The Global Financial Crisis - Report Example

Why the Global Financial Crisis Proves that Capitalism is a Fundamentally Flawed System Introduction The global financial crisis (GFC) occurred between 2007 and 2008 and resulted into a massive recession that affected the entire global financial system. Its background, nature of occurrence and effects on different sectors of the economy in different regions of the world was so widespread and intense that many regions are still struggling to overcome the effects. In this essay, it is argued that occurrence of the GFC is enough evidence to prove that the global capitalist system, on which the global financial system is based, is fundamentally flawed. To prove this point, three key reasons are presented in the essay as follows. For the first reason, it is argued that the history of the global capitalist system has been characterised by frequent occurrences of different types of crises. For the second reason, it is argued that the factors that led to the emergence of the GFC are incidentally the key characteristics that define the global capitalist system. Lastly, it is argued that the global capitalist system has been progressively shifting from a position of relative stability to one of complete instability over time. Reasons why the GFC proves that the global capitalist system is fundamentally flawed There are several reasons that prove that the global capitalist system is a fundamentally flawed system and that the GFC is enough evidence for this. To begin with, the global financial system has been characterised by the occurrence of a number of crises. The crises, which have occurred in different regions of the world and have varied in terms of their strength and extent of effects, have characterised the history of the global financial system since its development in the early times. The occurrence of the GFC can be seen within the context of the history of the capitalism and the global economy that has been characterised by the occurrence of different types of financial crises over time. According to Bresser-Pereira (2010, p. 4), there are several fundamental things that have happened in the global economy that have worked not only to prove the inherent instability of the system but also to strengthen the observation that the history of the global economy has been one replete with different types of crises. Therefore, whereas events such as the Great Depression of the 1930s and the Second World War affected the nature of the global capitalist system, changes in the regulatory and policy environment led to a shift in the global capitalist system to one that was characterised by financial instability, high rates of interest and a propensity to collapse. The idea that the history of the global economy has been characterised by a regular occurrence of different types of crises is not a new one. Tapia (2013, p. 5) observes that between the 1960s and the current time, the overall economic output of the world, measured in terms of the world gross domestic product, has experienced five distinctive declines which have occurred at different times and have represented five major crises that have affected the entire global economic system. It is observed that systemic declines in the level of output in the global economy occurred in the following periods: during the mid 1970s, during the early 1980s, during the early 1990s, between 2000 and 2001 and finally, between 2008 and 2009 (Tapia 2013, p. 6). Such periods, during which the level of output of the global economy declined, were characterised by declines in the level of investment as well as capital formation and have come to be described as periods in which the world economy experienced large-scale economic crises or financial downturns. In evaluating the place of the GFC in the history of global capitalist system, Schularick (2010, p. 8) states that the crises that have affected the global financial system for well over the past 140 years have occurred in a highly distinctive pattern. Whereas the occurrence of such crises was a highly rare phenomenon during the period preceding the Second World War, their frequency, extent of effect and intensity increased considerably during the period following the Second World War and at the beginning of the 21st century (Schularick 2010, p. 9). It can be seen that the global capitalist system has been defined by the occurrence of different types of crises over time. In acknowledging this fact, Harvey (2011, p. 11) states that crises serve a very important purpose in shaping the course of evolution of the global capitalist system. It is observed that the occurrence of different types of crises, which vary in terms of extent of spread and intensity of effects, works to correct the irrationalities of the entire capitalist system and as a result, helps in the adoption of new dimensions that help to define new approaches that are used in the system (Harvey 2011, p. 12). Therefore, since crises (such as the GFC) represent an inherent degree of instability within a system regardless of the purpose that they serve in it and since they have been occurring throughout the history of capitalism, it can be argued that the global capitalist system is inherently unstable and prone to such events. The second reason as to why it can be argued that the global capitalist system is inherently unstable and that the GFC that occurred in 2007-2008 was proof for this arises from the relationship between what actually triggered the crisis and the overall characteristics of the global financial system. Essentially, the crisis was triggered by a number of factors that occurred prior to the period. Incidentally, the very factors that caused the crisis formed the key characteristics that defined the international financial system in particular and the global capitalist system in general. Also, it is important to point out that the factors which contributed to the occurrence of the crisis occurred over a considerable period of time. There was a fundamental change in the nature of the international financial system following the Great Depression of the 1930s and further following the collapse of the Bretton Woods institutions in the 1970s (Seabrook 2012, p. 364). The Great Depression led to the development and adoption of a wide range of measures that sought to effectively control the manner in which banking and other financial institutions conducted their operations. It is the same policy environment that was prevalent immediately before the collapse of the Bretton Woods institutions in the 1970s (Seabrook 2012, p. 364). However, as Wray (2009, p. 57) states, the international financial system at the time of the crisis was characterised by the following factors: less regulation of the manner in which institutions carry out their activities, increasing privatisation of organisations, consolidation of major organisations operating in the global financial system, and an increasing reliance on market forces for the regulation of the system (Wray 2009, p. 67). It is the development of such factors, which resulted from changes that have been instituted into the system over time, that has come to define the global financial system in particular and the global capitalist system in general. With respect to the immediate factors that triggered the GFC, Posner (2010, p. 256), states that the international financial system developed policies that encouraged the demand for mortgage-backed securities in the housing market. This approach created the right conditions for risky lending that led to a sudden rise in speculation in the housing market. The burst in the market that followed this situation was the trigger that set in motion events that defined the GFC. These observations are echoed by Caprio, Jr and College (2009, p. 14) who observe that the securitisation of mortgages, coupled with failure in the regulatory environment, played a key role in precipitating the crisis. Furthermore, Bresser-Pereira (2010, p. 14) observes that the global financial crisis was caused by a number of different factors, key among them being the normal cycle in the global capitalist system in which a period of accelerated rate of creation of capital often precedes a burst in the form of a financial crisis. Furthermore, the highly deregulated nature of the global financial system has been identified as another key factor that contributed to the emergence of the crisis (Sherman 2009, p. 13). As a result of globalisation, developed economies have experienced increased inflows of capital from newly emerging economies and this caused disruptions in the behaviour of the interest rates over the long-term (Schularick 2010, p. 5). Since the highly integrated nature of the global economy can be seen as a result of the effect of the interaction between globalisation and nationhood in the way international issues are handled (Croucher 2003, p. 2), it can be argued that the highly integrated system, which is a key characteristic of the global economy, contributed to the emergence and development of the crisis. The third reason as to why the global capitalist system is inherently unstable as proven by the occurrence of the GFC regards the general trend in the global capitalist system that has been observed over the course of time. Generally, the inherent instability of the global capitalist system as proven by the occurrence of the GFC can be attributed to the general trend of the global capitalist system. Generally, it has been observed that apart from being inherently unstable, the system has been moving from a period in which the availability of different types of policy measures ensured its relative stability to one in which major changes in the policy environment resulted into its general instability (Wray 2009, p. 56). Changes in the global financial system have been taking place in several important ways. For instance, there has been a progressive rise in the degree to which home mortgages have been securitised in the global economy since the beginning of the 1980s (Wray 2009, p. 58). Through securitisation, mortgage products were changed into international products whose risk was spread over a large pool of investors. As much as this financial innovation represented deep changes in the global financial system, it represented fundamental changes that triggered the onset of the crisis. Furthermore, the global economy has been progressively changing from a relatively stable system that was characterised by the traditional banking model to one in which dependence on monetarism and the market in general took precedence (Wray 2009, p. 56). Since financial markets are not regulated by the same laws that are used for traditional banking institutions, this has increased the likelihood of occurrence of crises as was epitomised in the occurrence of the GFC. The last way in which the global capitalist system has been changing from relative stability to instability has been seen in the form of an increase in the importance of the neoliberal economic thinking in the management of the affairs of the global economic system (Bresser-Pereira 2010, p. 47). Initially, the global capitalist system was built on the theory of liberal economics which led to the establishment of international institutions that sought to ensure stability of the global economy after the Second World War (Kelton 2012, p. 352). However, the changing nature of the international economic environment has led to the emergence of completely new theories that propose the exact opposite of what worked to ensure that the system remained stable during the early times. Conclusion Therefore, it can be concluded that the global capitalist system is inherently flawed and that the occurrence of the GFC of 2007-2008 only worked to prove this point. Three reasons are in support of this position. In the first place, it can be seen that throughout its history, the global financial system, which is built on the global capitalist system, has been characterised by the occurrence of financial and economic crises. Although the intensity and extent of spread of the crises has varied at different times, one thing that has become apparent is that the history of the global capitalist system has been synonymous with that of financial and economic crises. Therefore, frequent occurrences of financial crises since early times are evidence of the vulnerability and instability of the global capitalist system. Secondly, the factors that contributed to the emergence of the crisis are the key blocks upon which the global capitalist system is built. Therefore, the policies that have come to define the global financial system have made the system inherently unstable. This was confirmed by the occurrence of the GFC. Lastly, throughout its history, the global economic system has been slowly changing from a position of relative stability to one of complete instability. Changes in the policy environment, interaction between institutions in the global financial system and other factors have contributed to the unstable nature of the global capitalist system. References Bresser-Pereira, LC 2010, ‘The global financial crisis, neoclassical economics and the neoliberal years of capitalism’, viewed 31 October 2014, Caprio, Jr, G & College, W 2009, ‘Financial regulation in a changing world: lessons from the recent crisis,’ viewed 1 November 2014, . Croucher, SL 2003, ‘Perpetual imagining: nationhood in a global era,’ International Studies Review, no. 5, pp. 1-24. Harvey, D 2010, The enigma of capital and the crises of capitalism, Oxford University Press, Oxford. Kelton, M 2012, ‘Global Trade,’ in Devetak, R, Burke, A & George, J (eds), An introduction to international relations: Australian perspectives, Melbourne, Cambridge University Press, pp. 348-359. Posner, RA 2010, The crisis of capitalist democracy, Harvard University Press, New York. Seabrook, L 2012, ‘Global finance,’ in Devetak, R, Burke, A & George, J (eds), An introduction to international relations: Australian perspectives, Melbourne, Cambridge University Press, pp. 360-370. Schularick, M 2010, ‘140 Years of financial crises: old dog, new tricks,’ viewed 31 October 2014, . Sherman, M 2009, ‘A short history of financial deregulation in the United States,’ viewed 1 November 2014, . Tapia, JA 2013, ‘From the oil crisis to the great recession: five crises of the world economy,’ viewed 31 October 2014, . Wray, LR 2009, ‘Money manager capitalism and the global financial crisis’, Real-World Economics Review, no. 51, viewed 31 October 2014, . Read More