The Current Global Economic Crisis and Globalization - Essay Example

? The current global economic crisis and globalization Globalization According to Faundez p. 28), globalization is defined as the process through which the interdependence and connectivity of the world’s businesses and markets is increased. Globalization has accelerated dramatically in the past two decades following the technological advances, which have made it easier for the people to communicate, travel, and carry out business internationally. The two major recent forces, which have actually driven and accelerated globalization, are the rise and expansion of the internet connectivity and the improvement in telecommunication channels. Generally, as connection between economies is strengthened, the consequences are always an increased competition, but also increased opportunity (Faundez 2010, p. 226-29). Globalization and the US Politics An analysis of contemporary and historical patterns of the imperial structures, US political preference, and globalization in the era of Post-World War II has been conducted. From this analysis, it was established that the present-day globalization is rooted in some orchestrated political developments in US. It is also seen as progressing along the dimensions and stages linked by not many pivotal turning points. This present-day globalization results in a situation where the US auspices dictate the global order that is increasingly dominating the inter-state system. In this error of totalizing globalization, the US Empire and globalization have very substantial overlap. The global structures seen in the later day must be primarily because of more or less fortuitous political engineering by councils of American political preferences, whose aim is to harness, shape, and reconstitute the international order. all these are done to favor and benefit the America’s neo-imperial purposes. This makes globalization today to have an indelible imprint placed by the American imperial steamroller way back in twentieth century. The globalization is also a result of more or less practices, preferences, and liberal ideologies.The bailout bill that is going to be highlighted in this paper will further expound of the political aspect of the globalization. Globalization responsible for the power decline in national governments Ritzer (2011, p 99) argues that delocalization has not only affected the individuals but it has also affected the neighborhood institutions. Delocalization has led to many adverse effects among which, is the reduction of the authority of the national governments to control and have an influence on their economies, in this case, the macroeconomic management. When the economic activity shifts, for instance In United States or Japan, their effects are felt all over the world. When the technological, services, and manufacturing financial markets are internationalized, the consequences of this move will be an impaired freedom with which the nation states can act. Furthermore, with the rise of such international institutions as the European Central Bank, the European Union, and the World Bank, new imperatives, and constraints have arose (Ritzer, 2011). Consequently, although the influence brought by the nation states has been shrinking because of the globalization process, it has not vanished. Instead, the input of these national states is still pivotal especially when it comes to the creation of the conditions that lead to appropriate international governance. The important thing however is the examination of the manner in which the national states frame their ideologies concerning policy. In this case, there is a powerful claim that the influence of globalization is largely controlled by the degree to which the politics have become market-driven everywhere. The point is that the governments are no longer in the position of managing their national economies. What is only expected from the governments is that they must be more involved in managing the national politics in such a manner, which make their governments withstand the pressures caused by forces of the trans-national markets (Herrmann, 2005). Globalization and risk Apart from opening up high possibility, the use of new internet technologies, in combination with the need for profit making, the worldwide reach comes with specific risks. It has been argued by some writers that the power gain from the technological economic progress is now being hindered by the presence of risks. In this case, the risks can be regarded as the possibility of harm coming from the economic and technological change. The hazards associated with the industrial production, for instance, can rapidly spread and go past the immediate context of their generation. In this way, the risks are becoming globalized (Boulle, 2009). The risks arising from modernization have a normal tendency to lead to globalization. When the hazards become universal, it is because of the industrial production. Though industrial production may be arising from one nation, the market chains will eventually connect the hazards to an extent in which it extend to reach everyone on earth. They permeate through borders. According to some arguments, the globalization has a boomerang effect of this kind. This means that risks can catch up with anyone, whether they are profiting or they are producing. The basic idea beneath all this is very clear and very simple. Anything that negatively affects life on this planet also negatively affects the commercial interests and the property of those relying from the co modification of the life’s requisites or life. Consequently, a systematically intensifying and genuine contradiction comes from the property interests and the profit that improve the process of industrialization and its often-threatening consequences, which expropriate and endangers profits and possession, not mentioning the profit and possession of life (Boulle, 2009). The 2008 global economic crisis as a product of globalization In 2008, the global economic crisis was sparked by the federal government bailout. The bailout bill was brought to the House of Representatives. A number of federal government officers put together this bill, which was also, called Emergency Economic Stabilization Act. This bill meant that the Treasury secretary would get the power over $ 700 billion for buying such financial assets like mortgage-backed securities. This is because the plummeting values of the mortgage-backed securities had resulted in the freezing of the credit markets. In its original form, the bill was overturned. Those who were supporting the bill claimed that it would keep the United States economy from collapsing. On the other hand, those who were opposing the bill claimed that it was drafted in hurry, and because of this will place a lot of pressure on the taxpayers who had no responsibility for the irresponsibility of Wall Street (Faundez, 2010). Besides, these opponents also argued that the bill was less popular with the country at large. Considering the close November’s elections, the politicians made sure that their decisions did not affect their voters in any way. Because of the failure of the bill, amount worth $ 1.2 trillion was removed from the American stocks’ market value. This is because the investors who were afraid had to flee for the safety of government Treasury bonds and gold. The Dow Jones Industrial Average experienced the largest decline in one day whereby it dropped 777 points. The S & P 500 on the other hand, made a 9 % drop, which had not been seen in two decades. After the failure of the bill in the House, the action of the Senate came in. here; the bill was amended and passed overwhelmingly. The amendments, which were seen, included the addition of over $ 150 as tax breaks to businesses and individuals. The version of the bill was passed and amended by the House of Representatives later by a wide margin. After just an hour following the passage of the act by the congress, President George W. Bush signed the bill into law (Faundez, 2010). The Bailout Bill Das (2009) claims that the bailout bill had a number of details. One of the contents of the bill was the Troubled Assets Relief Program (TARP). In this case, the bill was giving an authorization of $ 700 billion. The authorized funds were going to be used in buying and holding the trouble loan-based assets. Majority of these assets were linked to the home prices in the falling United States housing market. The plan of the Treasury was the hiring of the asset managers whose responsibility would be that of determining the kind of loans to be bought as well as the way of doing the buying. In addition, the asset managers were to work out the pricing details and the buying procedures (Das, 2009). The other detail was that involving the protection of the taxpayers. According to this provision, if incase the government experiences a net loss after five years period, then the duty of the president was to submit a legislative proposal seeking reimbursement. This reimbursement was expected to come from the financial institutions, which participated. The help for homeowners was the other detail. In this case, the Treasury had the duty of buying mortgages, mortgage-backed securities, and other assets whose security was the residential real estate. By investing in these loans, the treasury would be in the position of minimizing foreclosure and encouraging the loans solvency. At the same time, treasury will have the authority of cutting some penalty to homeowners falling behind on making their payments. This was therefore, going to be something, which has never been done by commercial lenders (Faundez, 2010). International Involvement Beyond the United States, the impact of credit crisis was felt internationally. Consequently, the credit crisis has had a great influence on the services of financial sector globally. This has caused many foreign banks especially those prone to challenging local environment and collapse to respond hastily to the fast de-stabilization of the performance of their economies. These banking institutions have not been different from those financial institutions in the United States of America in terms of the value erosion. Value erosion, which is characterized by the fear that the investors have when they are over exposed to complex mortgage securities is therefore turning all the investors in the global market afraid (Das, 2009). 1. Europe It is outlined by Bridgstock (1998, p 55) that in Europe, the impact of the 2008 global crisis was first felt by the Northern Rock bank which is UK based. This bank was, in February 2008, nationalized by the British government. The nationalization had come after the bank had failed to raise enough funds to meet the borrowing requirements of the bank. Officials who were behind the nationalization viewed it lightly as the only means of avoiding bankruptcy following failure of the negotiations for buying the beleaguered institution. The government had no otherwise but to assume all the debt obligations, which were about $ 90 billion pounds of the Northern Rock, thus signaling the first great UK bank intervention. 2. Government Intervention in European Markets From the time the UK bank intervention was seen, the local government states all over the Euro Zone have employed aggressive measures in providing a lifeline to the institutions, which are beleaguered. This was due to their fear that the failure of one institution was going to result in successive collapses, not only in their nations but also throughout the whole continent. In UK, Bradford and Bingley, the financial lenders, were nationalized. In Iceland on the other hand, the Glitnir, which is the third largest lender, was also nationalized. In addition, the governments of Netherlands, Luxembourg, and the Belgium partially nationalized Fortis, a financial conglomerate. They did this by buying main interests in the subsidiaries allocated to the respective nations. About nine billion dollars were infused in Dexia by French and Belgian government (Bridgstock, 1998). On the other hand, the Ireland government announced it would be guaranteeing payment reaching up to $563 billion in financial/bank debt, which included the individual deposits, short-term borrowings, and securities. This was the Ireland’s most ambitious strategy for restoring normalcy especially to the European markets. The individual deposits, short-term borrowings, and securities constitute twice the gross domestic product of the country (Ormerod and Clifton, 2007). According to Munck (2005) such great moves have raised worries amongst officials elsewhere, especially in the United Kingdom, who is afraid of this size of incentives to investors, who currently lack such guarantees to engage in money transfer out of their nations to Ireland. The response by the German government was that of guaranteeing all the saving accounts, which are private in the country. However, the German government refused to insure other liabilities of the banks. These issues have elicited ongoing debates discussing on the extent of the development of a holistic approach by the European countries to the intervention of the government in financial markets. Consequently, leaders from Italy, Germany, Britain, and France had to hold a financial summit whose aim was that of establishing a more unified front. 3. Russia Due to the erosion of the confidence in the international markets, the Russian stocks experienced a massive sell off. This was because investors were busy withdrawing the capital from the country. Economic uncertainty brought worries to the already existing concerns that were seen after the invasion of Georgia by Russia in August 2008. The amount of investment capital that has left the country since then is over $ 63 billion dollars. When the biggest drop was experienced by the equities, the trading on the main exchanges of the country saw the investors stopping the trading. Because of this, there was an injection of $ 14 billion by the world bank to the Russian financial system, besides the setting aside of about $ 50 billion dollars for providing support to cash starved organizations that have seen the rapid fall of their values. Particularly hard hit are the wealthy oligarchs. This is due to the increase in the borrowing cost. By the end of 2008, the amount of debt obligations, which were due, are $ 48 billion dollars (Tung, 2007). 4. Asia When it comes to the financial institutions of Asia, the exposure to the obscure financial instruments that has turned the world around is little. The reason for this is that the Asian financial institutions have experienced financial crisis of their own whereby firms had such lessons of taking the risk management approach that is more measured. This kind of risk approach is the one that relied less on leverage but maintained higher liquidity ratios. Because of this, the Asian firms especially in Japan have been in the best position for making strategic investment s in such industry as finances (Robertson, 1994). Mullerat and Brennan (2010) claim that even with the precaution, the Asian government has the awareness that their nations have no immunity to the general dynamics in the markets. Because of this, the Asian countries witnessed the dipping of their stock markets as banks constricted credit with the fear of counterparty risk. Moving in line with Europe, the national governments of Singapore, Malaysia, and Hong Kong then responded by giving all the banks the guarantee to deposit in their respective nations. This strategy was aimed at preventing the banking institution from being run on. On the other hand, the South Korean government, which is the fourth largest economy in Asia, comes up with a $ 130 billion as the bailout plan meant to assist the banks in paying their international debts. Pakistan In Pakistan, the ongoing security concerns and the political unrest in the middle of the global economic crisis resulted in a significant capital flight out of Pakistan. This took place despite the efforts of the central bank to restore investor’s faith by injecting cash into the system and at the same time despite the new guidelines that prohibited a sell-off to occur in Karachi stock market. Because of this, there has been a severe reduction of the reserves of the foreign exchange. If the government does not access the additional capital it would be vulnerable a failure in payment, and as a result has engaged itself actively in seeking support from Saudi Arabia and China in oil concessions form. Consequently, Pakistan was financed by the Asian Development Bank and the World Bank in October 2008, to a tune of $ 1.5. On the other hand, the UK’s Department for International Development and the Islamic Development Bank made pledges of $ 1 billion respectively. IMF was believed by the analysts to have been the last source of capital for Pakistan in case it had lacked additional aid (Marden, 2003). Implications of the Crisis Bank lending Appadurai (2001, p. 100) claims that the global economic crisis led to bank lending. Consequently, the banks have been selling-off their stocks massively due to the perceived failure that they had in managing the risk. In this case, the banks were being drained further of liquidity, while many were being led to the edge of insolvency. Even after the injection of cash by the central bank into the global economy, through the provision to the financial institutions of the large short-term loans, the interbank lending has been subjected to a grinding halt, as banks fear giving out capital to unstable counterparties. The reluctance of these banks to lend to each other, further bring down the credit markets, making it hard for individuals and corporations, even those possessing outstanding consistent track record of loan repayment or those having strong credit scores , to utilize debt in financing the buying of everything ranging from the equipment to auto loans. The decision of the European markets and United States to take the main portions in the financial institutions may be an indicator through which the finance industry can be convinced that it is now safer to lend (Lechner 2009, p. 33). Real Estate According to Scholte (2005, p. 66) the impact of global economic crisis in the real estates was felt, as there was a significant downward pressure on residential and commercial values. The housing supply in tertiary and secondary markets has seen a significant increase in 2008 because of not only the increase in foreclosures, but also the inability of the property owners and the developers to refinance or sell projects in the middle of the credit freeze. When we consider the fact that the average largest investment of America is in home, this can be troubling particularly. With a continued decline in the real estate prices, there will be the erosion of the homeowner equity. There will also be the wiping out of the same equity in some cases. In the situation where there is no availability of the credit, especially in the near future, the debt obligation of the owners comes to maturity. Because of being unable to make the payment, many will default settling the debts For the US policymakers, it seems they are employing proactive measures in trying to prevent a free fall in the pricing. At the same time, the policymakers are looking for a second bailout that would ensure that the real estate market is explicitly addressed. One key feature of such a strategy is that the mortgage terms would be re-negotiated in order to cut down the rate of foreclosures. However, the extent to which borrowers and banks would be involved would call for negotiation with legislative bodies (Boudreaux, 2008). Credit Default Swaps The market of Credit Default Swaps constitute the loosely regulated group of financial firms whose business is to buy and sell insurance that would bring protection against the losses on such instruments as asset-backed securities and collateralized debt obligations. These credit Default Swaps will get more from the government authorities as the magnitude and influence of these contracts turn into better focus on the greater financial markets. Though the right size of the Credit Default Swaps market is not well defined, it is doubtless that it stretches up to trillions. In fact, one of the strange estimates is that the market is worth $ 62 trillion (Barnett, et. al., 2010). The creation of the Credit Default Swaps market was done much like the creation of the insurance. Therefore, the objective of this creation was that it would make it possible for the financial institutions to offset the negative exposure to securities through the insurance of their losses. Companies made premium payments to counterparties to ensure that their face value arising from such instruments as bonds would be covered. However, due to the variation in the cost of the premiums, which was determined by the perceived probability of default, as well as the extent of loss, the premiums were traded and regarded as an indicator of the stability of the bank (Barnett, et. al., 2010). Retail Sales Because of the 2008 global financial crisis, the estimated decline in the retail sales in relation to the previous year was 2 to 3%. The major causes of this decline were cited as the falling consumer spending, deep discounting, and the winter storms that kept the shoppers away. The figures of the retail sales were predicted to continue falling as the lower disposable incomes continued to constrain the household budgets. However, the effect of this fall was not felt by all retailers. This is because the retailers with big boxes have seen an increase in their sales because they were offering lower prices that were affordable to the consumers (Steger 2010, p 36). 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