Global Economic Crisis 2008: Causes, Effects, and Policies

Introduction

The statement that the world is facing an economic crisis has become almost redundant. Despite its sometimes exaggerated media coverage, the fact remains that the global economy has indeed faced severe challenges. In some countries, the negative effects of the crisis were already felt by the population and the business community, while in others they were expected to peak throughout 2009. The causes and implications of the crisis are multifaceted, and while it is not the aim of this paper to discuss them exhaustively, no treatment of the economic crisis can begin without a short background on the situation.

Once the reader has become acquainted with the features surrounding the globalized economic crisis, the paper moves on to identifying the international regulatory institutions and the role they play in developing and implementing policies in response to the crisis. The framing of this as a globalized economic crisis is not incidental — it is grounded in the principles of globalization. Just as technological, political, economic, social, and cultural values have transcended national boundaries, so too have financial difficulties. The forces of globalization that facilitated international operations across organizations and countries also meant that difficulties encountered in one instance quickly generated chain reactions for other parties involved.

Having established this globalizing context, the paper continues to discuss the policies developed and implemented by international institutions. A concluding section follows, restating the most significant findings of the research.

The economic crisis that emerged in 2008 was a relatively new phenomenon, meaning that specialized literature on the matter was still scarce at the time. Readers could retrieve relevant information primarily through media outlets and journal literature, though one must be aware that media coverage can shape perception by presenting situations in a particular light. To ensure the formation of an objective opinion, multiple sources must be consulted.

The Economic Crisis: Causes and Effects

The financial blog Moolanomy (2008) offers a simple answer: it was greed that generated the economic crisis. While greed was evident at most levels, the parties held primarily responsible for the negative outcome are the real estate agents who continued to inflate prices, and the mortgage lenders who attracted customers with special offers while concealing large and adjustable interest rates. Brent Budowsky (2008) approaches the issue from a different angle, arguing that the primary cause was the failure of the Bush administration's political leadership.

Joe Miller and Brooks Jackson at the Annenberg Public Policy Center conducted a thorough analysis of the U.S. economy and concluded that the crisis was generated by the following factors:

Just as with the causes, the effects of the financial crisis are multifaceted, and various sources emphasize different implications. UNICEF, for instance, pointed to a massive reduction in aid given to women and children due to financial shortages, warning that this could generate a social crisis. Andy Kilmister (2008) reveals that the crisis materialized in reduced investment funds and lower organizational profits, which in turn led to reduced government budgets, a decrease in jobs, higher costs of living, and diminished living standards. Kilmister goes a step further in assessing the effects of the economic crisis by relating them to the prevailing model of economic stability. He argues that the model of economic growth promoted as being based on production was in fact based on exchange, suggesting that the very model of economic development and financial sustainability may need to be reconsidered.

Given that the economic crisis was no longer merely a rumor, 2008 saw the reaction of numerous national and international institutions. The policies implemented varied from one institution to another and were diverse in scope, addressing a wide range of issues. Some policies were highly specific, while others were more general and aimed at aiding those affected by the crisis. In the large majority of cases, policies were directed at increasing the stability of the financial system. The British Government stated its triple goal clearly: to "support stability and restore confidence in the financial system; protect depositors' money; and safeguard the interests of taxpayers" (2008 Pre-Budget Report).

The British Government was relatively slow to assume a critical position, in part because it did not initially comprehend the magnitude by which problems in the U.S. would affect the United Kingdom. However, once the scale of the threat to the English financial system became clear, the UK government implemented three major policies:

Another measure, this time directed at aiding the population rather than stabilizing the financial system, was a temporary reduction in VAT. This measure was implemented by the UK as well as other countries and was designed to reduce the cost of living for populations affected by economic hardship. What remained open to debate, however, was the real utility of such a reduction in a context where it implied reduced revenues for government budgets.

The future policies to be developed and implemented by the UK government revolved around the following priorities: continuing to monitor the financial system to ensure it could support the wider economy, including through appropriate levels of lending to businesses and households; strengthening the Banking Bill to enhance the authorities' ability to deal with banking group holding companies and the insolvency of investment firms; and introducing measures to facilitate the raising of equity capital (2008 Pre-Budget Report).

The United Kingdom did not restrict its policy response to its own borders. It also set the basis for an international response to the crisis involving several partner nations, with the aim of addressing the root causes of the contemporary financial crisis. Up to that point, the program had managed to restore some stability to the British financial system, with continuing efforts to revive and stabilize the real estate industry. The European Union responded favorably to the agenda proposed by the UK government, which emphasized the need to address: prudential oversight of capital, liquidity, and risk management; transparency and valuation; the role and uses of credit ratings; the responsiveness of authorities to emerging risks; and arrangements for dealing with stress in the financial system (2008 Pre-Budget Report).

Policy Responses to the Economic Crisis

The European Union responded to the crisis through the development and implementation of several courses of action. First, it had to unify the efforts and attention of all 27 member states. Once this was achieved, the institution began working to stabilize the European banking system, with resolving the liquidity shortage as the first priority.

Although the EU's initial responses were broadly positive, analysts estimated that its member states had yet to feel the full devastating effects of the crisis, which were expected to hit European economies during 2009 and 2010. Accordingly, the EU's role was seen as one of implementing protectionist policies across three simultaneous directions.

The first set of policies revolved around the creation of a new market architecture at the EU level. This would strengthen the EU's position in the face of future challenges by ensuring sustained and strong support from central banks, allowing banks to rapidly implement rescue plans, and allowing the Union to rapidly deploy decisive methods to prevent the expansion of the crisis to other countries (Commission of the European Communities, 2008).

The second set of strategies addressed the need to thoroughly analyze the impacts of the crisis on the real economy and to identify ways of improving it. These policies combined short-term solutions for issues requiring rapid response with long-term projects. The short-term solutions would be specific and dependent on the unique features of each problem. The long-term policies would focus on:

The third set of policies, as also emphasized by the UK government, involved taking coordinated global action in response to the crisis. These policies had to be transparent, efficient, and representative, and would operate on four simultaneous fields: improving international regulatory standards; improving cooperation and coordination between international regulators; improving the ability to monitor and prevent a global economic crisis; and increasing the ability to deal with crises at national and regional levels (Commission of the European Communities, 2008).

This multilateral regulatory approach reflected a broader recognition — shared by economists and policymakers — that the interconnected nature of modern financial markets requires internationally coordinated oversight. The Financial Stability Board and related international bodies have since been central to developing such frameworks in the aftermath of the 2008 crisis.

The financial crisis hit global markets throughout the course of 2008, and at the time of writing the worst was yet to come for several European countries. The causes, as well as the effects, are multifaceted and analysts have not fully agreed on them. National and international institutions have nonetheless joined forces to alleviate the negative effects of the crisis.