Capital inflows did not sufficiently feed into productive investment, and the competitiveness of economies was not upgraded to assure sustainable growth. Changing the drivers of growth and its sources of financing.
IMF forecasts is built on faulty theory
Governments have overspending
Political and big corporation influence on big banks made it a problem for them to write legislations there on behalf.
The lawmakers politically and unintellectual forgot about the old lessons of depression in 1930’s.
Ironically, as the crisis has unfolded, economists have had no choice but to abandon their standard models and to produce hand-waving common-sense remedies.
- Increase in unemployment due to meltdown there is little hope that it would come down quickly.
Approaches
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The Federal Reserve…recognized that, despite suspicions, it was very difficult to definitively identify a bubble until after the fact, that is, when its bursting confirmed its existence…Moreover, it was far from obvious that bubbles, even if identified early, could be pre-empted short of the Central Bank inducing a substantial contraction in economic activity, the very outcome we would be seeking to avoid.-complexity theory
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Leaders in the politics and financial institutions were overconfidence that nothing will harm to the economy even allowing credits without much precaution that was a starting of a bubble and it burst and it’s after effect suffered with all the people together.
In contradiction change blindness happened to people and rumour propagation with hint sight biases also make the situation till worsened.
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Bounded rationality to government and foreseeing financial institutions.
PART2
Causes of financial crisis in 2008 & 2011 and compare those with classical and Keynesian approaches
- The media spread the news rapidly, resulting in a sudden decline in confidence from investors, and less capital flow. Investors’ sensitivity to shock and panic resulted in a sudden decrease in liquidity, which firms heavily relied on. The failure of one firm offset the risk of contagion, and led to failures of many other firms.
Many firms held securities containing highly positively correlated risks, and failed to diversify their portfolio to decrease risk.
Counties with large trade surplus with the US, such as China, preferred safe investments. They bought huge amounts of treasure bonds, and pushed rate of yield down. As a result, foreign investors started to invest in mortgage market related securities. This huge amount of foreign investment gave US mortgage firms more money to lend out; thus, raising the price of housing
the decrease of liquidity due to the decrease of short term debts
The US went further on financial innovation.
Governments have overspending.
Higher interest rates.
case the returns on bank assets will be low as debtors will not be able to pay back their loans due to a weak economic performance
The classical economics believes in establishing equilibrium between supply and demand. Monetary methods used by the government in critical situations can only worsen the economic situation in the long term period.
The main argument against classical approach is the lack of a clear mechanism of dealing with the recession in the short term, including unemployment.
The Keynesian approach on the other hand believes that specifically when the total production is higher than the resources available to purchase the produced products. Such a situation results in recession of economy.
Keynesian theory claims that in such a situation, government policies may be used to increase demand, thus leading to the reduction in unemployment and deflation.
The Keynesian approach implies that economy cannot sustain self-regulation, thus the governmental interference is inevitable.
Undoubtedly the US government now faces a lot of major problems. It needs to create jobs and boost the economic growth. I believe that the optimal approach to economic policy of the United States would be the Keynesian approach.
Keynes assumed that there can be two main approaches to dealing with economic recession: reduction of interest rates and government investment in infrastructure.
If the state places a large order in some enterprises, it will result in employment of additional manpower for these firms. Those who were unemployed will receive wages and will be able to increase their spending on consumer goods, and, accordingly, will increase the aggregate economic demand. This, in turn, would increase the aggregate supply of goods and services and general health of the economy.
.During the economic crisis of 2008 most countries turned to the Keynesian approach to economic policy and started to intervene into the private sector in order to create a more stable situation within an economy.
European Debt market 2012, Predictions
Nothing is certain about the debt market. Only predictions:
- Market points out that many countries have big debts to repay, but demand from consumers for goods and services are weak.
- Probably France’s AAA rating will downgraded.
More costly the finance will be.
Chance of public protest to exit from euro currency.
Leaders could resign or removed.
Many countries find difficulties in securing the funding of national budgets and moreover Crisis continues.
Euro survives.
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Network theory of systemic risk is a tool to find the possibility that a triggering event such as a bank failure or a market disruption could cause widespread disruption of the financial system; the functioning of the global financial system has been challenged by an extraordinary sequence of such triggering events. Network theory can help us to analyse the systemic risk of such disruptions (i) by looking at how resilient the system is to contagion; and (ii) what the major triggers and channels of contagion are.it is necessary to construct risk-based balance sheets.
Even though the theory say so it is very difficult to do so because of vast size of EU and different governments in different countries’.
