Government's Role in an Interconnected Global Financial Market
Recent events have merely confirmed what economists have known for some time, namely, that the interconnectedness of global economic activity renders macro-management by single governments redundant. Their function is now to regulate markets to ensure economically efficient solutions.
This essay will argue that the 2008 financial crisis has brought to the forefront of global political consideration what some economists have known for some time. This is that 1) The global financial system is inherently flawed and cyclical recessions are a product of its nature 2) The interconnectedness of the global financial system means macro-management cannot fully buffer an economy against these cyclical recessions 3) Policy has reduced effectiveness in this interconnected world 4) Globally co-ordinated regulation and co-operation in preventing and managing crises is an imperative 5) Although less effective, macro-management can still have a role in terms of preventing, and managing future crises.
Minsky’s (1992) financial instability hypotheses took a stance against the laissez faire ideology that was politically rife throughout the 1980’s. He argues that flaws are inherent in the capitalist system, as periods of economic prosperity encourages risk-seeking behaviour by both lenders and borrowers which is fundamentally dangerous in the financial sector. He argues that private sector debt accumulation during periods of boom is the main contributing factor to economic busts. This debt is contributed to by 3 kinds of borrowers, each associated with a different level of risk. These 3 borrowers -ranging from least risky to most risky- are: hedge borrowers, speculative borrowers and Ponzi borrowers. During periods of prolonged good times, risk is not appropriately attended to and de-regulation occurs in financial markets. Resultantly, Ponzi borrowers become more commonplace in an economy and their ability to pay their debts relies solely on the reliance of the
This essay will argue that the 2008 financial crisis has brought to the forefront of global political consideration what some economists have known for some time. This is that 1) The global financial system is inherently flawed and cyclical recessions are a product of its nature 2) The interconnectedness of the global financial system means macro-management cannot fully buffer an economy against these cyclical recessions 3) Policy has reduced effectiveness in this interconnected world 4) Globally co-ordinated regulation and co-operation in preventing and managing crises is an imperative 5) Although less effective, macro-management can still have a role in terms of preventing, and managing future crises.
Minsky’s (1992) financial instability hypotheses took a stance against the laissez faire ideology that was politically rife throughout the 1980’s. He argues that flaws are inherent in the capitalist system, as periods of economic prosperity encourages risk-seeking behaviour by both lenders and borrowers which is fundamentally dangerous in the financial sector. He argues that private sector debt accumulation during periods of boom is the main contributing factor to economic busts. This debt is contributed to by 3 kinds of borrowers, each associated with a different level of risk. These 3 borrowers -ranging from least risky to most risky- are: hedge borrowers, speculative borrowers and Ponzi borrowers. During periods of prolonged good times, risk is not appropriately attended to and de-regulation occurs in financial markets. Resultantly, Ponzi borrowers become more commonplace in an economy and their ability to pay their debts relies solely on the reliance of the