The Cause of the Global Financial Crisis Essay Example

the crisis will also be critically analysed, the essay will demonstrate how such deregulation is a result of flawed regulatory procedures during the past 30 years and thus, the blame will bounce back to regulatory failure. This essay will commence by a critically analysis of Braithwaite’s argument with reference to a range of examples and evidence. Subsequently, the opposing argument will be critically analysed with examples and evidence and it will be seen that the blame for the crisis shifts back to regulatory failure which is thus, the concluding viewpoint.

There are many academics who are on the same line as Braithwaite in regards to the recent 2008 GFC and thus, provides viewpoints and examples that simply enhance his argument that “we live in an era of regulatory capitalism and thus, flawed regulation and flawed governing of regulations is responsible for the most recent financial crisis of 2008”. The existence of regulatory agencies like FED, SEC and the Treasury who are responsible for regulating and monitoring the actions of Corporations suggest that we live under a system of Regulatory Capitalism.

Therefore as will be seen below, certain regulations and regulators are responsible for the crisis in many ways. Levine (2012) blames the crisis on a lack of regulatory responses to the actions of financial institutions. Prior to the GFC, regulatory agencies preserved certain policies even after knowing that such policies could potentially destroy the economy in a destructive manner, such as the loose monetary policy which allowed for pricing inflations. By turning our attention to CDSs in particular, FED was very well informed of the increasing danger of banks using CDSs to reduce

Capital Reserves.

In fact the FBI issued a public warning in 2004 about the likelihood of a widespread fraud in the subprime lending market because of the CDSs however FED failed to amend policies in response to such warnings. While it is valid to argue that JP Morgan had freedom to create CDSs as the banking system was unregulated at the time in which FED had no responsibility in regulating financial systems, FED is regarded as a regulatory agency and their job is to maintain the stability of the financial system and eliminate or contain any risks that may arise in financial markets.

FED received a plethora of warnings and information suggesting that such CDSs are extremely risky and detrimental to the economy. Therefore they had sufficient time and opportunity to contain the risks of CDSs. However the fact that they were reluctant to do so and thus, failed to conduct their responsibilities in a proper manner resulted in the crisis. Similarly to the above statement and thus to Braithwaite, Coffee (2009) blames the current GFC on a lack of Regulatory monitoring. As a result, financial institutions had an incentive to further exploit the financial markets and pursue their own interests at the expense of those of society.

Moreover Coffee (2009) specifically places the fault on the most significant regulator SEC because of their failure to oversee the CRAs and detect the reasons behind their inflated ratings, which led to the crisis. Coffee (2009) lists many reasons for the poor performances of the CRAs which SEC either couldn’t do or were too reluctant to acknowledge. Such reasons include no competition as there

are only three CRAs in the CRA market; as CRAs in the USA were never held liable for anything or never settled a case, they were not imposed to any liability threats.

SEC being a professional and crucial Regulatory agency in the Commercial Sector should have being aware of such incentives of CRAs. Instead SEC entrusted CRAs to provide accurate ratings and thus, did not feel the need to oversee the agencies. Coffee (2009) believes SEC entrusted CRAs to provide accurate ratings as there are only a few CRAs in the market so therefore, CRAs would know that their ratings would be heavily relied upon and thus, act in an acceptable manner. However, this was far from the truth.

Furthermore during the decade prior to the recent GFC, it was explicitly obvious that the rise of structural finance and the emergence of Fitch Ratings would have imposed further pressure on CRAs to inflate ratings in order to maintain a favourable reputation. The fact that SEC placed their complete trust on CRAs to act in a considerable manner and was oblivious to how such internal and external factors mentioned above could change the behaviour of CRAs in a negative manner demonstrates another sort of regulatory failure that led to the recent crisis.

CRAs only acted in this manner as they knew they were exposed to limited monitoring by SEC. Furthermore in support of Braithwaite’s argument, although there were regulators and regulatory agencies in place to govern financial institutions during the 2008 GFC era, they were more interested in fulfilling the needs of private financial institutions with which they have close affiliations too, instead

of regulating financial institutions to fulfil society’s best interests. As a result, such actions by regulators have hurt the economy through the recent crisis.

This can further be explained by the extensive degree of “Regulatory Capture”, which Braithwaite also touches on, that leaves a profound impact on the U. S Financial sector. Avgouleas (2009) believes that executives who resign from the Finance sector to commence work at significant institutions like SEC, FED or Treasury enter such institutions with very limited or even anti - regulatory views and strategies.

This can be explained by Alan Greenspan leaving JP Morgan Bank to take on the role of Chairman of FED in 1987 as well as both Robert Rubin and Henry Paulson resigning from Goldman Sachs to take on roles as Treasury Secretaries under Bill Clinton and George W. Bush. Consequently, both Rubin and Greenspan exploited their positions to abolish the regulation of the banking system which simply left banking and other financial institutions completely unregulated and thus, led to the recent GFC. After exploiting their positions in such manner, both Rubin and Greenspan resumed their previous positions in the financial sector.

Furthermore while CEO of Goldman Sachs, Paulson induced the bank into buying extensive CDO’s based on fraudulent loans and when he became Treasury secretary he initiated a successful war against regulation of the banking system and securities. Avgouleas (2009) credits such failures to lack of independence of Regulatory agencies as Regulators most often identify with private financial institutions they have close ties with and aim to please their needs and interests through the governance of regulatory policies.

Therefore Regulators in this case encourage

and permit Capitalists to behave in a fallacious manner which is the most important reason as to why they are responsible for the recent crisis. Whilst academics above are in line with Braithwaite and provide somewhat meritorious statements as to why regulations and regulatory agencies are responsible for the recent crisis, there are also multiple academics who convincingly argue that we live in an era of Neoliberalism Capitalism and that the recent GFC was simply the fault of Capitalists during this process of deregulation.

Kotz (2009) argues that deregulation of financial markets since the end of the 1970s enabled financial institutions to continuously pursue any activity that would simply maximise profit, which is rather typical of an unregulated Capitalist economy. Maximisation of profits as well as raises in household incomes both in a deregulated economy allowed for such asset bubbles to be created and the bubble could only be fed by a financial system under a Neoliberalism Capitalism structure.

Such actions would not be allowed under a Regulatory Capitalism system prior the 1980s because of the noticeable detrimental effects of such expansions to the economy. Furthermore as Crotty (2009) states, the current financial regime under Neoliberalism Capitalism contains extensive perverse motives that leads to excessive risks, exacerbate booms and creates crisis. Such perverse incentives include fees granted to financial institutions from rapid growth in mortgage securitisation, executives’ bonuses in years of high risks which will certainly increase substantially during booms.

As Crotty (2009) explains, it is impossible for regulations to exist as long as perverse incentives exist as a Regulatory Capitalist system would not allow Capitalists to maximise their own gain at

the expense of the entire society and economy. Capitalists have proven to be successful in grabbing such incentives through the recent crisis and thus, this contradicts Braithwaite argument that recent GFC is attributable to regulatory failure. However as previously mentioned, there are many reasons as to why regulators can be reluctant to prevent such expansion and perverse incentives.

For instance close affiliations with such private institutions might divert regulators focus from the long term interests of the society to the short term profits and benefits of such institutions because regulators plan to either take up a position or resume their position in such private institutions once their contract as regulators is over so therefore, they must ensure that such institutions remain profitable. The consequence of such actions like formation of GFCs does not occur to them once they realise an opportunity to favour private institutions and assist them in maximising profits.

Thus for this reason, the main cause of the GFC shifts back to regulatory inconsistencies which in turn is in light with Braithwaite’s argument. Tridico (2012) takes the initiative to examine the underlying root causes of the series of GFCs that occurred in the past, including the recent one. Like Kotz (2009) and thus contradictory to Braithwaite, Tridico (2012) agrees that the series of GFCs originally stemmed from a process of deregulation as a result of the increasing inequalities in both income and wealth and in income and profits.

This is only possible through an unregulated Capitalist society as labour and wage regulations under a Regulatory Capitalism system would prevent such growth in inequalities. Statistics do demonstrate that in the past

30 years which Tridico (2012) describes as a period of Neoliberalism Capitalism era, the income of Capitalists and other wealthy Americans has increased rapidly whilst the income of lower class Americans has only decreased.

Likewise statistics also demonstrate that the rate of production output has increased rapidly in the past 30 years whilst wages of such workers who are responsible for the increase in production output rate has decreased. The underlying reasons for such inequalities can only be explained by motives and intentions of Capitalists who are not subject to regulations such as class exploitation, increasing profits by compressing labour whilst simultaneously increasing intensity and duration of labour as well as increasing profits through tax exemptions.

Such consequences laid the basis for the recent crisis because firstly, it enabled the wealthy who owned extensive amounts of funds to invest into risky financial assets. Secondly with declining wages, workers had insufficient funds to acquire necessities so therefore under heavy pressure by mortgage purveyors, felt the need to borrow money against their homes to purchase necessities and pay off bills Therefore such growth in inequalities in the U. S, which laid the foundation of the recent crisis as well as the series of past crisis, is only possible through an unregulated Capitalist society.

However as much as Tridico (2012) might be correct in stating that the underlying root causes of the series of crisis stemmed from inequalities in a deregulated economy, it is important to note that there were weak policies and regulations implemented during the past 30 years, regulators have failed to govern Capitalists in an appropriate manner and many regulations and policies have

been relaxed during the past 30 years as a result of regulators favouring the needs of Capitalists.

Thus although it can be argued that the relaxation of policies and regulations deems deregulation to be main cause of the GFC, such deregulation occurred as a result of extensive flawed regulatory decisions and procedures which culminated into one of the worse GFCs the world has seen since the Great Depression.

This statement however is disputed by Crotty (2009) who believes that financial crisis only gets larger every time because of larger government bailouts during the previous crisis which simply provides Capitalists with greater opportunity to exploit financial markets under a deregulated system and thus, explains the severity of the recent crisis.

Whilst still contradictory to Braithwaite, Blankenburg and Palma (2009) believes that the underlying root cause of the recent GFC is the declining rate in profits during the Neoliberalism era. This, in turn, is in further contradiction to the academics above who believe that the underlying root causes of the recent GFC is because of the increases in profits by Capitalists during the Neoliberalism era.

As Blankenburg and Palma (2009) states from a Marxist perspective, increases in profits in a Capitalist economy results in an overall prosperous economy whereas decreases in profits results in prosperity decline which may in turn, transform into a recession as business investment declines, unemployment rate rises and people’s living standards are deterred. As a matter of fact, Mosley (2003) provides statistical evidence to prove that the increase in unemployment rates and inflation rates was due to declining rate of profit in the past 30 years of this “Neoliberalism

era”.

In order to restore and raise profits to satisfactory levels, Capitalists found it acceptable to increase the prices of their goods instead of increasing product output which simply led to higher rates of inflation in the economy. Such action would be disallowed if Capitalists were heavily regulated. The reasons as to why profits have decreased in the past 30 years is because of high investments in emerging technologies which makes capital rise at a much faster rate than the number of workers employed.

Although such evidence was provided in 2003, Blankenburg and Palma (2009) states that such evidence has major inferences to the recent crisis because decreases in profits in a productive economy always motivates Capitalists and wealthy investors to invest extensive amounts of money into financial assets as they are more profitable than investing in physical asset capital because they do not involve costs of producing and then selling commodities.

Most importantly, financial assets could be easily traded in the global market because of extensive global financial deregulation. Therefore from Blankenburg and Palma’s (2009) perspective, it can be seen that the current GFC could be a result of low profits which induced Capitalists to undertake actions such as price inflation which would not be allowed, under any circumstances, in a Regulated Capitalism economy and thus, remains contradictory to Braithwaite’s argument.

However as Blankenburg and Palma (2009) blames price inflation on lower profits, the monetary policy that is currently in place aims to prevent such inflations from occurring which once again indicates weaknesses in governing regulations and policies. Thus by critically analysing the cause of the financial crisis from Blankenburg

and Palma’s (2009) perspective, the cause of the recent GFC would once again bounce back to regulatory failure which is in turn, consistent with Braithwaite.

Overall, it can be seen that various academics above provide sound examples and evidence to support both Braithwaite’s argument and the argument that the recent GFC was caused by deregulation which makes complete sense and are extremely compelling. By deeply analysing the issue, it can be seen that regulators such as FED, SEC and the Treasury were firstly put in place to oversee the actions of financial markets, to make sure financial institutions are acting in the best interests of society and are not exploiting financial markets to the detriment of society and most importantly, to contain risks.

Therefore, we were living under some form of Regulatory Capitalism during the recent GFC. However the recent GFC and its extent prove that regulators failed to carry out their responsibilities in a considerable manner. Whilst lack of oversight and lack of regulatory response play a huge role in the cause of the recent GFC, the fact that Regulators were favouring the financial institutions for their own gain and thus, enabled Capitalists to exploit the financial market is the most prevailing cause of the recent GFC.

Although financial markets and the Global financial markets were left unregulated which induced some academics above to believe that we were living under a Neoliberalism Capitalism system during the crisis, the reason as to why such systems were left unregulated is because of weak regulations and policies, relaxation of most regulations such as the banking regulation and Glass Steagall Act in order to favour

Capitalists and financial institutions has resulted in Capitalists taking full advantage of the markets this time to a much greater extent because of easy accessibility to resources given the advancement in technology.

Therefore although the recent GFC was caused by actions that are typical of an unregulated Capitalist society, the economy only became deregulated as result of flawed regulatory implementations and decisions which in turn is in light of Braithwaite’s argument. Conclusion Conclusively, it can be seen that certain Regulations and Regulatory Agencies were put in place during the past 30 years in order to eliminate or contain risks that could potentially lead to a financial crisis.

However the fact that Regulators failed to take on their roles in a consistent manner for the many reasons mentioned above demonstrates that they are overall to blame for the recent Crisis. It can be seen that sufficient evidence have been put forth which suggests that the deregulation of financial markets is to blame for the whole crisis which to an extent is true. However as mentioned above, the only reason why such financial markets were left deregulated is because of flawed regulatory procedures and flawed governance by regulators and thus, falls in line with Braithwaite’s argument.