The global financial crisis of 2008 was a critical period as raised several concerns about financial globalization and neoliberalism. Generally, neoliberalism advocates for the necessity and desirability of transferring economic power and control to markets. Beginning around the 1970’s, the perspective was credited with the robust economic growth of the 1990’s and the 2000’s (Lane, 2013, pp. 555). Arguably, the financial crisis exposed the flaws of neoliberalism. This is an attempt to discuss the causes of the global financial crisis and its impact on neoliberalism as the preferred policy in global matters.
Initially, the participation of European banks fueled the accelerated growth of the asset-backed securities market in the US that was central in the market panic. Generally, these banks also obtained dollar funding from the US money markets. Therefore, the role of European banks in enabling the expansion of the US asset-backed markets did not arise from the balance of payment information (Lane, 2013, pp. 563). However, the implicit exposure of European parent banks grew in line with these American activities. Secondly, the pervasive and sharp rise of household’s leverage and subsequent defaults on housing loans also fueled the crisis. The collapse of the subprime market and consequent decline in house prices acted as the catalyst for the crisis in the US and triggered similar declines in Spain, Ireland and across the emerging markets (Lane, 2013, pp. 565). The direct inclusion of homeowners increased the complexity of the crisis for there are no recommended measures for dealing with large-scale defaults and negative future ramifications.
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There was the creation of investment instruments whose returns were dependent on favorable economic performance. Specifically, the immense growth of structured credit products like collateralized debt obligations (CDO) relied, in a complex manner, on payoffs to other assets (Claessens and Kodres, 2014, pp.8). Commonly, the risks these new products attracted were not fully appreciated and were rationalized by rating agencies and added to the instability.
Financial globalization enabled the balance sheets of several banks to record express growth and the same occurred in two levels. The globally active banks grew quickly in size and complexity, thus increasing the difficulty of national regulators in adequately monitoring risk profiles. In the context of credit supply, domestic banks and affiliates of foreign banks could raise various forms of wholesale funding on the international markets (Claessens and Kodres, 2014, pp.8). On the credit demand side, capital inflows created a low-interest setting and improved the net worth of domestic borrowers by inflating domestic asset prices. Therefore, financial globalization contributed to the quick growth of domestic credit through influencing the aspects of both supply and demand (Norgen, 2010).
Financial liberalization and deregulation contributed to the financial crisis (Lane, 2013, pp. 565). For instance, the removal of barriers between American commercial and investment banking along with increased reliance of banks on internal risk management happened without commensurate development in a supervisory capacity. There was increased intricacy and opacity, resulting generally from the US private label securitization of weak credits, the explosive growth in derivatives globally, and the cloudy operations of the shadow banking system (Lane, 2013). The originate and distribute model of securitized mortgages failed to properly distribute risks while undermining proper risk assessing incentives like rating agencies. Complexities of the securitized products made it difficult ascertaining their values and led to the parties incurring risks (Norgen, 2010).
The complicated use of asset-backed commercial paper under the support of mortgage-backed securities with differential maturities of liabilities and assets increased the risk of a loss of confidence in the values of underlying assets (Claessens and Kodres, 2014, pp. 8). For example, around 2008, huge sums of money from the American and European money market funds flowed into commercial paper and short-term debt. Furthermore, over-reliance on repurchase agreements created long chains of borrowing for the support of other trading book assets in large, interconnected banks and securities dealers.
The 2008 financial crisis stems from an association with neoliberalism along with the introduction of the free market. Both the administrations of Margaret Thatcher and Ronald Reagan used the privatization of public services and deregulation of their respective financial sectors to spur economic growth (Burton 2013, pp.10). Consequently, such policies gave the financial sector powers to influence economic growth. Alarmingly, such changes also allowed those in charge with economic growth to engage in risky lending for personal gain. The financial crisis involved the crash of subprime mortgage market and involved selling mortgages to the poorest Americans. This particular crash involved subjecting low-income families to predatory lending via subprime mortgages. These individuals were tricked into believing that they would be able to repay the loans as the lenders profited from them. For example, Bear Stern’s creation of the “Securitization of Community Reinvestment Act loans” was then guaranteed by Freddie Mac and given triple-A credit rating (Burton 2013, pp.11). Nevertheless, the loans were offered to people who were not able to make consistent repayments. Generally, the deregulation of the financial sector gradually created the financial and housing crises of 2008 (Kate, 2011).
On the other hand, neoliberalism has enhanced aggregate growth, stable prices, efficiency and productivity enhancements, and the protection of private property over distributional equality. In addition, neoliberalism enhances access to essential goods and services, environmental sustainability and leisure time. The financial crisis exposed the various flaws of economic neoliberalism and subsequent use of economic neoliberalism policies has enabled global economic recovery (Centeno and Cohen, 2011, pp.30). Moreover, global unanimity on neoliberalism has made survival of alternative views impossible.
Bibliography
Burton, R., 2013. Neoliberalism, Social Harm and The Financial Crisis. Internet Journal of Criminology , pp.1-20.
Centeno, A.M and Cohen, N.J, 2011. The Arc of Neoliberalism. Annual Review of Sociology
Claessens, S. and Kodres, M.L.E., 2014. The regulatory responses to the global financial crisis: some uncomfortable questions (No. 14-46). International Monetary Fund.
Kates, S., 2011. The Global Financial Crisis . Edward Elgar.
Lane, P.R., 2013. Financial globalisation and the crisis. Open Economies Review , 24 (3), pp.555- 580.
Norgen, C. 2010. The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions. Available at http://www.intosai.org/uploads/gaohq4709242v1finalsubgroup1paper.pdf (Accessed 28 October, 2016).
