Current Global Economic Crisis

Current Global Economic Crisis

The global financial crisis culminated near the end of 2007 and well into 2008. The stock markets worldwide were dipping, large financial institutions were crumpling, and governments had to prepare bailouts of the biggest financial institutions. A global financial meltdown affected the lives of almost everyone in the global world. Some argue that the problem would never occur if ideologues that assist the current economics models are not so inconsiderate of different standpoints and concerns. In a position that we (current students) are, we have to be aware of economic situation in the real world. It seems that the recession the United States and whole world experienced in 2008 still impacts global economic environment negatively. Current global economic crisis impacts all the people currently working and in need of work and the purpose of this essay is to introduce relevant causes of this crisis for the general public to become aware of the roots of problem and better understand it. I believe that root causes of the current global economic crisis are laying within the deregulation, corruption and excess credit creation by greedy financial institutions.

Probably the most dominant cause of the current global economic crisis was deregulation of financial institutions. Sulliven defined deregulation as "the removal or simplification of government rules and regulations that constrain the operation of market forces" (Sullivan and Sheffrin). Deregulation is not complete elimination of laws against fraud or property rights; rather it is the reduction of government control over business, in that way moving to a more laissez-faire market. The lenient legislature allowed these institutions to take considerable amounts of unnecessary risk, bet against it and get away with it. The example that goes along with this cause is increasing practice of the shadow banking system. Many companies were trading derivatives and using off-balance sheet financing through these shadow channels. What they did was they were giving out loans to pretty much anyone knowing that there is a big chance for default on those loans. Then they hedged those loans by betting against them, and selling them in a bulk of securities. Funny part is - the laws did not say this was illegal.

The other important cause to mention is the corruption within the regulators, politician, and high executives of the big financial institutions. According to Daniel Kaufmann, the corruption is not unique to developing countries. Mr. Kaufmann states "Bribery remains rife in many countries, totaling about $1 trillion globally every year" (Kaufmann). This seems like pretty significant amount, or should I say amount that really makes some serious changes. How does this happen? Well, powerful companies (or individuals) bend the regulatory, policy and legal institutions of the nation for their private benefit. This is typically done through high-level bribery, lobbying or influence peddling (Kaufmann). Obviously bribing a bureaucrat to obtain a permit to operate a small firm is not significant. However, a telecommunications corporation that corrupts a politician to shape the rules and grant it monopolistic rights could be a big deal. What people need to realize is that with the industrialization corruption challenges do not disappear - they become more sophisticated. Two examples of corruption underlying the current global financial crisis are Freddie Mac/Fannie Mae and AIG. Freddie Mac/Fannie Mae "spent millions of dollars lobbying some influential members of Congress in exchange for, among other things, lax capital reserve requirements for these mortgage giants" (Kaufmann). AIG bribed regulatory oversight and form a "small" derivatives office located in London by taking inordinate risks turned into an empire of 100,000 employees in 130 countries, seriously adding to the global crisis. I truly believe that these two examples show how corruption was used as a tool to consume the holes in the legislation to exploit financial schemes and in that way caused global economic crisis.

Lastly, the excess credit creation by greedy financial institutions caused the housing bubble to burst and pushed us into the recession in 2008. The banks were soft on their credit terms and because of that they were giving out mortgages and lending money to almost anyone. Well, that is great,