Crisis as an Inevitable Feature of Capitalism Essay

Pages: 13 (4733 words)  ·  Bibliography Sources: 13  ·  Level: Master's  ·  Topic: Economics

Economics

Crisis as an Inevitable Feature of Capitalism

What were the immediate and long-term causes of the current political economic crisis?

Today's economic and financial crisis began in the rich world particularly in the U.S.A. It has been referred to as a financial meltdown, storm or credit crunch. Credit crunch is an economic condition in which investment capital is hard to get. It means that there is hardly any credit available for investors. For the rich countries, it has created panic and has been seen as the worst in recent years and has been compared to the 1930 great depression. In other words it has been a big crash or a bust (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).

Even though troubles in the U.S. subprime mortgage market triggered the current financial crisis, its deep cause on the financial side is to be found in the faulty institutions and practices of the current financial direction, often referred to as the New Financial Architecture (NFA). This refers to the integration of modern day financial markets with the era's light government regulation. After 1980, increased deregulation accompanied by fast financial advance inspired powerful financial booms that ended in disaster. Governments answered with bailouts that permitted new expansions to start. These in turn ended in disaster, which triggered new bailouts. Over time, financial markets grew ever bigger relative to the nonfinancial market, significant financial products became more multifaceted and opaque, and system-wide leverage burst. As a consequence, financial crises became more menacing. This process ended in the current crisis, which is so severe that it has pushed the global economy to the brink of depression. Fear of financial and economic crumple has provoked unparalleled government salvage efforts that have been, to date, not capable to end the emergency (Crotty, 2009).

In order to appreciate the root cause of this crisis one needs to comprehend the root cause of boom and bust. Dissimilar to popular opinion, this is not the product of capitalism or the free market, rather it's caused by the environment of the banking and monetary system itself in the way it functions. The boom cycle is attained by the three pillars of the global financial system, which are fiat money, fractional reserve banking, and central banks. When the pyramid of debt created by this trinity gets out of control, it must be liquidated, creating what is known as the bust. There are many factors that led up to this situation:

1. Banks lend out more money than they take in. The basis on which banks can and do fail, is that if all depositors ask for their money back at the same time, the bank would be unable to meet such a demand as the money is simply not there.

2. Banks use what is termed a fractional reserve policy, which means they can literally take in $1 on deposit and lend out $10. Therefore the foundation of the banking system is essentially fraudulent. The money one thinks the bank has is really in fact not there. The business of fractional reserve banking is founded on faith and assurance.

3. it's deceitful because banks are lending out money held on deposit which is supposed to be on demand and are in effect making money on money they do not have, and have no right to use.

4. Because of this fractional reserve system, and the fundamentally deceitful nature of it, it's always probable that banks can fail. In order to avoid this scenario, central banks were created to be lender of last resort. In other words to supply the money the banks don't have, in order to make good on their false promises. This is intended to maintain the faith in banks.

5. Central banks control the money supply at will, by controlling all fundamentals of the fractional reserve course, by changing the reserve requirements and the total money supply as and when believed to be necessary. Operating under a state granted monopoly, central banks have massive hidden power.

6. Governments love fiat money, fractional reserve banking and central banks, because it gives them access to free money with which to influence the electorate and carry out their goals. It permits governments to appear generous by over-promising on social welfare and to take aggressive actions by financing wars and disorder out of the same supply of money.

7. Money can be manipulated in this manner because it is what is called fiat money. Fiat money is paper money that really has no true or inherent value. It is given value simply by government authority, by way of the legal tender laws in each nation. Unlike the money which naturally evolved throughout history, like gold and silver, fiat money has no natural restrictions and no historical model for long-term success. When the state pumps up the fiat money supply, it loses its purchasing power.

8. Governments and bankers love fiat money and fractional reserve banking because they are partners and co-conspirators in the business of engaging in deceitful financial transactions.

9. The current economic crisis has its foundation in the growth of easy credit which creates the boom and bust cycles. This is made doable by loose monetary policy as set off by central banks and authorized by the political powers using the devices of fiat money, fractional reserve banking and central banks (the global financial/economic crisis: causes & solutions, 2008).

2. How has the current crisis impacted upon financial markets, the "real" economy and our everyday lives?

What we are seeing is an era where greed has become the foundation for economic growth. It is, therefore necessary to go beyond short-term financial bail out solutions and to seek long-term transformation based on sound ethical and moral principles which will govern a new financial design. The signs of the times are indicative of the fact that it is today probable to talk about these fundamental changes because international belief and the promise of cooperation are encouraging and there is a spirit of shared liability (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).

Free market capitalism based on neo-liberal economics, meaning less state intervention in the market, is unfortunately considered the best system of wealth creation ever revealed by humanity. Today, it has proved to be impractical. It has taken dissimilar forms in history in a lot of countries but essentially it is about who should control capital. At the international level, this dispute is vague because there is no global government. Economically powerful companies, banks and multiparty organizations backed by the uniformly powerful states that control them in an inequitable way, rule and sway the world as is now being seen. These forces are once again proposing unsustainable solutions to the current crisis (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).

A democratic state which stands for the public should in reality be the monitor that controls the failure of markets on the one hand and makes sure that practice of ethics and social justice on the other should direct all markets. What is really happening in the world is that there is a propensity to dampen this from happening despite the fact that the current free system has shaped several disasters in the area of food, jobs, and ecology and has further widened the gap between the rich and the poor between and among nations (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).

Primarily, free market capitalism generates its own crisis. The misleading notion that markets can adjust themselves has now been uncovered as false. "Mr. Allan Greenspan the former Chairman of the U.S. Federal Reserve Bank and a staunch believer of free market has also admitted that markets cannot regulate themselves. The system created a global casino system which rests on virtual wealth. Finance has been detached from real economy. Secondly, new financial instruments and institutions were formed to manage this unjust and unfair system that punishes those who produce real assets and rewards those who do nothing except to speculate. Usury has been legitimized and institutionalized. This system has created financial bubbles that have bust" (the Current Economic Crisis, its causes, its impact and possible alternatives, 2009).

The U.S. is the largest economy in the world. It has shaped the dollar as a worldwide currency. This arrangement gives it influence to stir other economies in the world. In the late nineties, the U.S. banks and the financial devices of the government became depositories of the excesses accumulated from petroleum producing countries. Banks were in effect flooded with money and ready to lend to those who needed it. It was at this time that the cheap lending and borrowing with a later rise in interest rates shaped the debt crisis for a number of poor and middle income countries threatening to default on payments. "Several other financial crises occurred including the Asian one in the 80s as finance became increasingly speculative transforming money… [END OF PREVIEW]

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