How to respond to the global financial crisis?

The global financial crisis is an issue that requires serious attention in order for us to effectively respond and combat its negative outcomes. Its effects are felt by everyone; whether it is through unemployment, a reduction in wages, bankruptcy or lower family budgets. This poses many problems for the future of the economy, unless we can discover ways or develop techniques to overcome it.

The current financial crash has its origins from real-estate markets based in the U.S. Banks across America began offering low income citizens loans in order for them to purchase housing, known as sub-prime loans. The banks then sold off these loans to institutions; however the people who obtained these loans were incapable of paying them back. This was further compounded as house prices dropped, overturning the system. The financial institutions therefore lost money as the assets they had bought were worthless. This left the economy exceptionally unstable as prices within the market were extremely volatile and the actual value of goods unknown. Panic ensued and many tried selling their stock, numerous companies were left bankrupt, causing redundancies and mass un-employment across the globe.

The problem that remains is how to deal with the crash and provide an efficient and effective economic model. There are many different opinions and proposals on the matter, some more extreme than others. It has been argued whether capitalism still has a future? Whereas others argue that reform with the capitalistic system is what is required to combat the global financial crisis. The article written by Martijn Konings discusses the problems we face whilst tackling this crisis. It identifies that our experience of 20th century capitalism can be used to establish and confirm the moral and social complications we now face in this age. It states that the financial turmoil is a result of political irresponsibility and refers to economists such as Stiglitz and Krugman whom are both a part of the 'Keynesian Movement'. It is clear that this article focuses on this method as a means of appeasing people affected by the crisis and to help produce economic stability. Keynesian philosophy states that the market is not capable of regulating itself and that government regulation in the economy is necessary for its general health and development. The article even goes as far to claim that "We are all Kenesians again, aware of the need for government to regulate the unruly dynamics of free markets." This implies that we all acknowledge the problems associated with the free market and that irresponsible decisions made within the financial market can be avoided through government guidance and regulations. Keynesians view the free market as very problematic and

acknowledge many difficulties with it.

The global financial crisis was partially a result of speculative investment; such behaviour had taken place in the free market and had been consolidated under neoliberal thinking. Irresponsible actions from financial institutions and banks would be unable to take place under Government regulation which would ensure that such abuse of the system would not take place. The source quotes that even the U.S. President; Barrack Obama seems to promote such ideals: "It is an indisputable fact that one of the most significant contributors to our economic downturn was an unravelling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess." 2The article argues that in an era where our lives have been influenced by such behaviour it is often hard to comprehend significant reform. However the main argument of the article is not to propose radical reform but to carry out Keynesian policy and to regulate the free market in order to prevent the adverse dynamics of the market such as speculative investment and to ensure that the market remains stable. This article written by John Quiggin recognises that the current nature of financial transactions has resulted in the collapse of regulation within the global economic system, which has led to the economic meltdown. Although rescue efforts by the government have restored credit flow the market still remains extremely fragile.

The article is more severe in the approach to dealing with the crisis and proposes a total re-structuring of the financial system. There are a number of different proposals. One of these being a new financial structure whereby national regulated systems are incorporated with one another in order to create a healthy international financial structure. This means that transactions will not be able to take place internationally unless the international system has been granted the power to do so. A minimal tax placed on financial transactions can be referred to as the Tobin Tax. The article proposes that this is an extremely positive action in order to help secure exchange rate movements so that they are related to capital flows and the fundamentals of trade, as opposed to the frantic changes within the market. By charging people for transactions made it would drastically reduce banks and institutions from taking part in speculative investment. This tax would be essential in stabilising the market and ensuring financial security. However it is vital that there is global co-operation, otherwise unregulated market activity would exist where the tax is not applied.

The article then presents three different policy options. The first is a comprehensive

1 M. Konings, the Global Financial Crisis, Readings, pg. 7-10 2 M. Konings, the Global Financial Crisis, Readings, pg. 8

re-regulation of the system, so that the government has greater control over the financial market, ensuring stability and preventing speculative trading and investment. This would allow the government to have control over a number of different aspects within the economic system. The second policy is to eliminate deposit guarantees once the crisis is over, this way people will have to undoubtedly make their own decisions on the security of their money. However the third and preferred option is narrow banking. The article infers that all institutions should have a clear purpose including banks and that there should be a clear difference between public and private institutions. All links between protected and nonprotected institutions should be dismissed in order to avoid the risks of the unregulated market. This means that banks are to be prohibited in marketing unregulated products and that private enterprises should be limited to levels of bank credit to reduce the level of possible failure. 3 Also vital to recovery is financial innovation, the article suggests that innovation left to its own devices contributed to the economic downfall. Unregulated financial innovation would contradict a regulated economic system, for this reason the article suggests that innovation will only take place after it has been assessed and if it poses any threat to economic security then it will not be carried out. Others with more extreme viewpoints will argue whether capitalism can continue to exist whilst it continues to put pressure upon our social existence and overall well-being. The main goal driving capitalism is; capital accumulation, the process whereby capital is acquired. Although this process brings about economic development and social change there are a range of negative aspects that are a consequence of this structure such as; exploitation, alienation, class conflicts, inequality, poverty and recurring economic crisis.4 It is evident throughout our history that there is a troubled relationship between economic progress and our happiness, on both an international and national scale. The unforgiving nature of capital accumulation produces significant hostility and emphasises class differences, especially in a period where technology is evolving often resulting in redundancies. It is an economic system striving for profit. However it does not take into account the surrounding environment, the welfare and security of individuals, the grave inequalities that it produces which often result in periods of economic recession leaving many without jobs and financial security. 5

3 J. Quiggin, Financial Regulation after the Crisis, Readings, pp. 288-292. 4 J. Quiggin, Financial Regulation after the Crisis, Readings, pp. 291-292 5 Stilwell, F. (2009) Political economy: the contest of economic ideas, oxford university press, victoria: pg 387