Why is the Global Financial System Prone to Repeated Crises - Case Study Example

Why is the global financial system prone to repeated crises? Does history repeat itself? The age old adage may ring true, especially when it comes to an analysis of the Great Depression and the parallels with the economic crisis of today. Financial instability over the past hundred years is a result of the universal entrenchment of capitalism and neoliberal inspired growth. Arguing that the global entrenchment of neoliberal economic activity is responsible for the economic crises afflicting the world, this essay will begin with an overview of the precursors to the global spread of neoliberalism and will follow with an analysis John Kenneth Galbraith’s work, The Great Crash, 1929. Arguing that the global system of economic affairs is prone to repeated crises due to the nature of neoliberalism and capitalist forms of economic development throughout the globe, the following will explore the recent global economic crisis and compare it with the Great Depression of 1929. Accordingly, the economic crisis of today shares many parallels with economic crisis eighty years ago and this essay concludes with an overview of the issues analyzed in this thorough and complete essay (Harvey 33-27). The Global Spread of Neoliberalism Planned capitalism, expressed through governmental economic intervention and the Bretton Woods Agreements of 1944, exploded during the 1970s. Bretton Woods, which established both the World Bank and the IMF, symbolized the supremacy of the United States in setting international monetary policy. Hobsbawm argues that these two international institutions were “de facto subordinated to US policy” (274). When the United States pulled out of the Bretton Woods monetary system in 1971 and allowed its currency to float in international markets, it caused a chain reaction with unexpected global ramifications. Currencies were devalued across the board and the United States, as well as its Western allies, were ill equipped to deal with the resulting oil embargo implemented by OPEC two years later. When OPEC, the Organization of the Petroleum Exporting Countries, announced that it would no longer be shipping oil to countries which had supported Israel in its war with Egypt and Syria in 1973, it triggered an international calamity known as the Oil Crisis of 1973. The Yom Kippur War – as the war between Israel and the joint forces of Egypt and Syria in 1973 is now known – inadvertently led to a global economic crisis as OPEC members and Arab oil producing states used their economic leverage to embargo the West. Oil shipments to the Western world stopped and this was aimed at causing specific damage to the economies of the United States and its allies. Petrodollars, meaning money earned by Middle Eastern countries through the sale of oil to the West then re-invested in those same countries, were used to extract serious political leverage and made clear just how dependent the West has become on producers of oil. Describing it as the start of the “Crisis Decades”, 1973 represented an important turning point in global economic relations. The Crisis Decades were particularly harmful for members of the Third World. In fact, “since 1970 almost all of the countries in the region had plunged deeply into debt” (Hobsbawm 422). Deep debt – all of sub-Saharan Africa reportedly had debt in 1980 which exceeded its annual GDP – ensured that these countries remained at the bottom of the world capitalist economic system and remained there in semi-permanency. Foreign direct investment ceased to exist altogether and debt servicing, an average of 9.6% in 1982, kept these developing countries in servitude. According to Hobsbawm, “the main effect of the Crisis Decades was thus to widen the gap between rich and poor countries” (422-424). The First global Oil Crisis occurred in 1973 when the Arab countries of OPEC established OAPEC, the Organization of Arab Petroleum Exporting Countries, an organization which played an important role in the oil shocks of the early 1970s. As a result of Yom Kippur War in 1973, the first Oil Crisis began with an oil embargo, explicitly stated by OPEC and the dual countries of Syria and Egypt. Announcing the oil embargo in early October 1973, the Arab members of OPEC, along with Egypt and Syria announced their oil embargo in response to what it perceived to be flagrant American support for Israel during what became known as the Yom Kippur War. This was in response to what many in the Arab world perceived to the unrelenting support of the United States toward the state of Israel. These sentiments were exacerbated by events such as Operation Nickel Grass, in which the United States blatantly rearmed Israel during the Yom Kippur War. Although the United States was the initial target of the embargo its scope was later defined to include any county which supported Israel during the War. Using their economic leverage and the ability to wreak havoc on international financial markets, the Arab countries of OPEC used this multilateral organization for political purposes. Seeking to exert pressure on much of the West for its support of Israel during the recent War, but also dating back to 1948 and the establishment of a modern Jewish state in the Middle East, the Arab countries of the OPAC sought to punish the supporters of Israel (Vietor 1984). Africa, indebted since the 1970s and lacking sustainable investment infrastructure, was withering away (Hobsbawm 422). Following the collapse of the Cold War, Africa also lost geopolitical significance and the result has been economic retardation, political stagnation and continued population growth. Longtime US Cold War allies, such as the former Zaire’s Mobutu Sese Seko, were early casualties of the collapse of the Soviet Union but the overthrow of despots in Africa has not been matched with any serious economic growth. Global indifference to genocide in Rwanda and the current crisis in Rwanda emphatically demonstrate that in the post-Cold War world Africa has lost its strategic political value. A global financial system which is based upon extraction and the division of the planet between poor countries and rich countries has created inherent instability throughout global economic markets. Even the developed West is not immune to such crises. We now turn to an exploration of John Kenneth Galbraith’s impressive work, The Great Crash, 1929 to explain how the current global economic crisis shares parallels with the Great Depression. Analyzing The Great Crash Written more than a half century ago, The Great Crash explores which factors lead to the Great Depression in 1929 and seeks to provide a comprehensive analysis of the precursors to the worst economic crisis in American history. The terms “Great Depression” and “Great Crash” will be used synonymously throughout this essay since they refer simultaneously to the same event: the economic collapse of 1929 and the ensuing economic and social crises for much of the Western developed world. Although exploring an event which occurred more than eighty years ago and having been written in 1954, John Kenneth Galbraith’s The Great Crash by remains just as relevant today as it did more than a half century ago when it was first published. Seeking to explore the lessons of John Kenneth Galbraith’s The Great Crash today, the following will attempt to understand the lessons put forth by this important tome with respect to future financial strategy. What strategies articulated by this book are relevant today? What are the advantages as well as the disadvantages of the strategies put forth in The Great Crash, 1929? What can we learn from this event and apply to today’s context? These questions, and many more, will be analyzed with respect to the lessons for the future and strategic aims provided by The Great Crash, 1929. The United States, the UK and much of the Western world remain in one of the worst financial crises since the Great Crash of 1929. In the wake of the Cold War, the United States of America emerged as the dominant global economic and military power and ushered in a new world order of capitalist-inspired economic growth and prosperity. Virtually uncontested at the helm of the world’s strongest economy, the United States has recently witnessed ominous signs of an impending economic meltdown. A variety of factors precipitated the current economic crisis, an event which draws parallels with the Great Depression eighty years ago. Some of the precursors to the current financial crisis include the implosion of the American sub-prime lending market, a mortgage market in crisis and an induced credit crunch with global ramifications. Banks for foreclosing, people are losing their homes and the international economic situation is precarious as global lenders are closing their doors and filing for bankruptcy. The correlations with this financial crisis to the Great Crash of 1929 are so similar that it is eerie. Attempting to understand the reasons for the Great Depression, John Kenneth Galbraith analyzed the economic situation in the United States leading up to the Crash and outlined the preconditions for the crisis. Seeing the rise in speculation as perhaps the most important precondition for the Great Crash of 1929, Galbraith emphatically argues that an economy based upon speculation, such as through stocks, bonds, currencies, real estate, derivatives, and commodities is inherently unstable from a macroeconomic perspective and prone to a burst in the speculative bubble. Optimism is a characteristic of the speculative investor and Galbraith argues that an economic system with a speculative basis is liable to crash and subsequently a shaky basis for an economy. In addition to the risks caused by a speculative market, income inequality, so pervasive in the United States during the period further contributed to an unstable economy and this income distribution imbalance exacerbates instability. Accordingly, when “5 per cent of the population with the highest incomes in that year [1929] received approximately one third of all personal income", an economic crisis is sure to be on the horizon. Additional antecedents to the collapse include a weak banking structure, imbalance in foreign trade, weak economic intelligence and problems in the structure of US corporations. He argued that as economic actors, corporations in America were structured to contribute to the deflationary cycle as opposed to opposing it (Galbraith 102-206). Concluding Remarks Globalisation remains inherently tied to the forces of capitalism and neoliberalism and this is why the international economic system remains inherently unstable. This essay has traced the antecedents to the current wave of globalisation with an emphasis on key global events: the social revolution of the 1960s, the economic crises of the 1970s, neo-liberalism in the 1980s, followed by Communist collapse and the emergence of authoritarian capitalism in East Asia. The strategies outlined by Galbraith to limit the eventuality of a future economic crash are varied and provide lessons for the future to ensure that a crisis like the Crash of 1929 never occurs again. Lessons for the future include correcting the imbalance of foreign trade, restructuring the banking system to safeguard against inherent instability within the markets, the restructuring of US corporations to make them less predatory, proper income redistribution within the United States and a lessening of the dependence on speculation for the market to function. The Great Crash, 1929 is incredibly timely in light of the current global economic meltdown and although Galbraith provided strategic economic aims to ensure that an event like the Great Depression never occurs again, it is obvious that his forewarnings more than half a century ago have gone unheeded. Importantly, strategic economic aims provided by The Great Crash of 1929 include a lessening of the dependence on speculation as the backbone of the economy and further redistribution of wealth to ensure that a total reorientation of the engines of production takes place. Accordingly, when persistent income inequality is a feature of a domestic economy, the system itself will remain untenable and prone to implosion. Remembering the mistakes of the past is also an important strategic aim advanced by Galbraith and an understanding of what happened in 1929 is, according to this author, the best way to ensure that an event similar in magnitude to the Great Crash of 1929 never occurs again. Works Cited Galbraith, J.K. The Great Crash, 1929. New York: Penguin Books, 1992. Harvey, D. A Brief History of Neoliberalism. Oxford University Press, London., 2007. Hobsbawm, Eric. Age of Extremes: The Short History of the Twentieth Century: 1914-1991. London: Abacus, 1994. Vietor, R.H.K. Energy Policy in America Since 1945: A Study of Business-Government Relations. Cambridge University Press, Cambridge, 1984. Wade, Robert. The First-World Debt Crisis of 2007–2010 in Global Perspective. Last Accessed August 25, 2009 http://www.challengemagazine.com/extra/023_054.pdf Read More