Could western nations have avoided the 2008 financial crisis?
Examine potential causes and assess whether they were inevitable
What would happen to the financial markets of today if the potential causes of the crisis of 2008 were evitable? What the result would be if the low interest rates, the easy loan approvals and the major dollar evaluations were not present? The 2008 recession would not have happened. As Domitrovic (2012) states the weak dollar is a core reason for the stagnation of 2008. Why is this so and what the potential causes of this crisis are a question that deserves exploration. As potential causes for the crisis are highlighted the following; first, the weak American currency can be blamed for the exposure of the financial sector to the currency-hedge instruments, especially to those in lands that was not merely a symptom, but a root cause of the crisis. Second, the markets for easy loan approvals and all the rest of the fundamentals of the crisis were only a manifestation of the major dollar devaluation (Domitrovic, 2012) that made the causes of the stagnation inevitable. In other words, the potential of the main financial players was overestimated and that led to social, financial instability and poverty increase. Moreover, the domestic sections of the economy of the United States of America were regarded as having destabilizing forces within the financial world (Grigor’ev and Salikhov, 2009), an opinion backed by the crucial hurdles to the operation of the financial markets at global level. Though different authors have contrasting opinions and put the blame for the crisis in the financial markets on various factors, the truth is that those factors were unavoidable.
The western nations could not have avoided the 2008 financial crises since the low real rates were an almost global phenomenon; however, the low interest rates have not led to the existence of many and cheap money. On the contrary, the money was missing, their price was increasing and a deflation was being present (Buckley, 2011). Who brought back the low interest rates and were they of common interest to all the world governments? It is a fact that the governments, banks, central banks and regulators have made repeated mistakes in their basic procedures regarding the economy, lendings and the control of them. Moreover, the low interest rates went hand in hand with the loose nature of mortgage banks' appraisal procedures, brand-new models of lending and various ways of scamming that eventually made the economy shrink and placed the poorest people outside of its functions. Simply put, even in advanced markets, debt reached unacceptable levels in banking as well as in some non-financial businesses. Thus, the markets broke down and the government intervention was necessary if stability was to be restored. Indeed, the injection of money into the system led to increased government debt problems that in turn made the crisis unavoidable.
Consequently, conservative economic policy throughout the crisis cycle was necessary, including prudent national finances with something in reserve when things turn down. The developed countries reacted to the crisis not only with an attempt to bring more money into the economy but also with continuation of the policy of holding interest rates at levels even lower than at the beginning of it; some of the banks in collapse were nationalized, others received massive government injections, third received guarantees from governments. In fact, only a few were allowed to go bankrupt, lose their customers’ means and trust. As a result the low interest rates, loose mortgage procedures, scams and easy lending proved that the capitalist economy is generally unstable and difficult to control. Crisis might occur at any time. However, the pursuit of liberal economic doctrines has significantly contributed for the 2008 financial crisis. It is indeed a failure of capitalism at all, and if it did not happen earlier this is due to the fact that an interest policy in contradiction with liberalism dogmas was followed. Moreover, due of the activities of the supporters of neoliberalism, the measures against the crisis remain unfinished which is a prerequisite for both its prolongation and second wave (Otter, D, & Weatherly, P,. 2008).
The devaluation of the dollar was regarded as an important aspect of the 2008 financial crisis. Domitrovic (2012) for instance argued that in the present economic situation, the exposure of the financial sector to the currency-hedge instruments, especially to those in lands was not merely a symptom, but a root cause of the crisis. In his own words (Domitrovic, 2012): "To mistake credit-default swaps, subprime mortgages, easy loan approvals and all the rest with the fundaments of the crisis is to fail to ask why markets for these things suddenly materialized out of nowhere from 2003 to 2008. Since they in fact came in the face of major dollar devaluation, the real story cannot be the financial sector's accommodation of the new dollar weakness, but rather the fact and origins of that weakness itself." The solution is to go back to a system of fixed exchange rates; this can be done as an initial fixed rate of the euro to the dollar and has often been supported by the monetary policy of the Federal Reserve and the European Central Bank.
Therefore, any examination on the devaluation of the US dollar as a potential cause for the stagnation of 2008 is indispensable. "The American nation endured not only the great times of spending of the 2003-07, but the brutal Great Recession as well" (Domitrovic, 2012). For instance, if dollar had been devaluated, but housing and spending boom did not happen, then the Great Recession would also happen, the income inequality among the social layers would deepen, but without its so-called southing effect. Therefore, nothing should be taken for granted and prudent financial policies should be followed.
The main steps in dealing with the crisis were three: limiting protectionism policies, establishing coordinated measures of economic policy, and finally, preventing the hard landing of a large group of economies. According to Grigor’ev and Salikhov (2009) the downturn in one of the domestic sections of the economy of the United States of America has led to crucial hurdles to the operation of the financial markets at global level; the deep roots of the crisis lie in the limited internal and external demand and the resulting lack of economic growth, as well as the declining employment and low incomes. Thus, while other authors blamed the banks, financial institutions, weak US dollar, Grigor’ev and Salikhov (2009) accentuated on the domestic sections of the economy of the United States of America as having destabilizing forces within the financial world.
One rather contradictory investigation gives central place to the birthrate in the context of the financial crisis. Its findings showed that, while there is a decrease in the birthrate, fewer young people are occupying the job vacancies, thereby making the pensioners who have already left the system a burden for the working class. Unlike most other studies where the focus is on faults of the financial system as a whole, this research states that the unemployed young people actually upset the already established by their parents’ cycle of accumulation of savings. As a consequence families are not formed and savings are liquidated. Simply put, the banks were not the only culprit; furthermore, their role was restricted to aggravating the crisis by trying to recompense for problems that were already present. The debt as such should be reduced in the governments, households, financial and non-financial institutions and industrial corporations. Whatever the results will be, the lack of adequate number of newborns will eventually result in upsetting the already established cycle of production and accumulation of savings, all leading to a somehow vicious circle. The latter should be disrupted by the families who want to have children, who in fact will enter the world of production, generate income and savings and ultimately accumulate money instead of borrowing them from banks.
- Quote paper
- Silvia Stamenova (Author), 2017, Could Western Nations have avoided the Financial Crisis in 2008?, Munich, GRIN Verlag, https://www.grin.com/document/426767