FINANCIAL CRISIS

Financial Crisis: Global Financial Crisis Has Created a Structural Break in the Global Economy



Financial Crisis: Global Financial Crisis Has Created a Structural Break in the Global Economy

Introduction

The current world economic crisis originated in the financial sector of the advanced economies, beginning with supreme mortgage problem and the meltdown of mortgage backed securities in the US. The global financial crisis had its immediate reverberations in developed as well as developing countries which were closely linked to the global financial markets, as capital took refuge in safe havens and there was a rapid flight of capital from emerging markets to the advanced economies and particularly the US. This initial impact on the developing countries, however, was less pronounced as they were not integrated into the global financial markets. With the deepening of the global financial crisis, freezing of credit, and the sharp fall in the market value of private wealth, the global financial crisis turned into a global crisis of the real economy beginning in the fall of 2008. The LDCs have been affected more during this later phase of real economic crisis.

The global economic crisis has led to a sharp reduction in world trade and rapid decline in commodity prices. This is one of the main mechanisms through which LDCs have been affected. Foreign direct investment (FDI) flows which achieved their highest level in 2007 have been declining rapidly since the onset of the global financial crisis. The decline in FDI is the second channel through which the global economies have been affected, particularly the oil and mineral exporting countries.

Fumagalli states that the processes of globalization and financialization redefine the new international hierarchical structures. Financial markets play the role of social security (without any guarantee). The contradiction between short and long-term affects the possibility of performing support and institutional governance interventions. The financialization of the economy has annulled the autonomy of the national political economy. Money has become pure money-sign. Fu- magalli asserts that international relations are determined more by dynamics of geoeconomic variables rather than by geopolitical variables. In cognitive capitalism the source of (surplus) value is derived from the exploitation of learning and network economies. Economic governance leads to the possible overcoming of the capitalistic structure of accumulation. The reform of the process of accumulation implies renouncing to social governance practices. Hart maintains that the 2009 global financial crisis served to erode the negative image that most people hold about corporations, capitalism, and the profit motive. The global financial crisis plunged the world into a global economic slow-down. Boeckh insists that the last crisis was caused by excessive money and credit inflation. The policy reactions to a huge financial and economic crisis have the unintended consequence of creating the next one. One of the most important roles of central banks is to act as a lender of last resort in a financial crisis. According to Boeckh, risk aversion erodes as the most recent crisis fades away and prosperity ...