GLOBAL FINANCIAL CRISIS WAS CAUSED BY GREED

Global Financial Crisis Was Caused By Greed

Global Financial Crisis Was Caused By Greed

Introduction

The financial crisis of 2007-2009 has been called the most serious financial crisis since the Great Depression by leading economists, with its global effects characterized by the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity. (Hill 2008, pp.15-19) Many causes have been proposed, with varying weight assigned by experts. Both market-based and regulatory solutions have been implemented or are under consideration, while significant risks remain for the world economy.

In 2008, we have had a conspicuous example of a crash apparently caused by the banks. It looks like the “debt-deflation” type of crash. But we also have to account for oil, for Google, for China. These are the triggers which may be the underlying explanation of the behaviour of the banks. The relationship between business cycles and changes in business conditions may be mediated through bankers or speculators, but the big causes, as Schumpeter believed, may not lie in the banks themselves.

Efficiency of Global Financial Markets

Yes, the global financial markets are efficient. The economics of efficiency of global financial markets require large economies of scale, rather than an efficient balancing between risk and reward for capital invested. Global financial markets as a vehicle for maximizing returns on capital is also an assumption that is no longer sustainable.

The efficient markets hypothesis (EMH) holds that a stock market is efficient if the market price of a company's shares (or other financial securities, such as bonds), rapidly and correctly reflects all relevant information as it because available. (Lumby & Jones, 2007) In a truly efficient stock market, if all information turned out to be entirely reliable and complete, share prices could be relied upon to correctly reflect the true economic worth of the shares.

To explain why, the EMH has been propounded in three levels of market efficiency:

* Weak form efficiency

* Semi-strong form efficiency

* Strong form efficiency

Weak form efficiency is the lowest level of efficiency. It implies no more than that share prices fully reflect any information that may be obtained from studying and analysing past movements in the share price. It states that only knowledge of past share prices is fully absorbed into today's price. The next price change is random in relation to currently available information concerning past prices, thereby debarring technical analysts from making excess returns. Thus if the market is weak form efficient, it will not be possible to identify mispriced securities by analysing their past prices.

Semi-strong form efficiency is the next level. If the market is semi-strong efficient, it will also be efficient in the weak sense. Semi-strong efficiency implies that share prices fully reflect all the relevant, publicly disclosed information that is known about the company and its circumstances. Thus if the market is semi-strong efficient, it will not be possible to identify mispriced securities by analysing publicly available ...