However, Ravi Jagannathan, a finance professor at Kellogg School of Management, argues that this is only half of the story. “Solutions based on inadequate comprehension of the issues involved,” Jagannathan warns, “would likely lead to even worse difficulties down the future.”
The financial crisis that engulfed the United States, according to Jagannathan, Mudit Kapoor of the Indian School of Business, and Ernst Schaumburg of the Federal Reserve Bank of New York, was essentially a symptom of ongoing fundamental changes afoot in the world. Globalization has caused huge shifts in labor supply in developing countries, and the inability to respond to these movements is the root of the recession.
Was the Great Recession caused by globalisation?
The global economy was pushed into a severe slump by the financial crisis that began in August 2007 and exacerbated in the fall of 2008, which some have dubbed the Great Recession. World trade dropped at a rate not witnessed since the 1930s Great Depression.
How did the global economy fare during the Great Recession?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.
What triggered the recession of 2008?
The Great Recession, which ran from December 2007 to June 2009, was one of the worst economic downturns in US history. The economic crisis was precipitated by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages.
What impact did the global financial crisis have on globalisation?
The severity of the current financial crisis, as well as its many dimensions, raises concerns about certain fundamental aspects of the financial system, such as the overlapping efficiency of financial markets, the convenience of reducing the global level of debt by financial and non-financial companies in terms of total resources, the need for improved regulations and supervision, the suitability of risk management mechanisms, or the convenience of economic incentives based on volume. Furthermore, doubts about the financial system’s efficacy have been cast on market economies’ actual functioning and, indirectly, on the future of economic globalization. Is what Fischer said about globalization and policies that encourage it at the end of his Richard T. Ely Lecture in January 2003 still true today?
On the following pages, we will attempt to show that the globalization process can be slowed or shifted, despite the fact that, in terms of economic organization, the free-market economy remains the least-bad option. Nonetheless, as the current crisis has demonstrated, its functioning could obviously be improved. Long-term progress is dependent not only on the presence of dynamic, free, and open markets, but also on the sensible and efficient presence of the public sector, which is required to rectify negative spillovers caused by markets. The economic globalization process, however, follows a different logic than the market economy. When the free market is proposed across national lines, not only cultural and language hurdles must be overcome, but also economic, political, and legal barriers, some of which are rather large. In that sense, the economic globalization process might come to a halt because it is a choice, and as such, it could be reversed by current policies.
To answer this topic, note that the economic globalization process has mostly manifested itself in a major growth in trade and financial flows in recent decades. Four key motors have pushed this process forward at different times, with varying degrees of power and speed: public policies, worldwide company expansion, prevailing values and concepts in public policies and society, and technology. Because technology is not immediately affected by the economic crisis, we will not discuss it here; instead, we will focus on public policies, dominant values, and businesses. The primary external indicators of the globalization process will be examined first, followed by the three motors outlined earlier.
Trade flows
The recent implosion of the global financial system has slowed the economy, resulting in a sharp drop in foreign trade. Restrictions on credit to businesses, especially loans to businesses’ circulating capital, have exacerbated the downturn. Furthermore, the drop in economic activity has resulted in a large overcapacity in several sectors of the economy, resulting in an increase in unemployment. The car sector in Europe and the United States has witnessed the greatest reduction in sales in decades over the last twelve months. Other industries, such as steel and capital goods, have also seen significant declines.
As a result, the financial crisis has exposed some of the flaws and structural risks of economic globalization: greater reliance on international trade, greater exposure of domestic industry to excess capacity when economic activity drops abruptly, and indirectly, an incorrect but latent and manifest perception in the most advanced economies that globalization has weakened their countries due to a lack of resources. Once again, the deindustrialization of countries like the United Kingdom is bemoaned, even if the transition to a tertiary economy had grown to seem natural and almost desired in recent years.
As demand falls and unemployment rises, new arguments for economic protectionism emerge. Until now, the governments of the world’s most powerful economies have done a good job of resisting protectionism’s charms. However, this struggle will never be conclusively won: the prosperity of the entire globe, particularly that of the poorest countries, is dependent on the existence of open goods and services markets that allow them to export their goods to the most advanced markets. Without the ability to freely enter the markets of the richest countries, neither China nor Brazil, among others, would have been able to dramatically reduce poverty in the recent two decades.
Nonetheless, while trade flows counteract protectionism’s impetus, commercial interdependence among countries might aid in the faster spread of economic recovery. Emerging markets are also important customers for advanced-market enterprises. If they boost their exports, economic growth will improve, as will the requirement to import capital goods or sophisticated intermediate goods, as well as public infrastructure investments. For global firms, all of these trends are positive. As a result, just as commercial interdependence has exacerbated the crisis’ worldwide consequences, it also means that any recovery by the most important economic countries would have a faster impact on the global economy. As a result, we can see that globalization as a process can have a wide range of effects on the global economy, and that these effects are not always predictable or preset.
Capital flows
The financial crisis had a direct, immediate, and massive impact on capital movements. To begin with, the liquidity issues that initially afflicted US banks and investors quickly spread to all countries participating in the global economy. Liquidity issues swiftly developed into credit limits, which harmed businesses with the highest debt levels the most.
A rising belief that liquidity problems could endure for a long time and escalate into solvency issues prompted a capital flight from emerging countries to more developed economies in April 2008. According to BIS data, the MSCI index of emerging market stock prices plunged 28 percent in local currency between May and September 2008, even before Lehman Brothers collapsed, although the S&P 500 index lost only 12 percent during the same period. This could be because the uncontrollable liquidity crisis of the first months of 2008 morphed into a financial panic about the global banking system’s imminent collapse, prompting investors to prefer US Treasury debt to emerging market assets.
Direct investments in emerging countries have also plummeted as a result of growing uncertainty about global demand and demand in the countries receiving those investments, as well as credit restrictions imposed by investment firms in their home countries and the fact that investments in emerging countries have become less appealing as the economic situation has changed.
The recent restructuring of the banking system, mostly in the United States and the United Kingdom, has resulted in increased concentration as troubled banks are absorbed by more stable banks, as well as a shrinking of the size of some of the large multinational banks. Two phenomena collide in this scenario. First, US financial authorities have made it clear that banks receiving government assistance must enhance the efficiency of their operations. Second, the restructuring of international operations is an obvious area for improvement in many institutions. The decreased number of worldwide activities in European banks, such as those in England, Holland, and Germany, is the consequence of a deliberate decision by the top directors of those institutions to maximize resource management and minimize the degree of global diversification of their operations.
The need to sell assets to reduce debt, the increased demands of capitalization, an awareness that some international operations have been characterized by poor risk management, and the need to divest themselves of international operations that were not very efficient in some cases are all factors that have influenced banking institutions’ decisions. This is a fascinating occurrence. As a result of the financial crisis, one of the most dynamically internationalizing sectors, banking, is experiencing a decline in international activities.
Furthermore, the difficulty of regulating multinational banks due to their greater complexity has sparked a public debate regarding whether it would be desirable for banks to operate in a narrower geographic region as regulated organizations. This argument is unlikely to constitute a turning point for foreign banking operations unless the debate on public policies in Europe changes dramatically. Nonetheless, the emergence of this argument demonstrates the extent to which the financial globalization process is now being questioned.
Finally, as a result of the financial crisis, mergers and acquisitions, another significant driver of globalization in recent years, have decreased. Because these company operations have a significant cyclical component, it is normal for them to decline in tandem with economic slowdown. Nonetheless, at this point in the economic cycle, the decline in the number and volume of such transactions is due to the loss of attractiveness of certain key markets, lower stock market expectations, general uncertainty about the future of globalization, and reduced credit facilities for debt-financed acquisitions.
Nonetheless, the financial crisis has demonstrated the importance of a high level of integration in the worldwide financial system. The massive budget and balance of payments imbalances in the United States have been financed with foreign savings, which would have been much more impossible just a few decades ago. Without China’s entry into the global economy, the US would have been unable to fund such deficits without significantly rising interest rates.
The second good aspect of financial globalization worth mentioning is that international capital flows have not fully vanished as a result of the financial crisis. As a result, the lack of liquidity in some markets hasn’t resulted in a broad-based increase in interest rates.
Finally, the crisis has shown the significant importance of government actions, particularly monetary policies implemented by major central banks to address the financial crisis’s perverse effects. The financial crisis was obviously avoided becoming a great depression thanks to a coordinated effort by central banks to infuse liquidity, calm the markets, and keep nominal interest rates low. In that respect, the crisis has demonstrated the effectiveness of the financial globalization circuits, even when specific institutions’ recklessness and a lack of regulation in line with new realities may have resulted in an even worse calamity. Similarly, central banks have demonstrated that, even when conditions are extremely difficult, as they were in 2007 and 2008, the financial globalization process allows for changes that would have been more costly and inefficient in other circumstances.
Public policies
As previously said, the financial crisis has prompted several concerns regarding the economic globalization process’ future. That crisis has shattered the foundations on which the global economy has grown in recent decades, foundations that essentially supported free and open markets, liberalization of international trade and capital flows, deregulation, and a reduction in the role of the government in the economy. This hypothesis is based on a collection of beliefs about the governmental policies that are required to ensure an economy’s proper functioning.
The first of these convictions is that, with the exception of monopolies, deregulated markets perform better than regulated markets. The second is that financial markets tend to be efficient, meaning that share prices accurately reflect all available information about companies. The third point is that, when confronted with the free-market/regulatory conundrum, the dominant paradigm has been one of less regulation and more market, particularly in financial markets.
In the light of the current crisis, reflection on these criteria leads to a rethinking of the public sector’s role in a market economy. This is neither the time nor the place to reconsider what have been generally correct decisions aimed at limiting or eliminating the public sector’s participation in mercantile companies, reducing tax pressures (particularly those that tax economic activity), and improving the efficiency of government spending. This is also not the place to argue for a larger role for the public sector in a country’s GDP, save from discretionary spending that is regarded wise in times of crisis. Nonetheless, it is apparent that the deregulation movement of the 1980s and 1990s corresponded with a reduction in the role of the state in economic activity to the point where two phenomena were confused for one another: less public sector involvement and less regulation. The first option, with less government involvement, has proven to be successful in the past. However, in certain areas, particularly in the financial sector, the move to reduce regulation was ill-advised.
One of the most significant consequences of the financial crisis has been a rethinking of the fundamental elements of market economies, as well as the necessity for more financial regulation. This occurrence will have ramifications for globalization. The first is that financial sector reregulation will make foreign expansion by banks more difficult, as well as limit and raise the cost of international capital flows in general. The second is that, in a period of lower economic development, a stronger public sector role as a financial sector regulator could drive it to intervene in areas of the economy other than those required to ensure adequate social security. The US government’s engagement in the car industry to save it is a striking example of these new realities. The restoration of state control could lead to further economic protectionism, including the blatant defense of so-called national champions in vital industries. This would be bad news for the normal running of economies, as well as a blow to globalization.
Dominant values and ideas
Another viewpoint has gained traction in recent decades, partly as a result of the ideas described in the preceding section, which have inspired economic policies in a number of countries: the idea that certain aspects of social life, or society as a whole, should behave in a manner similar to the marketplace, with the corresponding incentives. This concept peaked during the 1990s’ period of greatest expansion and resurfaced in the current decade before the summer of 2007. A rational approachthe premise that organizing economic activity in competitive markets is generally the most effective solutionhas been turned into the argument that social life should be centered on the market with this notion. Logically, the financial crisis has highlighted the ineffectiveness of many markets, particularly financial markets, and the need for fair regulation. It also disproved the idea that society is a reflection of the market.
It was in his first book, The Theory of Moral Sentiments, published exactly 250 years ago, that he exhaustively studied the function of non-profit values, as Nobel Laureate Amartya Sen recently pointed out in relation to Adam Smith (see Sen 2009). While claiming that wisdom is “the most advantageous of all virtues to people,” Smith went on to say that “humanity, fairness, generosity, and civic spirit are the traits that are most useful to others.” It is sometimes missed that Smith did not regard the pure market mechanism as a self-contained performer of excellence, nor did he regard the profit motivation as all that is required, says Sen. Sen concludes by stating that all of this should drive us to grasp the market’s limitations rather than rejecting it. To put it another way, the market has its bounds. Furthermore, there are additional personal and social issues that the market cannot account for.
The fact that the search for one’s own benefit or interest has become a basic principle of economic and corporate organizationnot to mention its presence in society as a wholehas been accompanied by an abandonment of the search for the common good, which is closely related to the previous hypothesis about the market’s role in the economy and society. In financial institutions, notably investment banks and collective investment organizations, the realization of personal ambitions and interests has been particularly eloquent, with some of these institutions disappearing as a result of the financial crisis. The pursuit of self-interest at any costs, sometimes motivated by avarice, has eroded many people’s personal integrity and jeopardized many organizations’ continuity, as well as the market economy’s stability and acceptance as a social norm. The current financial crisis has sparked an irrational surge of market suspicion, just as there is nothing rational about how the market economy was praised as a successful paradigm until recently.
The maximization of market value for shareholdersa new criterion that has supplanted the notion of maximum profithas become the core paradigm of corporate management, even though maximization is neither an active criterion nor the result of decisions that top management may make. Clearly, we tended to replace a real market of clients, products, people, efficiency, and economic results with a market based on expectationsthe stock marketon the assumption that the latter’s prices would reflect all available information. Payment of top management should be established in terms of corporate results, and more particularly, in terms of the company’s market worth, has finally become a widely accepted criterion. Paying top management is a difficult task, but it becomes absurd when the relevant indicators are short-term rather than long-term results. Short-term outcomes create perverse incentives to take risks in the hopes of making large short-term profits, without regard for the company’s long-term viability.
The solution to the market’s inability to explain certain human and social realities is to return it to its appropriate placethe world of economic transactionsand to acknowledge that there are countless dimensions and places in which market logic is insufficient in both the personal and social realms. Self-interest cannot be the cornerstone of a stable economic system or human society. If they did, the social fabric would be severely weakened structurally. A reasonable interest in one’s own concerns must be combined with a necessary interest in the legitimate well-being of others. That alone will ensure everyone’s peaceful and enriching coexistence. At the same time, an explicit defense of the common good is required, which embodies the social principles of freedom, fairness, peace, and human development that enable each individual to flourish. Authentic development, according to Sen, consists of providing people and society with the tools they need to create a future that meets their expectations and ambitions.
As a result, it is not a question of limiting the market’s correct working in economic life; rather, its actual meaning must be discovered in the sphere of economic transactions, where its operation is efficient for people’s and society’s development. At the same time, even in this environment, effective market control is occasionally required. The financial crisis has made it uncomfortably evident that a lack of effective regulation in specific areas of financial activity has allowed a massive financial disaster to erupt. Certain credit investment operations and specific opaque and non-liquid assets may have caused more damage if a more efficient and active regulator had been in place.
The current financial crisis has the potential to help return economic globalization to its proper placethe economya human activity that must be subjected to politics, which must be subjected to ethics, as found in Aristotle’s classical ideal (see Aristotle 1996 and 2002). That is a belief that has existed in Western society’s most illustrious ages. Politics must be aimed toward achieving the common good, which is a higher ethical objective than particular interests or lobbies. At the same time, economics should combine its different areas of expertisethe search for efficiency in the structuring of economic activityrather than attempting to apply the market concept to all aspects of social life. This viewpoint regards the market as an efficient mechanism for organizing a large portion of society’s economic transactions; however, as Pope Benedict XVI pointed out, economic activity cannot solve all social problems simply by applying the logic of commerce; to be efficient, it must pursue the common good, which transcends personal interests. In the end, the market economy need ethics in order to function in a long-term manner.
Similarly, as the industrialization of China and Brazil has demonstrated, globalization provides undeniable benefits in the pursuit of economic efficiency, including access to markets in the most sophisticated countries for products from emerging countries. Still, globalization’s logic cannot be limited to economic thinking, much less to what some have dubbed enlightened self-interest (a term created by Alexis de Tocqueville), which is a humanized version of the self-interest described by Adam Smith as the motivation for a merchant’s conduct.
As previously said, Smith never admitted that a person’s behavior should be motivated solely by personal gain, or that the market could be the only way to organize social life. It is just irrational to confine globalization to its economic elements and justify it in the name of benign self-interest. The use of self-interest as the primary criteria is an indication of selfishness and unfairness. Basing international relations on a benign egoist vision of globalizationone that breeds suspicion because it is perceived as an unjust model that ignores the demands of othersclearly poses a threat to the peaceful development of states and human coexistence.
In that sense, the crisis is a fantastic chance to consider how appropriate it may be to build economic integration procedures on great human ideals that encourage individuals and nations to work together. Economic efficiency as a manifestation of professional brilliance is one of those human values, but the humanization of interpersonal relationships, justice, magnanimity, and the pursuit of the common good, among others, should also play a prominent part.
International corporate expansion
International firms, together with technology and state policies to promote international commerce, have been significant drivers of the economic globalization process. The international expansion of modern corporations has ushered in a second round of economic globalization, this time with deeper roots than the first attempt prior to World War I. What impact has the financial crisis had on multinational firms and, by extension, globalization? Many companies’ expansion ambitions have been slowed by the crisis, but many directors believe that internationalization is a critical component of the twenty-first-century economy.
Many worldwide companies have seen a decline in activity as a result of the crisis for a variety of reasons. The first is the economic downturn in many nations, which has resulted in lower sales, particularly in capital goods and infrastructure, but also in automotive, telecommunications, computing, and consumer electronics. Some countries and regions, particularly those in Eastern Europe and Latin America, are experiencing extremely severe recessions. The second factor is the credit tightening that has impacted all businesses in general, but especially those whose investment initiatives are deemed to be the most risky, as is the case with overseas operations.
The third reason is that the location of a corporation’s headquarters is becoming increasingly important in certain choices. For years, we’ve permitted multinational corporations to increasingly structure themselves as networks, in which the center and periphery play varying roles throughout time, always in proportion to their contributions to the overall organization (3). The necessity to boost efficiency and save expenses has reasserted headquarters’ primacy as a result of the economic downturn. Spain, in particular, is subjected to this situation on a regular basis with multinational firms’ sister companies in the automobile and consumer electronics sectors, among others. This concern regarding the future of particular initiatives by foreign corporations is felt more acutely during times of economic crisis, as we saw in 199294a period of lower growth, but not necessarily of crisisand, unfortunately, we are experiencing it again today.
The financial crisis has also called into question the outsourcing of industrial activities model. Outsourcing provides companies with several clear benefits, including a very low-cost production structure, which is sometimes also more efficient; access to raw materials or emerging markets; a diversification of manufacturing risks across multiple markets; and a closer proximity to the final consumer. However, in other nations, the crisis has highlighted the detrimental impact of a gap between manufacturing capacity and innovation (which can have a restricting effect on the latter) as well as youth indifference in technical-scientific university courses. Given the growing importance of financial services in the economy and the loss of manufacturing sectors in the last two decades, the United Kingdom would be a good example. In fact, this mindset is a major roadblock in the development of new generations of firm executives and highly trained employees.
Nonetheless, the financial crisis has brought to light several beneficial features of corporate internationalization, which may stimulate this process in the future as the global economy improves. The first is that whether buying, producing, or selling on numerous markets, international firms prefer to look for efficiency in a systematic way. The second is better risk diversificationboth market and financial risksespecially in organizations with well-balanced portfolios across multiple geographies (4). The positive performance of the major Spanish banks or Telef3nica during the financial crisis is highly expressive in this regard, especially when compared to other enterprises in the same industry in other countries. The next point to consider is future growth prospects. The process of international expansion is never-ending. For many European companies, having a presence in emerging markets that have weathered the crisis the best, such as China, India, and Brazil, has been a lifesaver and will continue to be so in the future.
The fourth feature is that the crisis has highlighted the necessity of diversity within management teams, which is aided by internationalization. The presence of senior executives from other countries where a company has a large presence ensures not only a better awareness of the local market and its pertinent circumstances, but also a better ability to forecast the future in that area. The performance of major firms that have done particularly well in certain emerging countries, such as Novartis, Pepsico, and Unilever, among others, is inextricably linked to the fact that their senior management teams have a significant international variety.
The final feature is that the crisis has highlighted the importance of efforts in many worldwide corporations to improve information openness and good governance. Many people’s mistrust of the worth of firms has contributed to the severity of the crisis. The financial crisis has impacted all types of businesses, but those with the clearest approach to corporate governance have recovered more quickly since the bubble burst. The example of US and British banks is illustrative. The mistrust of their shareholders and the market has been particularly harsh on those institutions that have been sluggish to confess their losses, restructure their management teams, or modify antiquated economic remuneration methods. The banks who have demonstrated the most maturity in their corporate governance procedures and have been able to effectively tell their investors about the reality of their situation and the logic behind their strategic decisions, on the other hand, have been the least harmed by the crisis.
To summarize, the financial crisis has had a negative short-term impact on foreign corporations, albeit we don’t have enough evidence to say if this impact was more or less than it was on more local corporations. Logically, this has a detrimental influence on the globalization process, as businesses have been the primary driving forces behind it.
Nonetheless, we should note that the financial crisis has highlighted some of the advantages of multinational firms over those with a more domestic focus. It is obvious that a company’s internationalization potential cannot be determined by how severely it is impacted by a massive financial crisis that occurs once every few decades. Nonetheless, the impact of this crisis on international firms, which are at the heart of economic globalization, has highlighted some of the benefits of this type of business. Their advantages also provide a reasonable guarantee that, while globalization may slow during the crisis, it is not doomed to halt entirely.
Is globalisation under threat as a result of global economic downturns?
The global economic crisis, which began in 2008, has consumed the entire world and shattered the globalization process, which many blamed as the main cause of the disaster. Because of the global economy’s linked and interrelated character, the entire global financial system was at risk of collapse after American investment bank Lehmann Brothers filed for bankruptcy in September 2008. This sparked speculation over whether or not this signaled the end of globalization.
Many experts pointed out that the issue in the United States had affected all countries simply because globalization has meant that if the United States sneezes, the rest of the world develops a cold. As a result, anti-globalization sentiment emerged in many countries around the world, as the phenomena was widely perceived as adding to the poverty of many at the expense of a few.
However, it would be unfair to blame the crisis solely on globalization; national governments also had a role in ensuring that their economies were well-regulated and protected from global shocks. This school of thought contends that, notwithstanding the global economy’s interconnectedness, a combination of measures aimed at containing hot money and capital movements and guaranteeing effective regulation would have gone a long way toward protecting global economies from the global economic crisis’ aftershocks. Furthermore, rather than reacting in a knee-jerk manner, governments throughout the world could have seen the catastrophe coming since early 2007. As a result, rather than blaming globalization alone, individual guilt might also be held responsible.
However, the growth of protectionist impulses in many countries around the world suggests that globalization is to blame for some of the crisis’s effects. The trading of derivatives based on risk and return algorithms, combined with excessive greed and risk taking, has resulted in countries that allow global financial flows being impacted after the derivative market crashed. Indeed, this is a significant flaw in the current global financial system, as the close interconnectedness of the world’s economies means that any disruption in one part of the system quickly spreads to the rest of the system.
Finally, while globalization played a significant part in spreading the impacts of the global economic crisis around the world, it is also true that after efforts were made to prevent the crisis from worsening, the global economy began to recover. If there is a lesson to be learned from this event, it is that we should welcome winds from all directions while refusing to be swept away by them. As a result, while we should welcome globalization, we should also protect ourselves from its negative features.
What was the worldwide crisis that followed?
During the late 2000s, the Great Recession was characterized by a dramatic drop in economic activity. It is often regarded as the worst downturn since the Great Depression. The term “Great Recession” refers to both the United States’ recession, which lasted from December 2007 to June 2009, and the worldwide recession that followed in 2009. When the housing market in the United States transitioned from boom to bust, large sums of mortgage-backed securities (MBS) and derivatives lost significant value, the economic depression began.
What is the definition of economic globalisation?
Economic “globalization” is a historical phenomenon resulting from human ingenuity and technical advancement. It refers to the growing globalization of economies, particularly through the cross-border movement of commodities, services, and capital.
During the global financial crisis, what happened?
The crisis caused the Great Recession, which was the worst worldwide downturn since the Great Depression at the time. It was followed by the European debt crisis, which began with a deficit in Greece in late 2009, and the 20082011 Icelandic financial crisis, which saw all three of Iceland’s major banks fail and was the country’s largest economic collapse in history, proportionate to its size of GDP. It was one of the world’s five worst financial crises, with the global economy losing more than $2 trillion as a result. The proportion of home mortgage debt to GDP in the United States climbed from 46 percent in the 1990s to 73 percent in 2008, hitting $10.5 trillion. As home values climbed, a surge in cash out refinancings supported an increase in consumption that could no longer be sustained when home prices fell. Many financial institutions had investments whose value was based on home mortgages, such as mortgage-backed securities or credit derivatives intended to protect them against failure, and these investments had lost a large amount of value. From January 2007 to September 2009, the International Monetary Fund calculated that large US and European banks lost more than $1 trillion in toxic assets and bad loans.
In late 2008 and early 2009, stock and commodities prices plummeted due to a lack of investor trust in bank soundness and a reduction in credit availability. The crisis quickly grew into a global economic shock, resulting in the bankruptcy of major banks. Credit tightened and foreign trade fell during this time, causing economies around the world to stall. Evictions and foreclosures were common as housing markets weakened and unemployment rose. A number of businesses have failed. Household wealth in the United States decreased $11 trillion from its peak of $61.4 trillion in the second quarter of 2007, to $59.4 trillion by the end of the first quarter of 2009, leading in a drop in spending and ultimately a drop in corporate investment. In the fourth quarter of 2008, the United States’ real GDP fell by 8.4% from the previous quarter. In October 2009, the unemployment rate in the United States reached 11.0 percent, the highest since 1983 and about twice the pre-crisis rate. The average number of hours worked per week fell to 33, the lowest since the government began keeping track in 1964.
The economic crisis began in the United States and quickly extended throughout the world. Between 2000 and 2007, the United States accounted for more than a third of global consumption growth, and the rest of the world relied on the American consumer for demand. Corporate and institutional investors around the world owned toxic securities. Credit default swaps and other derivatives have also enhanced the interconnectedness of huge financial organizations. The de-leveraging of financial institutions, which occurred as assets were sold to pay back liabilities that could not be refinanced in frozen credit markets, intensified the solvency crisis and reduced foreign trade. Trade, commodity pricing, investment, and remittances sent by migrant workers all contributed to lower growth rates in emerging countries (example: Armenia). States with shaky political systems anticipated that, as a result of the crisis, investors from Western countries would withdraw their funds.
Governments and central banks, including the Federal Reserve, the European Central Bank, and the Bank of England, provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal and monetary policy, to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the vital commercial paper markets, and avoid a repeat of the Great Recession. For a major sector of the economy, central banks shifted from being the “lender of last resort” to becoming the “lender of only resort.” The Fed was sometimes referred to as the “buyer of last resort.” These central banks bought government debt and distressed private assets from banks for $2.5 trillion in the fourth quarter of 2008. This was the world’s largest liquidity injection into the credit market, as well as the world’s largest monetary policy action. Following a strategy pioneered by the United Kingdom’s 2008 bank bailout package, governments across Europe and the United States guaranteed bank debt and generated capital for their national banking systems, ultimately purchasing $1.5 trillion in newly issued preferred stock in major banks. To combat the liquidity trap, the Federal Reserve produced large sums of new money at the time.
Trillions of dollars in loans, asset acquisitions, guarantees, and direct spending were used to bail out the financial system. The bailouts were accompanied by significant controversy, such as the AIG bonus payments scandal, which led to the development of a range of “decision making frameworks” to better balance opposing policy objectives during times of financial crisis. On the day that Royal Bank of Scotland was bailed out, Alistair Darling, the UK’s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of “a breakdown of law and order.”
Instead of funding more domestic loans, several banks diverted part of the stimulus funds to more profitable ventures such as developing markets and foreign currency investments.
The DoddFrank Wall Street Reform and Consumer Protection Act was passed in the United States in July 2010 with the goal of “promoting financial stability in the United States.” Globally, the Basel III capital and liquidity criteria have been adopted. Since the 2008 financial crisis, consumer authorities in the United States have increased their oversight of credit card and mortgage lenders in attempt to prevent the anticompetitive activities that contributed to the catastrophe.