Essay \"What are the causes of the global financial crisis?\" PDF

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What are the causes of the global financial crisis?
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Student ID: 4209112 What are the causes of the global financial crisis? Causes of the financial crisis (2008) remain contentious. Numerous reasons cumulated in the financial crisis. This essay will examine some of the main explanations for the financial crisis. These causes include globalisation, easy credit conditions, increased risk taking, subprime mortgages, deregulation and the capitalist mode of production.

Many debates exist on reasons causing the financial crisis and the debate remains highly contentious. However, this essay will examine two broad schools of thought. Firstly, liberals, who believe that individual reasons such as deregulation, caused the financial crisis. Liberals generally contest the suggestion that the capitalist mode of production is at fault. Finally, historically materialists will be examined. Historical materialists believe that the capitalistic mode of production is inherently flawed and that the current financial crisis is simply a part of ongoing business cycles of boom and bust. This essay will explore these differing schools of thought to arrive at a conclusion of what caused the financial crisis.

This first section will examine what caused the financial crisis from a liberal perspective. Liberals argue that the neo-liberal economic order is not at fault, instead highlighting other reasons such as deregulation and greedy bankers. McMichael argues that the crisis was primarily encouraged by deregulation (McMichael 2012: 240). This deregulation resulted in rapid financialisation, in turn cumulating in greater risk taking and the potential for greater loss of capital. However, as deregulation occurred in the 1970s this does not explain financial crises prior, such as the Great Depression (1929-1939). Therefore, the liberal argument placing blame for financial crises on deregulation is flawed, as this explanation can only explain financial crises after the deregulation processes of the 1970s.

Liberal scholars tend to stress the individuality of each financial crisis (Tarpley 2011: 211). This can be examined empirically. The 2008 financial crisis was primarily a result of the US property bubble. Furthermore, the main cause of the Great Depression was the collapse of the US stock

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Student ID: 4209112 market. Therefore, individual explanations exist for each financial crisis. However, it is too simplistic to identify singular causes of individual financial crises.

Subprime mortgages can be examined as another cause of the financial crisis. Lapavitas argues that an explosion of subprime mortgages and the respective bubble burst resulted in the financial crisis (Lapavitas 2009: 119). This was a contributing factor to the 2008 financial crisis, as these ‘high risk’ mortgages, given to people with low credit ratings, caused many people to default on debt. This situation was made worst by the lack of liquidity in the market to bailout struggling banks, which suffered from a lack of cash flow due to defaults of subprime mortgages. In turn, this resulted in the foreclosures of banks such as Lahman Brother. However, a healthy economy could easily recover from such contractions. Therefore, further reasons were at fault for the 2008 financial crisis. For example, globalisation allowed the 2008 financial crisis to become a global crisis instead of a US crisis, due to the interconnectedness of the global economy.

Easy credit conditions can also be examined as causes of the 2008 financial crisis. Low interest rates resulted in large amounts of borrowing. The US Federal Reserve lowered interest rates from 6.5% to 1.0%, this was done to soften the blow of the dot-com bubble and the September 2001 terrorist attacks. Despite the reasons for low interest rates, borrowing was encouraged on an unprecedented scale (Yagi, Yokokawa, Shinjiro and Dymski 2013: 47). The situation was intensified through increasing national deficits in the global north. Bernanke, the Federal Reserve chairman, claimed that the increasing deficit caused the US government to continue borrowing from abroad, further lowering interest rates (Bernanke 2005). In essence this was creating a spiral of decline. Through the growing trade deficit the US continued borrowing from abroad, which in turn lowered interest rates, resulting in easier credit conditions for the consumer. Therefore, this highlights that easy access to credit resulted in the financial crisis. However, it is too simplistic to argue

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Student ID: 4209112 that easy credit conditions were the primary cause of the 2008 financial crisis.

Overall, the liberal tradition concentrates on individual reasons that caused the financial crisis. Some of these reasons have been discussed, but many others exist. The liberal school also argues that the capitalist mode of production is not at fault.

This final section will examine what caused the financial crisis from a historical materialist perspective. Lapavitas highlights that the economic crisis is a ‘fully fledged crisis of financialised capitalism’ (Lapavitas 2009: 118). This was enhanced from the growth of financial institutions worldwide (financialisation) and globalisation. This is evident in the 2008 crisis that amalgamated from a US to a global crisis. Furthermore, Lapavitas argues that the abandonment of Keynesianism for neoliberalism helped intensify the situation (Lapavitas 2009: 115). This suggests that the abandonment of Keynesianism resulted in the financial crisis. However, this does explain how financial crises arose within the Keynesian era, such as Black Monday and the OPEC Oil Crisis. These Keynesian era cries were still results from systemic failures within the capitalist mode of production. This is because Keynesianism is not an alternative to capitalism, as many capitalistic tendencies exist within Keynesianism.

O’Brien and Williams argue that market fundamentalism resulted in the financial crisis (O’Brien and Williams 2013: 172). This backs the historical materialist perspective. Market fundamentalism is essentially the belief that an unfettered market brings about greatest wealth for the greatest number of people. Soros highlights that this is essentially a laissez faire (let it be) approach to the economy (Soros 1998: 122). This lack of regulation can be observed as a cause of the financial crisis.

McMurty argues that the ‘financial crisis is merely a symptom of another systemic crisis of capitalism itself’ (McMurty 1999: 111). This is observable within business cycles of boom and bust. Rothbard highlights

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Student ID: 4209112 that periods of boom and busts are systemic inefficiencies within capitalism (Rothbard 2011: 791). These business cycles highlight that the capitalist mode of production is flawed as financial crisis are systemically entrenched within capitalism. Therefore, this highlights that the 2008 financial crisis was inevitable after the boom of the early 2000s.

By definition, capitalism is profit maximising. A way in which profits can be maximised is by driving down costs of production. This occurred by outsourcing labour to countries with cheap pools of labour – the global south. These countries were China, India and the Asian Tigers. McMichael highlights that outsourcing labour reduced the tax base of the global north (McMichael 2012: 238). This was because of the reduced number of manufacturing jobs in the global north. In turn, fewer jobs resulted in less taxation. Therefore, when the business cycle began the bust process less capital was available to reinforce the economy. This situation was exasperated through cheap, imported consumer goods that encouraged individual debt (McMichael 2012: 242). Bieler argues that high return ventures to increase capital are essential parts of capitalism (Bieler 2012). This can be observed in outsourcing to China, thus cutting costs and increasing capital returns. However, as Bieler highlights this is disastrous to the entire economy as it contributed to the creation of economic bubbles.

Bogle highlights that managers’ capitalism has largely replaced owner’s capitalism (Bogle 2005: 24). This is a systemic failure as firms are now being run to benefit the owner’s, not the shareholder. This benefits less people and concentrates wealth. This is not how rightists’ envisioned neoliberal economics. Thatcher and Regan, the main advocators of neoliberalism, emphasised a shake holding society. Nonetheless, new managers capitalism is a systemic failure, as exploitation is more prevalent within managers’ capitalism oppose to owner capitalism. This is evident in the huge bankers bonuses.

Bieler argues that competing companies constantly strive for greater profits over their competitors. This is a systemic failure as businesses are

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Student ID: 4209112 encouraged to take greater risks to obtain a greater return. In turn, this contributes to financial bubbles (Bieler 2012). This is another systemic failure of the capitalist mode of production that helped cause the financial crisis, as business’ are required to obtain greater profits, resulting the creation of financial bubbles.

Overall, the historical materialist school emphasises that the capitalist mode of production resulted in the financial crisis. However, historical materialists believe that individual explanations exist for the financial crisis, such as deregulation, financial bubbles, outsourcing and exploitation to name a few. But, these causes of the financial crisis are merely symptoms of the capitalist mode of production.

To conclude, this essay has examined two broad traditions, the liberal and the historical materialist schools. The liberal school highlights how individual reasons resulted in the financial crisis. Whereas, the historical materialist prospective coherently highlights how the systemic problems within the capitalist mode of production resulted in the financial crisis. Overall, both theories when combined coherently answer the question. Clearly, the capitalist mode of production, through business cycles of boom and bust, is flawed. But the individual causes which liberals highlight illustrate how financial crises are triggered. Therefore, the financial crisis was caused by the flawed capitalist mode of production. Furthermore, the individual causes of the financial crisis such as deregulation, outsourcing and globalisation to name a few are symptoms of the flawed capitalistic mode of production and often help trigger financial crises.

Perhaps the increasing power of TNCs will intensify financial crises in the future. A chilling example from history can be observed through the Dutch East India Company (VOC), which highlights what occurs when cooperation’s became more powerful than a state. Good government fulfills the responsibility to the people and even bad governments are afraid of the people. This was not the case in Indonesia under the VOC. The VOC was interested in profit not fulfilling governmental obligations

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Student ID: 4209112 (Green 2015). Therefore, as liberals highlight the increasing unimportance of states global financial crises will intensify due to increasing power of cooperation’s in their pursuit of ever-larger profits.

Word Count: 1642

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Student ID: 4209112 Bibliography Barry, Gills ‘Going South: Capitalists Crisis, Systemic Crisis, Civilisation Crisis’, Third World Quarterly, 31/2: 169-184.

Bernanke (2005) ‘Remarks by Governor Ben S. Bernanke’ (14 April 2005), Available at: http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/defa ult.htm (Accessed on 3 March 2015).

Bieler (2012) ‘Corruption in the Banking Industry – The Problem with a Few Bad Apples?’ (19 July 2012) Aviable at: http://andreasbieler.blogspot.co.uk/2012/07/corruption-in-bankingindustry-problem.html (Accessed 1 March 2015).

Bogle, John (2005) The Battle for the Soul of Capitalism: How the Financial System Undermined Social Idea, Damaged Trust in the Markets, Robbed Investors of Trillions – And what to do about it Warwick: IPS.

Green, John Crash Course World History (2015) Youtube (18 March 2015) Available at: https://www.youtube.com/watch?v=zPIhMJGWiM8 (Accessed on 19 March 2015).

Lapavitas, Costas (2009) ‘Financialised Capitalism: Crisis and Financial Expropriation’, Historical Materialism, 17/2: 114-148.

McMichael, Philip (2012) Development and Social Change: A Global Perspective London: Sage.

McMurty, John (1999) The Cancer Stage of Capitalism: From Crisis to Care London: Pluto Press.

O’Brien, Robert and Williams, Marc (2013) Global Political Economy (4th edn.) New York: Palgrave Macmillan.

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Student ID: 4209112 Rothbard, Murray (2011) Economic Controversies [e-book] Alabama: Ludwig von Mises Institute. Available at: http://books.google.co.uk/books? id=e5G13fmGBpsC&printsec=frontcover&source=gbs_ge_summary_r&cad =0#v=onepage&q&f=false (Accessed 27 February 2015).

Soros, George (1998) The Crisis of Global Capitalism: Open Society Endangered New York: Public Affairs.

Wallison, Peter (2011) Dissent from the Majority Report of the Financial Crisis Inquiry Commission.

Yagi, Kiichiro, Yokokawa, Nobuharum, Shinjiro, Hagiwara and Dymski, Gary (2013) Crises of Global Economics and the Future of Capitalism: Reviving Marxist Crisis Theory Oxon: Routledge.

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