Global Financial Crisis - International Relations Essay Writing Assessment Answer

International Relations Essay writing

Assignment Task

Is it only socialists who view the Global Financial Crisis as symptomatic of deep-seated problems inherent in capitalism?

International Relations

It is not only socialism who considers capitalism as the main cause of the global financial crisis. The global financial crisis was caused by capitalism flaws. Capitalism refers to an economic structure whereby the forces of demands and supply of products and services determine the prices and quantities in the market. In such a setting, the government intervention is allowed to intervene in case of a shift of the stable prices and quantities from equilibrium to disequilibrium state. According to Chor and Manova (2012, p.127), government interventions include an alteration of the taxes impose on goods and services. Moreover, the use of embargos and subsidies is common during government interventions in the market. The concept of capitalism is usually associated with private investments in a free market setting.

The global financial crisis was occasioned by the careless mortgage lending of financial institutions. The financiers were on an onslaught to make easy profits from mortgage holders who they did not care to screen for credit lending. The mortgage holders were made up of people who were loan defaulters, poor, lacked secure jobs and had huge debts. It is inconceivable that the financial institutions lent to such groups if people without confirming their credit worthiness. However, the pressure for the mortgage holders to seek was informed by the rising housing costs. According to Dieckmann, and Plank (2012, p.921), the generous lending of the financial institution led to the increase in the housing prices because the demand exceeded supply in the mortgage market. The crisis was also fueled by the increase in borrowing even amongst the financiers. The financiers could borrow from other institutions to lend to the mortgage holders.

The borrowing was made systemic, and many banks were involved in the borrowing and lending of funds to lend to the mortgage holders. However, the economy could not sustain such a trend of events beaus ether was no stimulation of economic activities. The financiers were aimed at making profits while the mortgagers were focused on covering their due mortgage loans. In this case, capitalism was manifest because the few financiers were taking advantage of the poor masses that were in dire need of loans to cover their outstanding mortgages. However, the poor could not afford the increasing interest rates and the rates eventually fell. The rates fell to enable the mortgage holders to pay back their dues. However, there was massive repossession of mortgaged houses. The houses were resold at throw-away prices, which could not suffice the loans borrowed by the financiers. Consequently, the financiers were in huge debts which could not be readily covered. The debt problem was involving almost every financial institution. The financial crunch led to a stop in lending amongst the financial institutions. Haas and Horen (2012, p.151) assert that the laissez-faire capitalism was manifest in the onset of the global financial crisis.

The private ownership of the factor of production is a compromise to an economy because such a system fosters monopolistic operations. It also causes an imbalance in investments. In capitalism, the government does not deter economic crimes like unfair competition. The government only deters theft, fraud, and use of physical force. The government usually intervenes in favor of individuals rather than masses. For instance, when the markets are unstable the government uses the private sector to restore stability. In the long-run, the resources are controlled by few affluent individuals while the poor majority lacks sustainable factors of production. Capitalism also fosters rewarding of the insiders. Such a culture is detrimental to the economy because of the need for circulation of money and economic growth and development growth. The government regulation measure should have an oversight authority because the government has fiscal tools for market intervention.

Overregulation of the markets is an attribute of capitalism. The slump in the economy, which precipitated the global financial crisis, was a manifestation of capitalism. The producers over-relied on borrowing to finance their production. The problem began in the US and spread to other great economies of the world. The US-based consumers are considering the buyers of the last resort because they buy products regardless of the financial crunch. The other manifestation of capitalism is the tendency of over-saving with the aim of lending to consumers. Such a trendy led to the banks servicing the loans of mortgage holders while they ignored financing development projects. Stimulation of an economy is better than the mere circulation of cash. The crisis was also caused by capitalism because the products produced could not be bought because of the exorbitant prices for the products and services (Chor and Manova, 2012, p.133).

The financial crunch spread to every economic aspect of the world economic system. However, the capitalism approach fosters unfair competition because the wealth in society takes advantage of their financial endowment in directing the goods, money and stock markets. The case was manifest in the over-lending to the mortgage holders in the US, which sparked the economic meltdown. In fact, over-saving is an attribute of capitalism, which compromises economic growth and development given that investment is forgone. Investment is a variable if the gross national income of an economy. The effect of such imbalance is that a different between reduction and consumption arises. When consumption is lower than production the producers lack funds to pay wages. Consequently, the employers are compelled to sack workers to cover operating costs. According to Dieckmann and Plank (2012, p.911, an increase in unemployment fuels inflation. The situation is exacerbated by the fact that, even after sacking employees, production reduces, and supply reduces.

The economic meltdown impact in the world economy was high because the prospects of such a recession are always compelling financial institutions to limit credit lending to customers. The establishment of a risk profile on the loans lent does not suffice hence customers are negatively affected by the global financial crisis. However, the financiers can restore confidence among themselves through prudent lending after a critical analysis of the credit-worthiness of their lending partners and mortgagers. Such analysis will always provide insight to the level of lending and rate to apply in the lending. Additionally, collaterals should be adequate to guarantee the repayment of the loans lent to both financial institutions, mortgage holders and other customers.