downed their tools in protest against the ‘invasion’ of Italian and Portuguese workers who they accuse of taking over their jobs. All this negate the advances of globalisation. Among the Asian nations of Middle East, China and India, the global economic crisis has not spared them despite their sound banking foundations. The economies over-reliance on American and European markets for their cheap products has declined in face of reduced consumer spending in these markets. The countries and other developing nations also offer cheap labour as the developed world outsources their manufacturing factories in these inexpensive territories. In China millions of factory workers have been laid off as manufacturing plants reduce their production due to the declining demand for their products in the western and other global markets caused by the global economic crisis. This has forced the countries which were largely reliant on foreign direct investment (FDI) for their growth to shift inwardly in efforts to rejuvenate their domestic industries. International investments have declined sharply as the effects of global financial slowdown reverberate across the planet. Many firms that had a global outlook are now forced to seek domestic consumers to stem their demise. The credit crunch crisis has ruined the reputation of capitalism as the foremost system of growth to world economies. The aftermath of the manipulation of the money markets resulting in plummeting stocks and reduced consumerism have shaken the foundation of the free trade as extolled by capitalism. According to Cooper (2008),“the prevailing laissez-faire, efficient-market orthodoxy cannot explain the historical pattern of economic progress, nor can it explain the emergence of financial crises, the behaviour of asset markets, the necessity of central banking, or the presence of inflation” (Cooper, p157). The domination of western conglomerates in the global markets is now been challenged as they are now viewed with suspicion. Local leaders are therefore calling for more stringent regulatory measures against the foreign investors’ hence discouraging foreign investment and globalisation. Similarly, world financial leaders have called for more rigorous fiscal measures to curb the excess of conglomerates and financial institutions. The recent G20 summit in London of the world leaders of the largest economies propagated for an end to ‘tax havens’ which include London, Zurich, Bahamas and the Cayman Islands. International monetary trade which encouraged globalisation will be affected due to enhanced international trade barriers that will discourage foreign investors. Advantageous free trade zones in the developing countries that have been used to source cheap labour and provide employment to local populations are drying up as firms close down. The credit crunch has therefore challenged the foundations of capitalism that have been manifested in globalisation as the free reign of international financiers has been now been retroactively viewed as disastrous to world economies. Governments are now busy enacting legislation aimed at strictly regulating the sectors thus negating the advancement of international or globalisation trends (Hudson, 2008). The presumed demise of globalisation however provides opportunities for the minimally challenged economies of the Middle East, Russia, Brazil and South Asian countries to purchase equities and other properties in the developed western countries. With reported losses of over $13 trillion dollars in the housing and equity markets, the United States economy is reeling with estimated production decline of over one trillion dollars. The same scenario is replicated in the European and Japanese economies rendering them vulnerable to the more prudent Asian financiers aiming at diversifying their investments abroad. They are buying stock at BOFA, HSBC, Citibank, Barclays, and Santander among others. The Qatar Investment Authority, from the Gulf, invested over £1.7 billion in Barclays, for a 7.7 percent equity share. The Asian countries have amassed huge dollar reserves with China alone accumulating over $1,000 billion enough to fund Britain’s total budget in cash. By 2008, China had over 345,000 millionaires and 108 dollar billionaires coming only second to the United States in that category in a span of 25 years hence providing a resource pool to conquer the developed countries that are deeply inundated in recession (Randall, 2009). Opponents of globalisation have been vocal on the destructive nature of the conglomerates on environment, democracy, and labour exploitation the Asian companies similarly has also totally disregarded this. Chinese and Indian companies lead in unrestrained toxic chemical emissions and other environmental degradation systems in total disregard of the environmental hazards. The countries insatiable search for raw materials to develop their domestic economies has led them to turn a blind eye on human rights abuses within the Third World as China’s Sudan, Congo, and Venezuelan ventures display atypical unfettered capitalist trend. The decline of the western multinationals has therefore only paved way for the new masters of capital to advance the course of globalisation. The conventional conglomerates have however not been totally vanquished but have merged becoming even stronger within their global network. Wall Street fifth biggest bank Bear Stearns was taken over by JP Morgan Chase in a subsidised $240m deal after the latter acquired a $30 billion dollar loan from the central bank. The bank also acquired Washington Mutual, a major mortgage lender, with assets prized at $307bn in September 2008. Another monumental bank Citigroup was injected with $20bn after its shares plunged by over 60 percent in a week in 2008 by the government. In Britain, the Royal Bank of Scotland (RBS), Lloyds TSB and HBOS had a total of £37bn infused into them. Others like insurance giant AIG have similarly been bolstered by the US Federal Reserve injection of $85bn. In the car industry the US government advanced funds to the three main vehicle manufacturers General Motors, Ford and Chrysler (BBC, 2009). Ben Bernanke (2009), the US Federal Reserve Chairman defending this protectionist tendencies stated, "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," (Young, 2009, p. 2). Although some analysts Turner (2008), Sorros (2009), Elliott and Atkinson (2008) have blamed some aspects of globalisation for the advent of the credit crunch, globalisation continues to flourish with tangible benefits to both the international companies and the local economies. Others like the Italian economist Loretta Napoleoni (2008) in a Newsweek interview blamed the credit crisis to rogue economics and globalisation. The lack of regulation has assisted unscrupulous institutions to engage in detrimental practices aided by globalisation to infect the world markets badly (Ehrenfeld, 2008). The emerging ‘reverse’ globalisation Thatcherites, Reaganomics and other conservatives groups who argue that the free markets system always balances out, weeding out the less efficient investors in the process (Gandhi, 2008). However Turner (2008), trashes the concept of the economists worship of GDP growth as a measure of economic development as poverty and inequalities brought about by unfettered globalisation persist. The IMF paints a grim global economic forecast with growth indicators based on the purchasing power parities (PPPs) indicating growth of 0.5 percent and -0.6 percent growth based on the market exchange rates. This global recession has led to some analysts predicting an overhaul of the existing financial map that may eventually spell the end of globalisation (Walker, 2009). The credit crunch has paralysed operations of major economies while devastating many large corporations which has spelled job losses for millions of workers and homelessness for many more. The genesis of the problem has been traced to the toxic sub-prime mortgages traded in the shadowy secondary market emanating from the US and later spreading globally to Europe and other parts of the world. Although globalisation has contributed to the spread of the malaise that has virtually infected the world economic system, the positive effect of international trade require better regulation to curb the incidents of the few rogue leaders of finance that triggered the collapse. Central Banks and other regulatory authorities have been lethargic in enforcing rules to control international trade. The biggest loser has been the consumer who will bear the brunt of the greed of the international financiers. The various Keynesian stimulus packages are necessary to rekindle growth as aptly elucidated by Cooper (2008), “Credit creation is the foundation of the wealth-generation process; it is also the cause of financial instability” (p.3). Globalisation is not therefore likely to end but will further be entrenched among the stronger corporations which have merged and strengthened with funds from their central banks and foreign capital from the emerging economies of Asia and South America. Similarly Asia conglomerates are filling the void left by departing western based companies as the new global powers. References BBC. (2009, April 3). Timeline: Credit crunch to downturn. Retrieved April 23, 2009, from BBC Online: http://www.bbc.co.uk/business/timeline_credi.crunch_downturn.htm Cooper, G. (2008). The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market. London: Harriman House. Ehrenfeld, T. (2008, April 23). Globalization’s Aftershocks. Retrieved April 22, 2009, from Newsweek: http://www.newsweek.com/globalization’s-aftershocks.htm Gandhi, N. (2008, Septmber 18). Credit Crunch or Something Else? Retrieved April 23, 2009, from WordPress.com: http://www.wordPress.com/credit.crunch/diary_globalization_champion.htm Hudson, J. R. (2008, November). The Credit Crunch: Consequences, Globally, Nationally and in the South West. Retrieved April 23, 2009, from University of Bath: http://www.bath.ac.uk/credit_crunch/index.html Morris, C. R. (2008). The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash . Phoenix: Phoenix Audio. Randall, J. (2009, January). Credit Crunch Signals Permanent Shift in Power. Retrieved April 23, 2009, from The Telegraph: http://www.telegraph.co.uk /permanent-shift-in-power.html Treanor, J. (2008, April 7). Toxic shock: how the banking industry created a global crisis. Retrieved April 23, 2009, from Guradian Online: http://www.guardian.co.uk/businnes/creditcrunch.banking.htm Turner, G. (2008). The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis . London: Pluto Press. UK Trade & Investment. (2009). Financing Globalisation. London: Economist Intelligence Unit Ltd. Walker, A. (2009). What is a Global Recession? Retrieved April 23, 2009, from BBC Online: http://www.bbc.co.uk/business/2/hi/ Young, A. (2009, January 16). Worldwide crisis could destroy globalisation. Retrieved April 23, 2009, from Newsquest (Herald and Times): http://www.theherald.co.uk/credit/worldwide-crisis-could-destroy globalisation.php.htm Read More