Financial Crisis

When we were assigned to write a financial report on the Economic crisis; throughout the world and 2008's crisis, I was worried that it would be a tough assignment because the content of the material would be hard to explain in a report. Paul Krugman wrote, The return of Depress On Economics and The Crisis of 2008. He did a great job of relating the economic crisis of the countries that he covered and made it understandable for someone who is not an economics major or a economists to comprehend. He did a great job giving easy examples of how to relate the problems that each country went through to his Baby sitting business. He used this Baby Sitting Co. as he went through certain economic crises so that it would be clear as to how it could relate from using another example.

The first chapter covered "The Central Problem" and how it was solved, which it discussed how it was time for the economy to change its focus more towards long-term economic growth in response to the Great Depression. Economics takes place in political context, so even though this book is about the economy and the crisis wrongs and rights, most of it has to do with political implementations that each government portrayed. During 1990 is when socialism collapsed causing the change of people minds through the idea in order to change the minds of the people. It first made its appearance in China when Deng Xiaoping moved into the world of Capitalism. "For the First time since 1917, then, we live in a world in which property rights and free markets are viewed as fundamental principles, not grudging expedients; where the unpleasant aspects of a market system-inequality, unemployment, injustice- are excepted as facts of life" (14). This quote gave the reasons as to why Capitalism was now taking over a new area because, no one had any opposing alternative. This new system ruled the world without challenge. Then Krugman goes into the topic of weather Capitalism was triumphant by discussing the reasons as to why and how Capitalism was taming the business cycle through different economies, even though market economies go through recessions. The recessions they go through can be short or mild but, generated a suitable economy through its industrial growth. All economies can go through bad times, it could be from the lack of effective demand, or by accumulated through coupons.

His Baby sitting model example is his example he uses, which in a quick description has the problem of couples who enter in this economy with children. They trade off hours of babysitting hours so they can have time to themselves without the kids. The problem with it was, couples tended to stay in more during the winter and prefer to go out more in the summer. This caused a buildup and an over collection of hours baby-sited during the winter. Couples saved these hours to use during the summer, which caused a big problem because economies can't survive off of too much surplus. This made it difficult for other couple to go out in the summer who used up some hours during the winter. The fundamentals of this issue can be related to a recession; when the public as a whole tries to accumulate cash, in comparison to the baby sitting co-op, which tries to accumulate hours of babysitting during the winter. This model can be solved by issuing more coupons and in the baby sitting model would be to issue more hours that couples can use. In a real world example, during "The Great Depression was brought on by a collapse of the effective demand and that the Federal Reserve should have fought the slump with large injections of money" (21). The only problem with injecting more money can be an issue, if the central bank is overoptimistic in the amount of job that will be created, and with too much money in circulation will result in inflation. In order to get out of the inflation period will cause the economy to go through a period of unemployment. The only skeptics and Critics of Capitalism was the fact that everyone will not benefit growth will be unequally shared and create inequality of wealth and income.

Latin America went through currency crisis and banking failures because of hyperinflation. Their approaches to solving economic problems were because of the failed approach through monetary wrongs. They struggled to control inflation along with other countries, they all took drastic changes to regain confidence in their own currency. Mexico went through one of the worst crisis during the 1930's called the Tequila Crisis (32). Which happened to drain its foreign currency which scared investors because, the devaluation in its currency and its future seemed like it would continue declining. The U.S. Treasury rescued Mexico by providing a large chunk (50 billion credit line) of money to rescue its foreign exchange market, which helped it stabilize.

Japans economic crisis was not as bad as Mexico's it only went through two years of it's GDP falling causing a depression. Which people did not expect because of Japans success in its economic growth caused it to go through a growth recession. "The standard response to a recession is to cut interest rates-to allow people to borrow baby-sitting coupons cheaply so that they will begin going out again" (p.71). Even though Japan did cut interest rates all the way down to zero it still was not enough. "So one theory of Japans slump was that the country was in a liquidity trap mainly because its bank were finically weak; fix the banks and the economy would recover" (p.73). That's exactly what Japan did, in 1998 Japan's legislature got $500 billion dollars to rescue the banks.

Asia had a crash that was similar to the rest of the crash topics in the previous chapters, such as Thailand's devaluation of its currency (the Baht) that caused a big financial crisis. Interest's rates were low in advanced countries because advanced economies were trying to get out of a recession so, investors looked at other countries to invest in return for higher yields. " In all the Asian economies, central banks tried to 'sterilize' the capital inflows: obliged to sell baht in the foreign exchange market, the Bank of Thailand would