Global financial crises has brought into focus debate about decisions made by the countries which are leading economic forces, making them to reconsider past living standards and habits. With the aim to examine the causes, effects, policies and prospects for the financial crisis D.Salvatore published the article in June 2010. Additionally author in the same paper suggests reforms in the U.S. macroeconomic decisions as the prevention of future crises. This analysis will first give summary of the main points of the paper and then my personal opinion about the context and structure of the paper. The United States and Europe did almost everything possible to avoid the recession: introduced stimulus packages, lowered interest rates, capitalized banks but, their efforts only succeeded in preventing a deeper recession or depression.
The outcome of the last financial crisis is evident to all: stock markets crashed all over the world in 2008, the capitalization of banks was cut by more than half, the entire U.S. investment banking sector as we had known it disappeared, all advanced countries fell into the “Great Recession” (the deepest of the post-war period), all of the most important and largest emerging market economies, with the exception of China, India, and Indonesia, fell into recession. However, despite the fact that they did not fell into recession China, India, and Indonesia need very high rates of growth to accommodate their large populations and to absorb their still significant subsistence sectors into the market economy. (Salvatore D, The Global Financial Crisis: Causes, Effects, Policies and Prospects, Journal of Politics & Society Columbia University (2010))
To find a solution first cause should be identified. Without the understanding of consequences and leading by the idea of promotion “the American dream” of owning a home the Clinton Administration in 1999 started the practice of subprime mortgages. The practice of giving high and even increasing amounts of home mortgages to clients that clearly could not afford them, resulted with the crises on subprime mortgages market eight years later, and further expansion of the crises into the financial and real sectors of the U.S. economy and in the rest of the world. These subprime home mortgages were then repackaged into mortgage-backed securities (MBS) and sold to credit market investors. Finally, the Securities and Exchange Commission (SEC), responsible for regulating this market, was not adequately involved in these transactions. With the global conditions on the financial market and business the crisis spread first to other advanced countries through the global financial system and finally to emerging markets when the former fell into recession and sharply reduced their imports from and capital investments in the latter.
Perhaps consequences for Europe would not be so devastating that European banks were not even in worst position. The crucial event that triggered the crisis was, of course, the failure of Lehman Brothers in September 2008. World recession has ended but growth is slow and unemployment is a serious problem in all countries. Salvatore proposed reforms as prevention to future financial crises. Reforms need to be comprehensive and general. Regulations should restrict or prohibit the use of exotic derivatives, which often sellers cannot explain and buyers cannot understand how these derivates are priced or how they work. The United States needs to save more and learn to live within its means. Americans save little relative to individuals in other developed countries and the U.S. government is a large net borrower. Substantially raising the household savings rate in the United States will be difficult with Americans addicted to overspending, but it is a goal the United States could potentially achieve gradually.
In the present crisis atmosphere, many nations may over-regulate and impose excessive restrictions on financial activities that would be detrimental to future growth. There is also the danger that the large injection of liquidity in the United States and in other advanced countries to jump-start their economies will lead to hyperinflation in two to three years’ time, which would then require a sharp tightening of monetary policy. (Salvatore D, The Global Financial Crisis: Causes, Effects, Policies and Prospects, Journal of Politics & Society Columbia University (2010)) The article “The Global Financial Crisis: Causes, Effects, Policies and Prospects” by D.Salvatore has a clear structure, informative and understandable to wider readers. Explanations are effectively written and prevention measures logically results from previous context of the paper. Indeed, as it is also shoved in the paper, in last decades through globalization process economic barriers are getting removed intensively and overall collaboration in the world increases. Some economists add reasons that precede to the bum on the mortgage market.
Through the direct investments of developed countries underdeveloped ones had perspective to gain high rate of economic growth. With the years that followed they, opposite to expectations, achieved higher rates of savings, what created possibility to invest excesses of domestic savings in developed countries. This was opposite to the initial idea of expected behaviour in globalization era, hence salaries in underdeveloped countries are low and the level of poverty is high. One of the potential explanations is that underdeveloped countries have higher tendency to savings due to uncertainty as consequences to different crises. Savers from underdeveloped countries have aversion to the risk, and they would rather invest in safer business with lower incomes such are investments in the USA. Due to the high influx of chip money from abroad banks have more available assets which they need to invest further to earn profit.
Mortgage market was one of the most safe and developed markets, which guarantee safe and high earning. For the future, the U.S. as consumption society need to learn to save more and to realise that there are limits to the growth of value of the assets. The last crisis is debt crises; essential to today business is taking a high risk with possible high profit. When, due to overload leverage, banks become insolvent they expect from politician power to save them from bankrupt by giving them large and free sum of money of tax payers. All this savings are base for the next crises, therefore total reform of financial system is necessary. With a system based on unrealistic suggestions- the value of an asset can grove continuously, greed on all levels of society and globalization as ubiquitous concept the global financial crisis was an sign, with large consequences, for comprehensive and broad reforms.