Global Financial Crisis Analysis
Description of Global Financial Crisis
World Bank (2008, p.1) posits that developing countries are not yet out of the wood from the global financial crisis. This is characterized by the fall in their GDP growth. Economic growth in developing countries is slowing and still shows signs of dropping even further. The global financial crisis in such countries is showcased when their exports to developed countries keep on falling. Capital is drawn from emerging markets and foreign investments dry up (Lange 2007, p.2). With the crisis global trade shrink and this makes developing countries cut funding to education, health, and other key government sectors. The global financial crisis is also characterized by a decline in remittances. This is the money that foreign workers send to their home countries. This poses a danger to developing countries because it is this money that is used in poverty reduction. It is also characterized by job losses in the developed world in sectors having high percentages of migrants. A crisis is also characterized by an increase in several extremely poor due to relatively high food and fuel prices.
Beams (2008 para.1) give the global financial crisis a Marxist perspective. He purports that changes that took place in the global capital markets failed to solve the contradictions that arose in the late 60s and early 70s. The contradictions which were suppressed later emerged to haunt the world over. The material productive forces clashed with the socialist means of production giving way to social revolution. This will determine the fate of the whole of humanity and the working lot. He says it is that fate that the world over is facing. International socialism will see the working class advancing their independent agenda by differentiating the policies instigated by leftist reformers and the radicals. Many Keynesians and would be Keynesians strongly believe politics bear the burden of responsibility to the emergence of the global financial crisis. More is attributed to the decision by the politicians to abolish the regulatory mechanisms that have been there from the period of post-war. Klein proposes that very stringent regulatory measures should be instituted to contain the devastating effects of the global financial crisis.
Cooke (2009 para.1) and Amin(2008 p.1) attribute the origin of the global economic crisis to tossing aside of the depression era financial regulations and allowing banks to merge into new institutions that came up with ways to transform debts into assets gambled away at stoke markets in trillions of dollars. The manufacturing sector which was the leading GDP earner has since been overtaken by the financial sector because investors have become frustrated by just producing things because the profits accrued are not anything somebody can be happy about. This is solely due to needing for manufacturers to compete with others in the world market, under capitalism, to sell their goods. For these manufacturers to break even in such markets, they have to reduce their prices. This calls for ownership of up-to-date and expensive machinery. Investments pumped into machinery affect the profit margin. Therefore the bigger the re-investment into the machinery, the lesser the profit for the owners shall be. This makes many investors hope into the financial markets which appear somehow lucrative to investors. This type of money wizardry has got its limits as money is simply a means of exchanging goods and services. It has no other use outside this. New financial instruments were created without connection to reality during the economic boom. Mortgages, cars and student loans were shipped around the world and sold as assets. Nobody was sure about what they were purchasing but were otherwise convinced that it was indeed a sure deal. This mystery is yet to be demystified. Indeed that is what financial bubble is money separated from the real products. It is all about taking debt and separating it from its source.
Areas of financial sector financial regulations have not been fully addressed
Of the many financial regulations ranging from regulating hedge funds, monitoring hedge pay and many others, the regulation that stipulates limiting the size of the banks has not achieved the purpose for which it was set for in the financial system.
Murray and Sy (2009 p.1) say the masses expect financial regulators to protect them from the ills that have infiltrated the financial markets. They also expect the regulators to ensure there is financial stability in the markets at all times. But the role of the financial regulators cannot address these issues. They are only mandated to oversee compliance by the industry players to the laid down acceptable practices. They also enforce existing regulations. There is a very wide rift between what people expect regulators to do and what they are supposed to deliver. The failure by regulators to address hedge funds can at times not be attributed to them in totality but to issues surrounding bureaucracies. Failure by regulators to address issues arising in the financial system is partly because their knowledge is not at par with the ever-growing new and unregulated financial instruments, practices, and ideas. Global financial crisis emanated from scopes outside circles of regulation, it remains a phenomenon yet to be demystified by the regulators.
Dodaro (2009 p.5) says the regulation system has failed to address many problems that dog the financial markets. Regulators have fruitlessly struggled to mitigate systematic risks brought about by large and interconnected financial bodies to see to it that they manage their risks. Regulators have tried to address problems emanating from financial markets as a result of the activities of large unregulated market participants like non-banking mortgage lenders, credit rating agencies and hedge funds. These entities at times play a pivotal role in the financial markets. The escalating numbers of new and more complex investment goods have proved to be a nightmare to the financial regulators and investors. Consumers have been between a rock and hard place when it comes to synthesizing new and increasingly diversified retail mortgage and credit products. Initiators of standards for accounting and financial regulators have had to bear with growing challenges in making sure that accounting and audit parameters respond appropriately to financial market development and indeed address challenges emanating from global convergence of auditing and accounting standards. The globalization of financial markets and the fragmentation of the US regulatory structure have made it difficult for the regulatory body to coordinate globally with other regulatory bodies.
Changes required in the financial regulatory system
Dodaro (2009 p.6) proposes radical changes that when implemented will ensure the inherent problems that have faced financial markets will be a thing of the past. These proposals will fix the gaps both domestically and internationally. Regulatory goals should be clearly defined regulatory bodies have to have objectives that are clearly spelled out, consistent and relevant. This would see regulators carry out their mandate and actualize their missions. These changes will help in authenticating the goals of financial regulation and enable access to critical information about how overlapping goals can be prioritized. They will also help in determining the required balance between specific rules and broad principles in the implementation of regulatory roles of regulators.
Dodaro (2009 p.6) proposes that regulatory system should make sure that financial institutions and their undertaking are regulated so that the demands and objectives of regulation are achieved. Activities that are bound to interfere with the insulation of consumers from risks, economic stability and other objectives should be amicably mitigated. This proposal will help in identifying gaps and help in formulation of risk-based criteria. It will also go a long way in coming up with ways with which the regulators can provide protection and at the same time put at bay efforts geared towards hampering innovation, formation of capital and economic prosperity.
Dodaro (2009 p.6) proposes a regulatory process that encompasses mechanisms for identifying, monitoring and managing risk to the financial sector without considering where the risk emanates from or the organization where it was created. This will help in formulating ways to broaden the perspective of individual regulators. By this, new and proactive will be instituted to check on emergence of systematic risks.
Dodaro (2009p.7) proposes a regulatory system that is flexible and adaptable. Regulatory systems should be made such regulators conform to market changes. These will help in determining how to expeditiously monitor market developments. This will go a long way in helping identify possible risks and the extent to which regulatory measures would be relevant and who is accountable. With this, one would be able to get middle ground between assessing new commodities that gain entry into the market and taking appropriate action to cushion the consumers and investors without interfering with innovation.
Dodaro (2009 p.7) proposes a financial regulatory system that is efficient and effective. The regulatory system should be able to withstand overlapping federal regulatory missions and stem out burdens that come up with regulations. This will robustly spell out the role of governments in the financial regulatory system and how the roles of the federal governments and those of the states can be synchronized in the financial regulatory system. It will also help in coming up with informed decisions about arguments for or against having multiple regulators in the market and other non-governmental players. This proposal will help in improving the efficiency of regulatory systems by consolidating agencies with converging roles to minimize costs to be incurred. It will also help in evaluating how the changes in the financial regulatory system may impact financial market activities and in a broader perspective the economy. Necessary corrective measures have to be taken to contain such consequences.
Dodaro (2009 p.8) has advocated for the protection of consumers and investors. He envisages a regulatory system that prioritizes cushioning the consumers and investors from any impending risks. This would enable market operators to get reliable information, legal protection notwithstanding. This proposal will make regulatory bodies give priority to consumer protection. It will enhance responsibility that will aid consumer protection. It will also go a long way in enhancing financial literacy of the general populace. It will also help in distinguishing between wholesale and retail products and help know the extent to which the distinction can help in their regulation.
Regulatory authorities should have financial oversight to ensure that products, risks, and institutions are all undergoing thorough regulation which will help contain negative competition and at the same time help harmonize oversight domestically and internationally. Availability of financial oversight helps in the identification of institutions, services and products that create same risks. Determination of consolidation levels helps in stabilization of financial regulation activities in the financial sector. It also helps in determining the extent of international coordination.
The financial regulatory system should be molded in such a way that it can cushion taxpayers from exposure to financial risks associated with financial institution failures. When the financial regulatory system cushions taxpayers from the risks perpetrated by financial institutions, systematic crises will have been stemmed out suppressing this moral vice. This regulatory measure will also compel financial institutions to mitigate ways to curb exposure to the taxpayers to the financial risks they should be held responsible for.
Dodaro (2009 p.8) proposes that the regulators should be made independent in their operations to be more authoritative and accountable in whatever they do. They should be protected from influence from any quarter that may curtail their operations. They should be sufficiently funded to enable them to meet their statutory obligations. This will stem out any form of interference that undermines the activities of regulatory bodies and make them more accountable and prominent in their endeavor to perform their mandate.
As the World Bank chief puts it, governments and the international community should come up with flexible, working, and foresighted regulatory measures that can cushion the taxpayers and the investors.
Amin, S., 2008, Financial Collapse, Systematic Crisis? Center for research on Globalization. Montreal: GRP.
Beams, N., 2008, The World Economic Crisis: A Marxist Analysis. World Socialist Web Site. Washington, ICFI.
Cooke, S., 2009, The deeper origins of the economic crisis. Center for research on Globalization. Montreal, GRP.
Dodaro, G.L.,2009, Financial Regulation. Washington, United states government Accountability office.
Foster, B. J. (2008). The Financialization of Capital and the Crisis. Monthly Review, Vol. 58, N o. 11, pp. 8-10.
Lange, H., Anthony, A., John, A., Thomson, D., Cornett, M.M.,2007, Financial Institutions. Management. McGraw Hill. 2nd Edition.
Murray, J. & Sy, W., 2009, Rethinking the role of financial regulators. Center for Policy Development. Sidney, CPD.
World Bank Group., 2008, The global financial crisis: what does it mean for developing Countries. World Bank. New York.