World Society in the Global Economic Crisis

World Society in the Global Economic Crisis

LONG-TERM STRUCTURAL CAUSES OF THE ECONOMIC CRISIS THAT REACHED ITS PEAK IN 2008

According to Padilla & Muolo (2010, p.23) the economic crisis, which reached its peak in the year 2008, is one of the major global economic problems witnessed after the great depression of the 1930s. Therefore, many economic analysts have tried to establish its causes. However, it is important to note that for the proper functioning of the economy, which is very important in the life of the nations; a lot of concern should be taken when handling the economical issues. The problems realized with the economy in the years proceeding the year 2008, were mostly structural; they were caused by such factors as; the behavior of the financial institutions, technological changes, and current trends in business activities. The following are therefore some of the contributions to the possible structural problems that resulted into the economic crisis of the year 2008.

According to Hippe (2010, p.7), the sub-prime mortgage problem in the United States of America, which started in 1995 and rose steadily to the year 2007, is one of the causes of the global economic crisis in the year 2008. This was the situation which saw the houses’ prices rising by over 70 percent even after the inflation adjustment. This increase occurred due to low mortgage rates and the financial speculation by the investors who anticipated increase in the prices on the houses and, hence, making higher profits. The public also expected the prices to rise further and so this increased the demand. However, the increase was at a faster rate than the increase in the household’s income and, therefore, the mortgage loans proved difficult to repay after sometimes causing default in payment. Being that the global financial system at this time was also very fragile; the defaults in repaying loans triggered the economic problems of the year 2008. The default also discouraged the mortgage business and so both the local and the foreign the investors withdrew their participation in the industry.

Hippe (2010, p.7), further notes that the severe credit crunch, which was as a result of the mortgage default, was also another source of the economic crisis. It caused a situation in which the financial institutions were unwilling to lend money to each other because of the uncertainties caused by the fall in the prices of the houses. This credit crunch problem was also fueled by the looming danger of insolvency of the mortgage institutions. In addition, the general global commodities’ price fall, which further led to the fall in the profits from sale of the commodities, was also another contributing factor to the economic crisis experienced in 2008. The business people and foreign investors tended to withdraw from business activities given that they could no longer earn or maximize their profit requirements; therefore, leading to the slow economic growth rate.

Deregulation of the financial industry, which started in 1980 by the governments, is another major long-term structural cause of the economic crisis in the year 2008. This was witnessed when the governments reduced their participation in regulating the activities of the stock exchange markets so as to allow them operate freely for higher productivity. However, instead of the anticipated productivity of the financial institutions, things worsened. This is because this move saw the financial institutions in the market acquire each other; leading to large monopolies. These monopolies, like the AIG in United States America, expanded its services to provide nearly all the financial services offered in the country. Its services included; giving mortgage loans, business loans, and even managing the retirement funds for businesses. Therefore, without much government restrictions on their operations, volatility in the market became more frequent leading to serious economic problems. This was also fueled by the fact that there were very few financial institutions that could absorb the financial market rate fluctuations (Memedovic & Lapadre, 2009, p. 6).  

According to Padilla & Muolo (2010, p. 23) International Monetary Fund as an economic institution also failed to advice the countries in the global market on how to implement good economic policies. This, therefore, led to continuous use of ineffective economic policies in the banking sector which put such countries into financial risks. With these poor economic policies in place, IMF made the investors and lenders to the countries already facing economic crisis to withdraw their help by declaring such countries very corrupt and incompetent in handling the financial issues. This saw the economic crisis spread to every country that seemed incompetent in making favorable financial policies. In the attempt to help this situation, the IMF made particular radical reforms of the economic affairs such as changing of the financial policies, labor rules, trade policies, and corporate governance. However, these radical reforms could only worsen the already collapsing economy.

According to Wehrheim (2003, p.60), privatization is also another economic scenario that negatively influenced the economy; it was highly witnessed in the years preceding 2008. This was the continuous handing over of the state owned business firms to the private investors for a better focused management. However, it also impacted negatively the economy, since the growth of the economy, to a larger extent, was determined by the private investors’ economic actions; who were less interested in the progress of the macro-economy. This in turn  reduced the conformity of such private firms with the state economic plans since the states could no longer regulate their activities to the maximum.

There was also lack of proper integration of the social and economic policies. For the prosperity of an economy, the social factors such as the people’s general welfare and economic policies have to be integrated. The economic progress is highly influenced by the behavior of the individuals. However, this integration was not properly done and hence leading to unbalanced economic factors which negatively impacted on the economy (Doyran, 2011, p.75).

The general reduction of taxes charged on businesses and the wealthy individuals was also another contributing factor to the economic crisis. Even though this was initially meant to be an economic strategy to increase the rate of investments in the various countries and to ultimately improve the economies, it impacted negatively on such economies in the long-run. This was because such countries were later faced with the problem of insufficient funds. Meaning that; they could no longer run their social and economic activities comfortably. This further saw the increase in the unemployment rate since the governments could not hire the whole number of people who were unemployed and pay for their salaries and wages (Roura, 2010, p.88).

Another long-term cause of the economic crisis of the year 2008 was the Price shocks in oil 1979. This saw the prices of oil escalate and maintain at greater levels. The event was a contributing factor to the inflation since the various commodities’ prices also went up. For instance, the prices of the manufactured goods went up since their prices, to some extent, were determined by the oil prices. Therefore, the continuous rise in oil prices destabilized the prices in the economy and hence making it difficult for the households to cope with the high prices (Suter & Herkenrath 2012, p.24).

According to Calhoun (2011, p.109), the period before the year 2008 was also marked by an emerging trend of business management. This was the hire of CEOs rather than choosing from among the career employees. In this case, the Chief Executive Officers of the various organizations were newly hired as opposed to utilizing the existing ones with the view of having different approaches to leadership. This trend contributed the economic crisis because the business organizations could no longer have a smooth and consistent running. Additionally, some of the newly hired CEOs lacked enough experience since they had not handled the corporate issues. Moreover, a section of them, brought from different industries, also had got no economic tactics in their new industries.

Shift in the use of long-term employees to the use of part-time workers by the various firms was also another fueling factor to the economic and financial crisis. The industries deviated from the use of permanent employees to the use of temporary employees. It was aimed at helping to cut on the cost of production of commodities since labor force would only be paid for the work done and for a specific period. However, it had its negative impacts that included the delays and failure to meet the production standards in terms of quality. This was due to the lack of consistency of the employees who were doing particular work. Such employees therefore failed to gain the needed expertise in their work. Everything resulted into poor quality goods which could not compete favorably in the global markets. The end result was thus uncontrolled pricing of the high quality commodities in the market hence inflation (Calhoun 2011, p.109).

Gipouloux (2011, p.186) also notes that the lack of a common international currency reserve was another great contributor to the economic crisis to the whole world. The U.S dollar, which was the best option for the currency reserve purposes, also faced valuation problems. The constant instability of the U.S dollar also meant that all the countries that depended on it had got the value of there reserves fluctuating. This made these countries lack confidence in the dollar as a store of asset and hence coming up with various local policies which were even worse than the use of the dollar. Therefore, the U.S lost its foreign revenue which initially was realized due to the demand for the dollar.

Before the year 2008, there were also a series of financial and economic crises such as the banking crisis, currency crisis, and the twin crisis which needed to be fixed. However, minimal attention was paid by the economic policymakers to properly solve these problems. Instead, the policymakers believed that the economic forces would help regulate the economy to its optimal point. Since these problems were a variety, the economic forces failed in the long run and they ended up into bigger economic crisis (Palley, 2012, p.33)

Subsidies to the wasteful interest groups also caused the 2008 economic crisis in the world. Even though the subsidies were meant to increase the local investments, it negatively impacted such economies. The industries which were subsidized did not focus on sustainable use of their resources noting that it was easy for them to obtain assistance from their respective governments. It, therefore, led to the accumulation of financial problems for such firms when the government was no longer able to generate enough funds for subsidies (Palley, 2012, p.33).

Castells, Caraca & Cardoso (2012, p.23) also note that the inflation rate which was in the increase before the year 2008 also contributed to the economic deterioration. This is because the fight against the increasing inflation rates had got policies which did not favor every sector of the economy. For instance, the reduction of inflation rates meant that the unemployment rate had to increase since they are inversely proportional. Therefore, the economy failed to solve the problem of unemployment by the year 2008 because of the earlier policies which had been formulated in an attempt to reduce the rate of the inflation. The increased use of the modern technology also contributed to the failure of the economy to respond to the unemployment issues. The global increase in the use of technology in productions in the late years of the 20^th century. The use of machinery therefore resulted to low rates of employment since only a few people were needed for the production process. This rendered many people jobless and hence lowering their purchasing power which negatively impacted in the economy.

Global financial imbalance was another contributing factor to the fall in the economy. This was the situation where some countries like the U.S suffered huge current accounts deficits while others like China were continuously in surplus accounts. This, therefore, led to more foreign borrowings by the countries with deficit accounts in order to finance their internal activities. Most of the funds generated by such countries were used to repay the loans and hence making it difficult for them to have a stable economy that could support itself (Castells Caraca & Cardoso, 2012, p. 23).

Additionally, budget deficits and the national debts are also some of the major financial catastrophes that led to the economic crisis in the various countries; especially the least developed countries. Such countries depended much on the developed countries, which were economically stronger to help fund their deficit budgets. However, because of their poor economy, they constantly borrowed and stayed in large amounts of debts. Such poor countries therefore remained unable to focus on the building of their own economies since they had to constantly pay their debts using the locally generated funds. This further affected the global economic growth since the international trade which is the backbone of the economy could not take place successfully among all the countries (Castells Caraca & Cardoso, 2012, p.23)

Another economic factor which resulted to the 2008 economic crisis was the global economic rise in the inequality between the rich and the poor. Normally, the poor, who composed of the majority, have got the high propensity to consume than the few rich people who on the other hand have got the high propensity to save. Therefore, the economic growth declined gradually since it is only the few rich people who could support it through additional investments while the poor who received a lot of support from their particular economies were in the increase.

Another factor that fueled the economic crisis was the excessive leverage. This was the situation where the investments of particular countries were highly financed by borrowings. It took place in the years preceding 2008. It added to the economic problems in that the returns from the investments were at very low rates due to the rates of borrowing. This therefore led to the decline in the economic activities of the borrowing countries and hence worsening the situation of the global trade (Allen & Gale, 2007, p.32).

Lack of uniformity in the global business transactions’ processes also contributed to the financial and the economic crisis of the year 2008. This limited the extent of the global business activities since the trading parties feared to risk in the unknown financial circumstances. The lack of uniformity was due to the insufficient supervision of the financial institutions and the lending procedures. It therefore discouraged the foreign direct investments since the foreign investors had no clear assurance of the security of their particular investments. This further worsened the international trade as countries could no longer cooperate (Agenor & Montiel, 2008, p.14).

The underestimation of the economic risks by the monetary policymakers was also another serious problem. The policymakers could not exactly predict the negative outcomes of the deregulation of the financial markets and the short-term responses to the recurrent economic crisis. In the long run, these short-term responses did not totally succeed in solving the financial crisis. The economic problems ended up accumulating to complicated economic crisis which could not be solved easily (Agenor & Montiel, 2008, P.14).

The late 20^th century was also marked with series of civil wars which to a great extent diverted the global attention from the economic planning. This was because attention was given on how to tackle the war crisis. This shifted focus and made the vulnerable countries use their resources uneconomically on military protection (Saw & Wong, 2010, p.173). Finally, according to Friedman (2011, p. 200), the environmental pollution by the manufacturing factories was another simple contribution to the declining economy. This was because the businesses that polluted the environment had to take care of the environmental damages irrespective of the cost. This, therefore, gradually minimized the profits realized by such industries; making it a global economic burden.

Conclusion

In conclusion, it is worth noting that the global economic crisis, which reached its peak in the year 2008, was as a result of a series of structural economic problems. Even though these problems were unfavorable for the economic growth, blame has to be put on the economic policymakers. It occurs as they fail to properly regulate and respond amicably to the already existing problems, while also seeking to prepare to tackle the anticipated challenges as they emerge.