The Financial Crisis of 2008: Problem and Causes

Introduction

The financial crisis of 2008 had influenced the well-being and prosperity of many countries in a negative way. Together with the rest of the world, the United States of America experienced the great recession that was considered to be the worst after the Second World War. There have been many debates concerning reasons for the global financial crisis. Nevertheless, there is still no agreement concerning primary causes of the crisis. The financial crisis has been followed by a prolonged recession that resulted in the rapid decrease of employment rates. In the following paper, particular hypotheses concerning the causes of the crisis will be evaluated. Then, the notions from separate readings will be taken into consideration for the achievement of the better understanding of the nature of the crisis and possible solutions.

Hypotheses about the Commencement of Crisis

As it has been already mentioned there is a great variety of suppositions concerning the principal reasons for the crisis. David Colander describes points of view concerning the issue in his book. The central idea of “A Manifesto for Economic Sense” is that all world’s leading economies believe in and employ the same ideas that were used in the 1930s. The Great Depression was the terrible crash of the US’ economy that led to the years of high level of unemployment as well as poverty rates.

The financial crisis of 2008 had the same consequences although they occurred in other settings. An irresponsible public borrowing was considered to be the primary reason for the crisis by many policy makers¹. Nevertheless, the author argues, “the conditions for crisis were created by excessive private sector borrowing and lending, including over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue”². David Colander has developed a structural stagnation hypothesis claiming that the reasons for difficulties refer to structural problems connected with globalization.

Robert Kuttner has introduced another hypothesis. In his latest book, “The Squandering of America’s Assets”, the author wrote that political decisions of the financial elite had not benefited the well-being of citizens³. Jon Wisman presented the same idea. He wrote that the American economic politics was largely predetermined by “people in the upperincome brackets”⁴.

Reasons for Crisis Endurance

In “A Manifesto for Economic Sense” Colander explains the reasons for the endurance of crisis via its nature. The primary position of the author refers to the inadequate approaches and reactions. When the housing bubbles collapsed, the private sector aimed to pay debts. The result of massive spending was the aggravation of the crisis. The wrong reaction concerned the emphasis on government deficits and the urge of the public sector to pay its debts.

Such a fiscal policy did not bring required results. In Chapter 11, Colander explains his understanding of causes of the continuation of crisis via structural stagnation. According to the author, both long-term and short-term causes affect the process of recovery. Thus, long-term causes refer to the neglect of globalization-related issues, trade deficit, and exchange rates. Short-term causes concern the immediate consequences of the financial crisis. Finally, Amitai Etzioni considers that financial crisis and its enduring effects have been caused by under regulations of the correlation between the free market and government in both private and public sectors⁵.

The Connection between Inequality and Unemployment

Inequality and unemployment became two the major concerns of the Great Recession. The level of employment decreased drastically and affected all layers of society. Dean Baker and Jared Bernstein have investigated the growing issue of inequality in the American society and found out that it is directly connected with unemployment rates. Recently, there has been a great deal of concern about the shifting of priorities.

Many people have been arguing that the issue of inequality replaces the problem of unemployment that is still rather a challenge. According to Baker and Bernstein, unemployment influences not only people who are without jobs. It affects all labor force. Unemployment decreases the ability of employers to hire people. Consequently, it results in a distorted system of wages. “This means that high rates of unemployment have a large impact on the distribution of income, hurting the groups that are already most disadvantaged in society”⁶. These most disadvantageous groups are African Americans and Hispanics.

Unemployment rates increased over the last decades. After the WWII and until 1979, the labor market regime was tight. As a result, the level of unemployment was low. In the following decades, labor market became slack, and it led to the decreasing income and the loss of job opportunities for employees. Robert Putnam describes these changes in the American job market and its impact on society from rather a different perspective.

He uses his hometown Port Clinton in Ohio as an example of what has happened to the American dream in the last decades. According to Putnam, working families could belong to the middle-class in 1950. The ability to work on plants was available for everyone and people sometimes preferred going to work instead of going to college. When the labor market regimes shifted, job opportunities reduced drastically. Consequently, people could not earn their livings, and it resulted in the distinct deterioration of the quality of life (drug abuse, poverty, poor living conditions)⁷.

Ending of the Crisis

David Colander suggests that government should employ stabilizing policies for the regulation of spending. It is of primary significance to avoid imposing high taxes on residents of the state. In Chapter 11, the author suggests exact policies to deal with short and long-term structural stagnations. Governments should introduce policies that facilitate the process of recovery such as making procedures of loan restructuring for banks easier. The most important thing for governments is to be able to accept failure. Also, it is necessary to find the balance between the governmental regulations and free market activities. As Friedman wrote, “the existence of a free market does not, of course, eliminate the need for government. On the contrary, the government is essential both as a forum for determining “the rules for the game” and is an umpire to interpret and enforce the rules decided on”⁸.

Bibliography

Baker, Dean, and Jared Bernstein. “Want to Attack Inequality? Reduce Unemployment.” Challenge 57, no. 5 (2014): 6-16. Web.

Colander, David. Economics. New York: McGraw-Hill Education, 2012. Web.

Etzioni, Amitai. “A Free Market versus a Regulating Government.” Challenge 52, no. 1 (2009): 40-46. Web.

Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962. Web.

Kuttner, Robert. Challenge. By M.E. Sharpe, Inc. 51.1. 2008. Web.

Putnam, Robert. “Crumbling American Dreams.” New York Times. Web.

Wisman, Jon. “Wage stagnation, rising inequality and the financial crisis of 2008.” Cambridge Journal of Economics 37, no. 1 (2013): 921-945. Web.

Footnotes

1. David Colander, Economics (New York: McGraw-Hill Education, 2012), 252. Web.
2. Ibid.
3. Robert Kuttner, interviev by M.E. Sharpe, Inc., Challenge, 51.1, 2008. Web.
4. Jon Wisman, “Wage stagnation, rising inequality and the financial crisis of 2008,” Cambridge Journal of Economics 37, no. 1 (2013): 939. Web.
5. Amitai Etzioni, “A Free Market versus a Regulating Government,” Challenge 52, no. 1 (2009): 46. Web.
6. Dean Baker and Jared Bernstein, “Want to Attack Inequality? Reduce Unemployment,” Challenge 57, no. 5 (2014): 7. Web.
7. Robert Putnam, “Crumbling American Dreams,” New York Times. Web.
8. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), 15. Web.