As the global economy struggles to move forward, a time to look back
Only on a deserted island could you find someone to say the global financial order is in need of a reboot. Yet, as political and economic leaders attempt to find a way out, it is useful to examine how we got into the mess.
In political circles the answer is easy enough to fit on a bumper sticker: Wall Street greed and deregulation. But financial markets and capitalism do not function as simply as that. So, what is at the root of the problem?
Roger Bootle contends in the London Telegraph that the financial crisis does not have one father, but several.
“Capitalist economies are a strange mixture – needing little or no macro management in normal times, but every so often absolutely relying on the state to pull them out of depression. This requires the most audacious leaders that democracy can throw up. The crisis is as much about the inadequacies of our political system as it is about the scandalous behaviour of the banks,” he writes.
Thomson Reuters columnist David Barker tackles the argument that deregulation caused the financial crisis, saying that the “story sounds plausible at first, but it breaks down when specific policies are analyzed.”
“Claims that financial firms’ capital requirements were relaxed shortly before the crisis are greatly exaggerated, and derivative mortgage securities multiplied not because of deregulation, but because their use was actively encouraged by government policy.
“An argument can be made that a completely different regulatory structure, such as the Canadian system, might have prevented the crisis. The institutions of the United States before deregulation, however, probably could not have done so. Whether a comprehensive regulatory system covering all kinds of previously unregulated entities is desirable or possible is, however, a different question than whether deregulation caused the financial crisis,” he says.
On Monday, it was reported that manufacturing contracted for the first time in three years, another sign of a stalling recovery. One thing is certain: Political leaders need to understand the financial and economic aspects of the recession and focus less on the politics.