Economic Globalization Has the 2008 Financial Meltdown Essay

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Economic Globalization

Has the 2008 financial meltdown in the U.S. And the ongoing economic crisis in Europe have practically ended the era of economic globalization?

Following the financial crisis that marred the U.S. economy along with other global economies as well as the ongoing Eurozone debt crisis, there have been projected concerns that this predicament would end economic globalization. The purpose of this paper is to assess this claim. Going by Immanuel Wallenstein's World Systems Theory, the political economy of Third World economies and developed economies of the West are mutually dependent. Wallenstein's conjecture is that the growth and expansion of Third World economies relies on constant interaction with Western developed economies seeing as the world is characterized by a structural division of labor where the developing nations of the Third World provide cheap labor and raw materials while the developed economies are the holders of capital and controllers of the market. Economic experts have argued that even in the midst of the global financial meltdown in the U.S. along with the ongoing Eurozone economic crisis, economic globalization remains intact. This has become possible through the decision by the governments to rescue companies from the debt crises.

Economic Globalization

While globalization revolves around breakthrough in the fields of science and technology, cross-border division of labor (market liberalization), economic globalization centers on growing economic interdependence between national economies globally through economic integration, cross-border movement of commodities, services, capital, and technology. Economic experts espouse that economic globalization commenced several hundred years ago since the inception of trans-national commercial engagements in Europe, the Americas and parts of Asia. Some of the historic trade arrangements include the Trans-Saharan trade and the Trans-Atlantic Slave Trade. While trans-regional trade engagement began centuries ago, it escalated towards the end of the 20th century under the auspices of trans-national trade regimes such as the World Trade Agreement (WTO) and General Agreement on Trade and Tariffs (GATT) (Shangquan, 2000). These trans-national trade regimes have since negotiated commercial engagements between nations on the international scene urging them to ease trade barriers and open up economic ties amongst themselves. This has become a pervasive trend as the developed nations of Europe and the Americas reach out to the less developed countries of the Third World through Foreign Direct Investment. The current landscape of economic globalization therefore comprises international capital markets, commodity markets and labor markets.

Gao Shanguan, a prominent Chinese economist argues that economic globalization has since taken an irreversible pattern in the wake of global economic integration as manifested in cross-border trade. Shanguan claims that global economies are inter-dependent. Citing Immanuel Wallenstein's World Systems Theory, he argues that the political economy of Third World economies and developed economies of the West are mutually dependent. Wallenstein's conjecture is that the growth and expansion of Third World economies relies on constant interaction with Western developed economies seeing as the world is characterized by a structural division of labor where the developing nations of the Third World provide cheap labor and raw materials while the developed economies are the holders of capital and controllers of the market. This trend persists since the Industrial Revolution when European imperial powers imposed colonial authority in the Third World. Shanguan therefore believes that the developing economies of the Third World cannot survive in the absence of Western neo-colonialism; likewise, the developed nations of the West cannot enjoy their prestigious economic status without exploiting the impoverished countries. Amid this pervasive interdependence, global markets remain inherently intertwined taking on the form of 'cross-border division of labor.' This cross-border division of labor works its way into every aspect of global economic affairs (Shangquan, 2000).

The 2008 financial meltdown in the U.S.

The U.S. hosing / real estate industry registered a remarkable growth in the years leading up to 2006 (Williams, 2011). During this period, housing / mortgage prices reached a record high. Sources retrieved from the annals of the Wall Street Journal indicate that the Case-Shiller home price index peaked in 2006 before recording a historic slump in 2008 following the bursting of the housing bubble earlier in 2007 (Williams, 2011). Economic experts reckon that escalating foreclosure rates among U.S. homeowners perpetuated a crisis that affected the collateralized debt obligation (CDO), subprime, Alt-A, foreign bank, mortgage, credit, and hedge fund markets adversely by August 2008. As housing prices soared, they reached the elastic limit and Wall Street began to experience a huge increase in home foreclosure rates and equally high subprime mortgage delinquencies. Subsequently, securities backed by mortgages declined significantly. The steep decline made refinancing very difficult. Subprime mortgages lost their value. The number of investors willing and able to purchase mortgage-backed debt reduced dramatically. After the housing bubble burst, the office of the U.S. Secretary of the Treasury reckoned that the U.S. economy as well as the global economy was likely to face a severe recession Zumbrun, 2013). The U.S. Housing Bubble had a major blow not only on mortgage markets, but also on home valuations, real estate, Wall Street hedge funds held by outsized institutional investors, home builders, home supply retail outlets, and foreign banks. This in turn heightened the risk of an economic recession both on a national and global scale raising concerns amid speculations on the effect of the deteriorating housing and mortgage markets (Mendlowitz and Edward, 2012).

The unprecedented collapse of Lehman Brothers, American International Group (AIG), General Motors, WorldCom, Enron, Fannie Mae and Freddie Mac nearly took the global economy down with it. In light of emerging studies, corporate malfeasance was one of the leading causes for the collapse. Experts called it a case of 'financial engineering' denoting the art of fraudulently manipulating accounts such that the financial position of a company appears stable and progressive. With the help of major audit firms such as Deloitte Touche, PricewaterhouseCoopers (PwC), KPMG, and Ernst & Young, the accounting department in WorldCom, Enron, AIG and Lehman manipulated financial records in bid to make the companies appear more venerable to attract investors and retain clients (Katz & Christie, 2011).

The unprecedented slump in the real estate bubble steered the global economy down the path of a liquidity crisis and credit crunch. As part of the initial response, Washington issued a green light to the Federal Reserve urging it to announce a limited bailout to the real estate / housing industry in order to assist homeowners pay their mortgage debts. The Wall Street Journal indicates that the United States government in conjunction with the Federal Reserve billed over $900 billion as part of the rescue mission in 2008 alone. In liaison with the Securities and Exchange Commission and the Treasury, the Federal Reserve took initial intervention steps beginning September 19 upon requests to mitigate the crisis. The Treasury allocated $50 billion designated to insure the investments in a program similar to the Federal Deposit Insurance Corporation (FDIC) program (Katz & Christie, 2011). A huge sum of the money set aside by the Federal Reserve to bail out companies affected by the recession went to two of U.S. government-sponsored companies: Freddie Mac and Fannie Mae. Another significant disbursement went to the United States Government agency identified as the Federal Housing Administration (Williams, 2011). The federal government similarly authorized the Federal Reserve Bank of New York to establish a 24-month credit-liquidity facility on September 16, 2008. AIG gained the mandate to draw up to $85 billion from the credit-liquidity facility, established under the auspices of Section 13(3) of the Federal Reserve Act, with its assets serving as collateral (Katz & Christie, 2011). Fed's chairperson, Ben Bernanke called on Congress to authorize the bailout of the entire banking and housing industries amid the mortgage crisis. This led to the Congressional approval of the Emergency Economic Stabilization Act of 2008.

European Sovereign-Debt Crisis

The ongoing financial crisis in Europe commonly referred to by economic experts as the Eurozone crisis or the European sovereign debt crisis has made it extremely difficult if not virtually impossible for various countries in the European Union to re-finance or repay their government debt. Back in 1992, European Union member states entered into the Maastricht Treaty pledging to control and limit debt levels and deficit spending. In the early 2000s, nonetheless, some of EU member states fell short of keeping their pledge to stay within the confines of the Maastricht criteria. As an alternative, they focused on securitizing future government revenues in an attempt to reduce their deficits and debts by selling rights to obtain future cash flows. Likewise, governments raised funds while evading best practice and ignoring globally agreed standards. This paved way for the sovereigns to mask their debt and deficit levels through subtle and unscrupulous techniques such as off-balance-sheet transactions, the use of complex currency, credit derivatives structures, and inconsistent accounting. As an example, Germany accrued an estimated € 15.5 billion from the securitization of pension-related payments from Deutsche Post Bank, Deutsche Post, and Deutsche Telekom in 2005?06 while guaranteeing payments in a way that investors only bore the risk from the debt accrued from the…[continue]

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