Financial Crises Not a Bug in the System but a Feature

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Following the global financial crisis the European Union economy suffered a loss on the stock markets - confidence plummeted with most investors liquidating their positions in the region. Since then, financial distress has been transmitted with declining confidence and credit restraint at a very high rate. Home demand and corporate investment were thus seriously affected. The financial crisis is a function of the existing structure, and the transmission and convergence of the various global supply chains is spreading extremely fast following the cross-border transition (European Union 1). The ongoing economic recession is likely to cause long-lasting and adverse impacts on financial performance. The current economic system is characterized by financial distress, and people are likely to be subjected to social hardships of all kinds across the European Union. For instance, flexible arrangements by the government and labor unions to create jobs will contain the high number of jobless individuals only for some time (European Union 1). However, the effect of the high unemployment rate in the region will eventually be observed. Also, there will be downturns in the region’s housing markets thereby affecting the households negatively. It is vital to note that similar economic situations continue to be experienced in Europe and other countries of the world due to cyclical reasons. Therefore, without undertaking far-reaching policy actions to successfully curb the menace, cases of financial distress are likely to be repeatedly felt in the economy. A simple explanation to ever occurring financial distress is where the tax bases tend to shrink permanently while contingent liabilities, which stem from bank rescues materializes.

In the United States, the asset bubbles have never been trusted as a way forward to ensuring stability in the country’s economic policy order. For instance, back in 1987after, the US stock market crashed, the nation’s value went down by about 22 percent and losing approximately 500 points (Peck 105). At the same time, the economic order of operation, neoliberal was still evolving and focused majorly on the value of the financial returns instead of the increases in wages as the primary source of income. A solution would then be found, and this included the flooding of the streets with money to recover the lost ground of the stock market in the US.

The American economy and overall the global economy have since then run on the financial crisis with the occurrence of the global financial crisis, the Asian financial crisis, the Mexican peso crisis, and the “dot-com” or “tech wreck” crisis, among others. The most recent case is that of China where the country’s stock market lost approximately 8.5 percent of its total value in 2015 (Peck 104). To curb the loss, China flooded its markets with money. While one would expect the US government and the Federal Reserve to follow the same suit, the ultimate solution would involve free lending to recover the huge losses in the market.

In addressing the financial crisis as a feature and not a bug in the American experience, it is important to understand how the nation got from the past economic times to the current situation. Like the American recovery, a Chinese slowdown has been evident though in the short-run. Consequently, there has been much anticipation on various movements in the Chinese assets and markets to balance the situation - a scenario that has left monetary policymakers with a lot of difficulties in determining a favorable global economic policy order. A similar situation is that of the Asian crisis back in the 1990s when Greenspan Fed increased the interest rates following the US growth (European Union 14). In response, a big percentage of the investors had no choice but rather shift the money to the US from Asia. While the strategy was a self-reinforcement to the occurrence, the Yellen Federal Reserve has shifted to high-interest rates towards reviving the global markets.

No substantive difference exists between the monetary accommodation involving the financial crisis of 2000-2010s and the fiscal accommodation involving the wage-price instability of 1960-1970s. Just like the financial crisis of the past economic times demonstrated the weakness or disadvantages of depending on increases in the asset prices for growth sustenance, the recent financial crisis shows the challenges of alternative economic policy order in determining a stable growth.

In the middle run, a country such as China faces the difficulties in resolving the limit, “middle-income trap” created by former World Bank president, Robert Zoellick (Peck 106). To overcome the limit, China (through the People’s Bank of China) has an obligation to promote domestic demand to ensure sustained growth - a reform that poses numerous challenges for the country. Such shifts in recovery strategies imply that China has to raise prices and wages and even strengthen the labor unions. The measure is likely to result in high inflation.

Financial crisis, especially involving the asset-price bubbles are indeed a feature and not a bug in the current system in the long-run. Since World War II, price and wage growth have continued to form the basis for sustained growth and demand thus the ever rising wage-price inflation. Governments focused on resolving the problem of inflation by breaking or destroying the market power of the laborers. For instance, in the UK and US, Thatcher and Regan sought to legal assaults and recessionary policies to break the labor unions. On the other hand, Keating of Australia resorted to more negotiated routes to achieve wage-price stability. However, it is crucial to point out that such claims are misleading since today self-regulating markets are almost impossible.

Works Cited

European Commission. Economic Crisis In Europe: Causes, Consequences And Responses. European Economy. Luxembourg, 7/2009. Print.

Peck, Jamie. "Zombie neoliberalism and the ambidextrous state." Theoretical Criminology 14.1 (2010): 104-110. Print.

August 31, 2021

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