What are the causes and what is the significance of the global financial and economic crisis that began in August 2007?

1. INTRODUCTION
It could be argued that for the current global financial and economic era, the notions of time and geography are tenuous . Although the previous statement may not be completely true, there are several inherent and intrinsic characteristics of capitalism that negatively affect the stability of the contemporary global financial and economic system. The deregulation of national markets and the neoliberal policies that can be identified under the headings of neoliberalism, the so-called Washington consensus, caused financial crises to become a standard phenomenon of the contemporary financial system and, as a result, created uneven repercussions for the world. The growing interdependence and interconnection of the financial and economic system spread the serious negative results everywhere. This essay will begin by introducing the contemporary global financial system and its main characteristics. It will then go on to provide an account of the features and the causes of the last financial and economic crisis. The third and fourth sections are concerned with the significance of the last financial and economic crisis and with what important conclusions can be drawn, respectively. As a consequence, the focus of this essay is the issue of the last financial and economic crisis by noting that the last crisis created severe ambiguities for the global financial and economic system, the causes of the last crisis are many and they are deeply incorporated in the roots of the capitalist system, the so-called financial globalization system, and its significance is based on the observation that the severity of the last financial and economic crisis proved that the capitalism is still a highly vulnerable system and a new radical financial architecture is needed to be created in order to avoid the possibility of a repeated systemic crisis.

2. THE GLOBAL FINANCIAL SYSTEM

 2.1. The main features of the contemporary global financial system.

 It can be said that the contemporary global financial system does not differ entirely from the previous systems. However, there are many features of the global financial system that can be seen as new. Several of the main features can be differentiated in the creation of the new financial instruments, the greater deregulation of financial and trading markets, and the growing existence and importance of international banks and financial institutions (Held, McGrew, Goldblatt, and Perraton, 2008). As Wade (2008) argues the liberalization, privatization and deregulation was on the epicenter of the contemporary financial regime. While it can be perceived as a growing interaction and interdependence, it cannot be said that a global financial system has been created . In addition, as Scholte (2005) insists the unevenness of capital and trade between regions, the importance of territoriality and the significance of national and cultural diversities still play a prominent role. Although the countries deregulated their national economies and decreased the capital controls with a significant amount of liberal policies, the role of the state as the main mechanism for transformation remains undoubted .

During a financial and economic crisis, the state’s role becomes more prominent as it is the only authority that can provide legitimate solutions and stabilize the financial system. Furthermore, central banks or other regulatory international institutions are also important figures of the global financial system. According to Wade (2007, p.115), the contemporary global financial regime is characterized by a US-led institutional complex synthesis of western governments and multilateral organizations such as the Basel committee, the Financial Stability forum, the G 20, the IMF, and other firms and think tanks. Additionally, the latest developments in financial architecture are not only bounded in the words of liberalisation and deregulation but also are expanded to the standardization of the contemporary global financial markets (Wade 2007). The features of the new Wall Street System are emphasized further by Gowan (Gowan, 2009).

2. 2. Crises and the contemporary global financial system.

Neoliberal policies that were developed after 1970s and the deregulation of financial markets are responsible for the crises of the last forty years (Scholte 2005, Helleiner 2007). Crises in the contemporary global financial system create appropriate conditions for raising restrictions for the financial and trading system. This phenomenon has been observed many times during the last century. Moreover, before common historical and quantitative features regarding crises can be observed (Carmassi, Gros and Micossi, 2009), the historical tendency stresses that ‘bubbles and busts are recurring events and that the periods leading to large financial crises are often very similar’ (Carmassi, Gros and Micossi 2009, p. 978) and that the quantitative strand combines ‘an increase in leverage, following excessive credit expansion and an unusual increase in asset prises’ (Carmassi, Gros and Micossi 2009, p. 981). Additionally, it is clear that ‘the revised structure of the international financial system is likely to replicate across the globe policies that will generate further crises, while preventing its architects from being held to account’ (Wade 2007, p. 129).

Contemporary crises of the global financial system have shown that even though the existence of a unique global financial system is questionable, their results not only influence the developed world negatively but also the developing world. Furthermore, it can be argued that, financial crises are capable of diffusing panic, anxiety and lack of confidence for the ineffective financial system everywhere. Financial crises not only affect the state or the region but also gradually the entire financial system. This is the so-called contagion effect that has been observed during the last financial crises. For the duration of the last years, each financial crisis generated discussions for a new global financial architecture but as Wade (2008, p.7) states for the previous crises ‘once it became clear that the Atlantic heartland would not be affected, the radical talk quickly subsided’.
3. THE FEATURES AND THE CAUSES OF THE LAST FINANCIAL AND ECONOMIC CRISIS

3.1 The features of the last global financial and economic crisis.

The last financial and economic crisis is unprecedented in many respects but mostly in its ‘global reach’ and ‘systemic gravity’ and it influenced the confidence and trust in global capitalist markets (Blankenburg and Palma, 2009). One of the most important features of the last financial and economic crisis is its epicentre. It originated in the centre of capitalism. At the same time the globalization of the financial system and in particular the growing speculating investors transferred the crisis from the US to the world. As Krugman (2008) states the inter-border investments were the main mechanism of crisis transition abroad. Moreover, Andrew Gamble (2009) emphasizes in its global impact because no state can avoid its consequences. In addition, it can be said that the last crisis is connected with the previous financial and economic crises (Soros 2009, Krugman 2008).

Krugman (2008) argues that the last financial crisis had all the important features of the crises which occurred during the last century simultaneously such as a housing bubble, a massive withdrawal, a liquidity trap, a break of international capital flows and a contagion effect. He refers to the last financial crisis as the leading crisis during the last 25 years which represents a new destruction of the contemporary financial regime. Furthermore, as Wade (2008, p. 10) observes, during the crisis ‘it is notable that extreme illiquidity in western financial markets coexist with overflowing savings and foreign exchange reserves in East Asia and Petro economies of Russia and the Gulf’.
Reinhart and Rogoff (2009a) analyze that unemployment, output and government debt will continue to deteriorate for at least five years. According to the International Labour Organization, global unemployment and poverty could increase by at least thirty and two hundred million people respectively (Blankenburg and Palma, 2009). Consequently, as Gowan (2009, p. 102) states ‘to understand the deeper roots of the malaise, we do need to probe into the overall socioeconomic and socio-political characteristics of American Capitalism as it has evolved over the past twenty-five years’.

3.2 The causes of the last global financial and economic crisis.

Many causes of the last global financial and economic crisis can be identified. First of all, the asset bubble and more specifically the housing bubble was an important cause of the last financial crisis. However, it can be said that the housing bubble was an efficient but not a sufficient condition for the crisis . As Wade (2008, p.11) notes ‘the housing bubble was only one part of much wider run up of debt’. Furthermore, Gowan (2009, p.101) states that ‘the notion that falling prices could shut down half of all lending in the US economy within a matter of months […] makes no sense’. As a result, it can be said that the housing bubble and the subprime crisis were the fuse that released the crisis (Soros, 2009). However many structural causes can also be identified (Turner, 2009).

Secondly, Robert Shiller (2008, p. 4) provides an alternative psychological explanation by arguing that even the most clever people cannot realize that an ‘epidemic of irrational public enthusiasm’ is the most important cause for a crisis’. He states that ‘psychological, epidemiological and economy theory all point to an environment in which feedback of enthusiasm for speculative assets, or feedback of price increases into further price increases, can be expected to produce speculative bubbler from time to time’ (Shiller 2008, p. 47).

Thirdly, as Krugman (2008) stresses, the structure and the collapse of the shadow financial and banking system was one of the most important causes for the crisis. Michel Aglietta (2008) notes that the last twenty years banks developed new financial tools that affected the devolution and diffusion of the credit risks. The contemporary financial institutions that affect the global markets are obsolete and inefficient. Moreover, Gowan (2009, p. 101) emphasizes that the main cause of the crisis is the structural transformation of the global financial system in the last 25 years. Martin Wolf (2009, p. 193) states that ‘it was what the experience of the previous three decades should have led one to expect’. It can be argued that ‘we are running bullet trains on ancient track’ (Shiller 2008, p. 11). Finally, it can also be said that the failure of the banking system and more specifically the crisis of the non-commercial banks was an important cause of the financial crisis.

Fourthly, the ineffectiveness of the US federal central bank was another important cause of the financial and economic crisis. In fact, the federal central bank could not affect either the financial markets or the economy in general (Krugman, 2008). Furthermore, Soros (2009, p. 102) states that by ‘one way or another, they fell behind the curve’. According to Aglietta (2008) the Fed was trapped in a high risk game which treated its independence. In addition, Morgan (2009) focuses on theoretical and practical failures of the central bank policies. As Turner (2009, p. 3) states ‘through their inaction they are also guilty of facilitating the worst economic contraction in the post-war era’
Fifth of all, it could be said that the cause of the crisis is the mathematical and econometrical models, which they underline the importance and the role of the markets. As Soros (2009, p. 104) notes ‘the belief that markets tend towards equilibrium is directly responsible for the current turmoil’. Thus, as Leijonhufvud (2009, p. 755) states ‘the dynamic stochastic general equilibrium theory as an intellectually enterprise has been bankrupted by the crisis’.

Sixth, the false perceptions and the growing optimism about the functionality of the market is another cause for the crisis. The growing optimism about the markets triumph triggered an increasing credit expansion which created the financial crisis (Soros, 2009). As Wade (2008) believes, the US triumphalism regarding the wars and the globalized finance and economic developments were the main causes of the last crisis. The globalization era proved a trap for the contemporary capitalism as many officials believed that it was a system without financial crises, and severe recessions. Under this circumstance many market and capital controls narrowed in name of capitalism.

Seventh, the neglect of political and economic officials to acknowledge, detect and act against the expected financial crisis was also an important foundation of the/leading to the crisis. According to Krugman (2008) the increasing dangers of a financial and economic crisis were neglected by them. It can be argued that as Shiller (2008, p. 3) states ‘ the housing bubble that created the subprime crisis ultimately grew as big as it did because we as society do not understand, or know how to deal with, speculative bubbles’.
Eighth, other major causes of the crisis are the deregulations, the new developments and the innovations in financial markets. As Crotty (2009, p. 575) argues the ‘deregulation and the globalization of financial markets combined with the rapid pace of financial innovation and the moral hazard caused by frequent government bailouts’ was one of the main causes of the last crisis. Therefore, it is clear that during the last six years there was a ‘prevailing trend –even more aggressive relaxations and lending standards and expansion of loan to values ratios’ (Soros 2009, p. 85). According to Wade (2008, p. 12) ‘it is no exaggeration to say that the crisis stems from the biggest regulatory failure in modern history’.

Finally, it can be claimed that the ideological dominance of capitalism, the so called Washington Consensus or neoliberalism, is responsible for the last financial crisis. According to Blankenburg and Palma (2009) the neoliberal ideology triggered unconceivable decisions and as Soros (2009, p. 224) states ‘not only has the prevailing paradigm-equilibrium theory and its political derivative, market fundamentalism- proven itself incapable of explaining the current state of affairs, it can be held responsible for landing us in the mess we are in’.
5. THE SIGNIFICANCE OF THE LAST FINANCIAL AND ECONOMIC CRISIS
Many significant observations can be identified from the last financial and economic crisis. One of the most prominent is that the contemporary capitalist system has created self-operated, self-regulated, and self-sustained characteristics that cause financial and economic crises. It can be said that politicians and entrepreneurs are not able to deal, understand and manage the new financial institutions (Shiller, 2008). If this is the case, it can also be said that global capitalism has created new rules and new institutions that independently affect the stability of the financial system. As Krugman (2008) states the politicians stand weak and they cannot affect the global financial and economic activities. Under these conditions the coherence of the dominant financial rules can be disputed even from Alan Greenspan (Blankenburg and Palma, 2009).

Furthermore, the last crisis proved that the global financial and economic system is controlled by ineffective regulatory principles and short-sighted authorities. It is clear that central bankers and government officials could not anticipate many of the financials signs before the crisis. For Morgan (2009) there is a necessity for new institutional arrangements, division of labour as well as the theoretical basis of central banks. There are many alternative proposals for the functioning of the global financial system but they were repeatedly ignored from the current financial architects and leaders despite the repeated crisis . Hence, the last financial and economic crisis showed that the contemporary global financial and economic regime is still vulnerable and many of the optimistic expectations and feelings have begun on numerous occasions a financial trap.

The last crisis is significant because both policy makers and the neoliberal system stood insufficient to provide solutions. As Blankenburg and Pauly (2009, p. 536) state that ‘there is no shortage of effective policy solutions […] there was no clear map to follow from past experience in how to deal with the global crisis’. Wade (2008, p.16) also stresses that ‘Among the many victims of the crisis is the dominant global model of financial architecture of the last two decades, the credibility of which has been seriously damaged’.

Besides, the last crisis is an excellent example of how a housing bubble can trigger the collapse of the global financial system. As Soros (2009, p. xxiv) states ‘It has spread from one segment of the market to other, particularly those which employ newly created structured and synthetic instruments’. The last crisis has shown that Shiller’s contagion of market psychology and the spill-over effect can be spread spontaneously, instantly and unexpectedly through the global markets to the global societies.

In addition, as Blankenburg and Pauly (2009, p. 536) state, ’Agreement that the severity in both scope and structural depth of the current financial crisis is such that only a fundamental organization of capitalism can restore medium to long term stability and sustainability of the economic world order’. It is clear that the current global financial and economic system cannot provide sustainable conditions for the global financial operations and a new operational financial system is needed. Wade (2008, p.21) states that ‘global economic regimes need above all to be rethought to allow adversity of rules and standards instead of imposing ever more uniformity’.

The last financial and economic crisis is a great opportunity to review many of our ideas and speculative tendencies. It can be argued and proved that the states are not able to protect themselves from the global financial crisis (Shiller 2008). However, the last crisis proved that the state’s role, regulations and controls still play a vital role (Aglietta 2008, Pauly 2009). As Shiller (2008, p. 10) states ‘the current situation is really an opportunity to redouble our efforts to rethink and improve our risk-management institutions, the framework that undergirds our increasingly sophisticated financial sector’.

Also, the last fincial crisis has shown that a slightly different relation of power has been observed. It is the first time that the US appeared weak to avert the financial crisis. Moreover, it can be said that an eruptive financial and political situation among the US, EU, China, Japan and other developing countries has been created. It could be argued that the epicentre of the financial and political system is possible to shift eastwards (Aglietta, 2008) because as Gowan (2009, 114) states the crisis stimulated ‘the raise of credibility of the Chinese model of a state owned bank centred financial system’. Nevertheless, this is not to say that the US will loose its hegemony, especially in financial markets. As Callinicos (2006, p. 534) states ‘there is no coalition capable of limiting US primacy’. According to Cohen (2009, p. 763) ‘the global economic crisis […] offered a golden opportunity for Europe to wrest financial leadership from the US either on its own or in coordination with Japan, China and others’. As a result, the last crisis reaffirmed the US hegemony in world affairs.
The last financial and economic crisis is significant because it proves that many of the neoliberal elements of economic and social structure are ineffective. In contrast to those who believe that global capitalism has defeated all of its opponents, it seems transparent that it has not defeated itself. The above situation has a direct effect on policy options. As Turner (2009, p.1) states ‘there will be few conventional policy weapons left to bring the patient back to life’. Moreover, the last crisis has shown that the global financial markets are highly interconnected and the global interaction in trade and finance triggers and delegates financial crises anywhere. As Soros (2009, p. 102) notes ‘the crisis is not confined to a particular segment of financial markets but has enveloped the entire financial system […] the unravelling of markets has defied the efforts of the financial authorities to bring them under control’. Furthermore Soros (2009, p.21) observed that, ‘Once the crisis erupted, financial markets unravelled with remarkable rapidity […] a surprisingly large number of weaknesses were revealed in a remarkably short period of time’
Finally, this essay goes further by noting that the Smithian invisible hand and the Keynesian government intervention are not appropriate paradigms for the contemporary global financial and economic system and that the neoliberal policies cannot provide significant solutions for the financial system. Crotty (2009, p. 575) states that ‘it demonstrate the utter bankruptcy of the deregulated global neoliberal financial system and the market fundamentalism it reflects’. Both the function and the ideology of the global financial system are based on wrong assumptions and rules. As Soros (2009) and Krugman (2008) believe, the last financial and economic crisis represents the failure of the global financial regime and that a new era; a new paradigm for the financial markets is needed. Wade (2008) argues that a new third capitalist regime was exposed by the crisis. It can also be argued that the last crisis ‘reflects the absence of organised and systematic opposition to neoliberalism’ (Blankenburg and Pauly 2009, p. 537).
It is evident that in the last century longer and severer crises can be detected. As Minsky argues during the last 50 years a slow transformation of the financial system towards fragility can be identified which is responsible for the systemic global crises (Wray 2009). In spite of this, this paper argues that this could not only be the case and also provides an alternative explanation. In fact, globalization could be a trap for global capitalism because it provides the theoretical argument for repeated deregulations of the financial system. Is it the ‘performance of the financial system that has been the Achilles heel of the era of globalization’ as Wolf (2009, p. 195) states or the opposite? But any time that the system is deregulated a consolidated right is revealed and a more vulnerable financial system is developed . It is a fact that as Pauly (2009, p. 972) states’ After each succeeding systemic financial crisis in the post-1970s period governments promised deeper co-ordination of their macroeconomic policies in an effort to contain cross-border financial risks’. In addition to this, Wray (2009, p. 826) stresses that ‘the current crisis represents a failure of Big Government Neoconservative model that promoted deregulation, reduced oversight, privatisation and consolidation of market power’. But who provides or necessitates or politicize alternative solutions? Nobody. It is fact, by paraphrasing Wade (2008, p. 7), that once it became clear that capitalism would survive the radical actions subsided . Furthermore, Blankenburg and Pauly (2009, p. 537) state that ‘the central obstacle is not the alleged newness of the phenomenon, but the powerful political resistance to change’. It could be proved that the crises of the last 30 years have shown that the capitalist system has deteriorated and there is a growing possibility that it may collapse from internal changes, as the consolidation of financial freedoms can cause longer and severer financial crises . As Palma (2009, p. 864) states ‘The roots of current financial crises are not necessarily found in an ideology that is toxic per se. Rather these roots can be found in a mostly rent-seeking and politically unchallenged capitalist elite transforming neo-liberalism in a toxic ideology capable of generating a monsoon of toxic assets’.

 6. CONCLUSION
In conclusion, this essay analyzed the last financial and economic crisis by providing a number of features and causes that affect the global financial system today. As it has been proved, the so called financial globalization system is vulnerable to many factors that directly or indirectly affect its functioning. The causes seem to be rooted both in the capitalist system and to individuals. This is the most important reason for us to believe that a new financial regime is needed. Each financial crisis that occurred within the last thirty years, has affected the developed and the developing world both unevenly and negatively. The last financial crises proved that the world’s economic and financial situation and architecture becomes more and more unsustainable, in contrast not only with the neoliberal philosophers but also with the silence of radical thinkers. On the other hand, this does not imply that the capitalist system will collapse but only that it is an unambiguous sign that capitalism and more particularly the financial and economic regime needs to change. However, if it remains unchanged more harsh crises will surface. In this essay, the author underpins an alternative perception on why the crises could demolish the capitalist system but at the same time acknowledges the difficulties to prove and the constraints of his opinion.
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