The Global Financial Crisis

Learning Objectives

1. 7.1Evaluate the causes that contributed to creating the financial crisis

2. 7.2Review the impact of the global financial crisis on different world economies, business, employment, and global power shifts

3. 7.3Evaluate the concerns that made different countries respond in different ways to the financial crisis

Financial crises and accompanying economic recessions have occurred throughout history. Periodic crises appear to be part of financial systems of dominant or global powers. The United States was at the epicenter of the financial crisis of 2008–2009. Enjoying a unipolar moment following the collapse of the Soviet Union and the failure of Communism, the United States was confident that economic liberalization and the proliferation of computer and communications technologies would contribute to ever-increasing global economic growth and prosperity. Globalization contributed to the extraordinary accumulation of wealth by a relatively few individuals and created greater inequality. In an effort to reduce inequality in the United States, the government implemented policies that engendered the financial crisis.

As we discussed in  Chapter 1 ,  finance  is usually the leading force in the growth of globalization. The rise of great powers is inextricably linked to access to investments and their ability to function as leading financial centers, as we saw in  Chapter 2 . Their decline is also closely linked to financial problems. Finance enables entrepreneurs to start various enterprises and to become competitors of established companies.

It is also essential to innovation and scientific discoveries. Finance also facilitates risk sharing and provides insurance for risk takers. Countries that have large financial sectors tend to grow faster, their inhabitants are generally richer, and there are more opportunities. Financial globalization contributed to unprecedented growth and prosperity around the world. China and India became significant economic powers, and the industrialized countries grew even richer. 1  Closely integrated into the financial system are banks and investment firms. When the financial system is in crisis, banks reduce lending, companies often face bankruptcy, and unemployment rises. Ultimately, as we saw in the financial crisis of 2008–2009, many banks fail.

The financial crisis triggered a global economic recession that resulted in more than $4.1 trillion in losses, saw unemployment rates that climbed to more than 10 percent in the United States and higher elsewhere, and increased poverty. Stock markets around the world crashed. American investors lost roughly 40 percent of the value of their savings. Housing prices plummeted from their record highs in 2006. Consumers reduced their spending, manufacturing declined, global trade diminished, and countries adopted protectionist measures, many turning their attention inward to focus on problems caused by the financial crisis.

Given the central importance of finance to virtually all aspects of globalization, issues such as trade, the environment, crime, disease, inequality, migration, ethnic conflicts, human rights, and promotion of democracy are affected. Furthermore, the financial crisis weakened some countries more than others, thereby engendering significant shifts of power among countries, especially between the United States and China. The European Union struggled over how much to use the euro currency to shore up or bail out banks and nations. The financial, economic, social, and political fallout continues. Citizens took to the streets in a protest movement against financial inequality that began in New York City as Occupy Wall Street and spread around the world. This chapter examines the causes of the financial crisis, its impact, and responses to it. It concludes with a case study of the decline of the Celtic Tiger (Ireland).

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