Global Financial Crisis (GFC)

The Global Financial Crisis (GFC)

The term “Global Financial Crisis” (GFC) refers to a situation in which assets and financial markets fall precipitously. As a result, the business environment deteriorates as a result of decreased purchases of services and goods. The crisis is frequently associated with a bank run or panic, in which investors withdraw their funds or sell their assets in expectation of a collapse in asset value. The GFC is thought to have started in 2007 when American investors lost faith in the value of mortgages, resulting in a liquidity crisis (Solimano 83). As a result, stock markets around the world became extremely volatile. This paper will discuss the cause of GFC based on neoliberal economic theory, Marx, Keynes, and Minsky theories.

Neoliberal Economic Theory

Besides, neoliberal economic theory is based on free trade. It includes privatization, liberalization, deregulation, reduction in government expenditure and austerity (Solimano 116). Some authors claim that the neoliberal economic theory has been the recent cause of the financial crisis across the globe due to free market trade. For instance, a free trade controlled by private sectors leads to exploitation of people as well as low wages. Consequently, the financial institutions gain a lot of power such as reducing the value of loans and increasing interest rates hence economic crisis.

Marx Theory

According to the Marx theory, a financial crisis is as a result of falling state of profits among businesses (Solimano 117). In a capitalist system, operating companies pay their workers less money (in the form of wages) than the amount obtained from the goods produced by the employees. In the long run, the workers have less money to spend on buying products and services thus the business make fewer profits hence economic crisis.

Keynes Economics Theory

According to Keynes economics theory, unregulated private markets in the economy indeed yield movements in prices and turn affect decisions made by the workers, businesses, and consumers (Solimano 117). Consequently, the decisions made push the economy into recessions, inflation, and even depressions. Keynes theory argues that if there is no external intervention, the private economy may remain inflated or depressed for quite long. Therefore, the approach identifies that the principal cause of the financial crisis is economy mechanisms.

Minsky Theories

Minsky theories attempt to provide explanation and understanding of featured and cause of financial crisis. For instance, the approach links fragility of financial markets in a regular economy life cycle with speculative investment to financial markets. During stable economic moments when cash flows exceed pay off debts, anticipation euphoria arises, and consequently, debts exceed the amount that debtors can pay off from their revenues hence financial crisis (Solimano 116). As a result, lenders and banks tighten the availability of credits and the subsequently the economy contracts.

The Falling Rate of Profit and Economic Growth

Remarkably, I think that the falling rate of profit and subsequent low rate of economic growth have been the primary cause of the current financial crisis. For instance, technological advancements have led to increases in productivity hence high profits. The businesses produce more to counter competition as well as increase profits margin. However, based on Marx theory, the employers pay workers fewer wages resulting in less money available for expenditure thus low economic growth. Consequently, a financial crisis occurs.

Conclusion

In summary, subsequent low economic growth rate, as well as falling profit rate, has been the primary causes of the economic crisis. On the same note, Marx, Keynes and Minsky theories are used to understanding the origins of the economic crisis. Additionally, some authors claim that adherence to neoliberal economic theory has recently caused a financial crisis.

Work cited

Solimano, Andrés. Economic Elites, Crises and Democracy: Alternatives beyond Neoliberal Capitalism. New York: Oxford University press, 2014. Print.