Topic: In light of the recent global financial crisis, critically evaluate the main tasks at both the national and international level that need to be undertaken if globalisation is to work in such way as to build an inclusive world economy.
The global economic crisis in 2008 - 2009 is considered the most serious crisis since the Great Depression of the 1930s. No country can escape the impact of the crisis although the impact on individual countries may differ in terms of severity of the decline in output ,State of economy, Labor Market, Fiscal Space, Institutional framework.
The main cause of the crisis began from a financial system in the United States. The bursting of the real estate bubble, balance sheet difficulties of the financial institutions, as well as an outright recession first emerged from the middle of 2007 have become more serious. From declaring the bankcruptcy of Lehman Brothers and the government aid for AIG in September 2008 has triggered a panic in the so-called "secondary banking system." Panic in the commercial banking system has lead to massive loss of liquidity and make freezes credit's active in the interbank and the repo markets.
However, this credit crunch is only the beginning. The banking system is the heart pumps blood (credit) that an economy needs to sustain life, when most of this heart stops working, the whole economy will become disorder -financial crisis become a economic crisis. Moreover, when the economy is deeper integration through trade and international capital flows, an economic crisis in a country or a region with a large scale such as the United States or United European Union became inevitable a global crisis.
According to Professor Gary Gorton, the leading proponent of the banking panic hypothesis, the crisis was sparked by turmoil in the subprime mortgage market because "the design of subprime mortgages and subprime securitizations are unique in that they are particularly sensitive to declines in house prices, leading to an information problem for investors when the house price bubble burst." He argues that no similar problem exists with securitizations generally, since "other securitizations are not so sensitive to the prices of the underlying assets and so they are not so susceptible to bubbles."
The most countries affected by the crises such as USA, European Community, can not cross their arms to "self-regulating market" that simultaneously execute many different measures to prevent and limit the bad effects of the crisis to their country. Countries around the world use some or most of the tools to fight against financial crisis. However, the measures adopted differ from country to country, depending on available fiscal space as well as the degree of vulnerability to the crisis.
At the Nation level
The United States was the centre of the crisis and its economy has been hit directly by the crisis in the subprime mortgage market along with the impact of financial crisis and subsequent credit crisis. Therefore, the US government had put a lot of measures to cope with the financial crisis.
The US government try to maintain the confidence among the investors and the public on the policies and prevent and control liquidity risk which can be disruption of financial system (especially the disruption of the subprime mortgage market) . With the monetary policy, central banks cut interest rate gradually from 5.25% per year (July 2007) to keep the record interest rates 0.25% (May 2009). Federal Reserve has also embarked on purchasing government securities (long-term Treasury and Agency securities) with the aim of keeping long-term yields low. The US government made available enormous amounts of liquidity, guarantees in support the takeovers of investment banks, rescue of financial institutions that were deemed systematically important ( such as AIG, Bear Stearns..). The Treasury launch the Troubled Asset Relief Program (TARP) in Oct 2008 to buy or insure "troubled" assets held by different types of institution, for an amount of up to $700bn. The US Federal Reserve has also conducted about $1.2 trillion in emergency commitment to stabilise the financial sector. However, it soon became clear that the initial policies (traditional monetary and fiscal policies) would not be sufficient to restore the confidence in financial markets, revive aggregate demand and halt rising unemployment.
According to Joseph E. Stiglitz also argued that " the bailout should conform to high standards of transparency and good governance. What we have done has provided a model to other countries of what should not be done, except in one respect: the Congressional Oversight Panel, which is finally beginning to shed some light on the extent to which the American people have been cheated and continue to be cheated." In addition to saving the banks and government financial institutions, the Nation budget should be spent a lot of costs for social insurance, support those who are unemployed. At the same time, it extended debits for people who owe the bank to buy a home with a bad debts. These actions contributed to limit the negative impacts of financial crisis on these target difficulties groups. To effectuate this policy, the Government was compelled to increase public spending to compensate for falling private demand. The Government may also have found it difficult to resist pressures for demand stimulation after huge amounts of public money had been mobilised at an earlier stage for the rescue of banks and other financial institutions that were responsible for the crisis. "However, the Economic stimulus packages in response to global financial turmoil focused only on banks and other state-backed institutions and reserved very little share for jobs-generation and social protection, which is much far from one nation's long-term development objectives" said Joseph E. Stiglitz.
Moreover, once the fierce recession take place,the federal government could promulgate a decree in which cutting tax or spending program to stimulate the economy without inducing a huge budget deficit. In fact, the government provide a fiscal stimulus plan even if it could make a big budget deficit. That means budget deficits not surpluses. And there was a notice that the combination of fiscal stimulus and bank rescue plan will be reduced a huge budget deficits. According to "Keynesian economists point out that in a deep recession the problem is excess saving and there should be no danger of a "crowding out" effect from fiscal expansion. However, if global markets perceive a danger of default on US Treasury borrowing or a risk of future inflation then there would be a rise in long rates even in a recessionary economy. There is a danger that markets will not be able to absorb the amount of government borrowing needed without triggering a rise in US interest rates and perhaps an unstable decline in the value of the dollar."1
There was many the reform implications of the competing hypothesis which is debatable. Calamities argues that "if there were no governmental safety nets, no government manipulation of credit markets, no leverage subsidies, and no limitations on the market for corporate control, one could reasonably argue against the need for prudential regulation." He recognizes, however, that this argument is "far beyond the feasible bounds of the current political environment
In terms of government policy, Taylor (2009) stresses that the excessively loose US monetary policy fuelled the credit boom, while others such as Elmendorf (2007) conclude that interest rates were not too low. In addition to these dimensions, the debate has considered both the contribution of domestic issues (US financial regulation and monetary policy) and global imbalances (the glut of savings flowing from surplus countries to deficit economies)
Therefore, the US policymakers should understand the laws applicable to the overall economy and there are a lesson that should be learnt from the financial and economy crisis.
At the International level:
In the midst of the crisis, the two largest financial institutions which play an important role in the global crisis that were the International Monetary Fund (IMF) and World Bank. The important thing can see that the international cooperation of the Organizations on the world coped with the crisis since the global economy crisis occured. This clearly reflected the success of the G20 meeting (including the G8, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Turkey, Australia, Argentina ti-na, Brazil and the EU) which was held in England on 2 and 3 April . The G-20 presented a Global Plan for Recovery and Reform that would "constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times". It includes:
• an increase in IMF resources by $500 billion (to $750 billion),
• a new allocation of $250 billion for Special Drawing Rights (SDRs),
• additional lending by multilateral development banks of $100 billion,
• support for trade finance of $250 billion.
Next step, the IMF overhauled the Fund's lending framework and streamlined loan conditionality by setting up a new short-term lending facility (SLF). Some countries which have impacted from the downturn can borrow immediately as much as five times their IMF quotas for three months with two possible rollovers. In October 2008, from a bilateral swap the United States Federal Reserve agree a shorter lending of $30 billion for Brazil, Mexico, the Republic of Korea and Singapore.
For Low Income Countries(LICs), the IMF established some regulations such as:
o New architecture of concessional financing facilities
o Extended Credit Facility provides flexible medium-term support;
o Standby Credit Facility addresses short-term and precautionary needs
o Rapid Credit Facility offers emergency support with limited conditionality.
o Reforms to borrowing limits for LICs: a doubling of average annualized access limits.
Although the G20's commitment provided a widely supported, mostly through the IMF. However they did not pay attention that the risk of poor countries could be lend more debt, and their policies are counter-productive again.
On the another hand, the support could have been made considerably more effective if it had been linked to a reform of the IMF itself. It was observed in past crises that those conditions mostly led the borrowing countries into even deeper crisis. Policy conditions attached to these IMF loans are fairly similar to those of the past. An SDR allocation effectively means printing new money, about $68 billion of which will go to middle-income countries and $17 billion to low-income countries. As SDRs are allocated according to voting shares at the IMF, two-thirds will go to rich countries. If a developing country uses its SDRs by exchanging them for hard currency, it will pay interest charges on the balances.
Joseph E. Stiglitz and many other economists believe that "Government regulation and oversight are an essential part of a functioning market economy. Without them, there will continue to be frequent severe economic crises in different parts of the world. The market on its own is not enough. Government must play a role." And
"The IMF appropriately stressed the urgency of addressing the persistent and growing global current-account imbalances, but it did not look at how these imbalances were linked to the systemic risks that were building up in financial systems."
According to Heiner Flassbeck, Director of the Division of Globalization and Development Strategies of UNCTAD, said one fundamental thing learned from the crisis is that the financial markets do not "get prices right," as has often been claimed……..Stocks and commodity prices are currently going up while the economic fundamentals do not justify these increases. He raised the need to revisit the merits of the original Bretton Woods system of fixed exchange rates adjustable only to reflect inflation.
Timothy Geithner (2009) also emphasized the IMF's role, "The IMF needs to ensure going forward that the distribution of global demand is far better balanced"
Conclusion:
From the financial crisis, the global economic downturn this time, we must reconsider seriously, in a spirit of scientific criticism, both practical models and theories of market economy has been or is being used. In the course of humanity have continued long-term use of market economy, no one can claim that would completely eliminate the crisis. But it is clear that international organizations, regional organizations, governments and business circles in all countries must be responsible for managing and improving the market economy under the new method more scientific and more democratic, market oriented economic and social progress in increasingly healthy and more humane, making the wants and basic needs, a variety of both material and spiritual life of individuals, social groups in all social systems must increasingly be more responsive.
"If the world's leading policymakers were to design a new global economic order, they would have to concede that markets require regulation in order to produce fair outcomes. It is time to keep globalisation in check with a robust and democratic system of governance", says Dani Rodrik
