In the chapter The Global Financial Crisis: Causes and Consequences of the book Neoliberalism: A Very Short Introduction Steger and Roy (2010), explain the three major successive neoliberal rises by borrowing limits and reducing the amount of securities for loans. The Reagan administration had a hand in the deregulation of the US financial sector. The greatest achievement of this administration was the Glass-Steagall Act which was signed by President Roosevelt to curb commercial banks from engaging in investment activities on Wall Street. This was after the 1929 crash and the Great Depression, which had given clear indications of savings and the involvement of the loan industry in the speculation activities taking place on Wall Street. Schemes were created to fluctuate the market conditions that facilitated the transfer of billions of dollars into bankers’ pockets. In addition, Steger and Roy (2010), argue that rescue packages by the government created at that time were capitalistic in nature; thus, was not that favourable to the common citizen.
Steger and Roy (2010) also explain the measures taken by the Federal Reserve Board to curb the corporate speculation that took place during the Great Depression, which included creating a securities exchange commission, setting a high mark for investors, and creation of independent rating credit agencies. Steger and Roy (2010) further state that the large commercial banks had the authority to underwrite securities, thus leading to bankruptcy of big commercial banks and loss of customers assets. “The restrictions imposed on commercial banks lead to a birth of series of vast conglomerates by financial services who were ready to venture into ventures not necessarily in there line of business” (Steger and Roy 2010, p. 124). The two authors state that the consequence was the development of secure mathematical models the dealt with more risk management in the future, which then became exceedingly popular with the new computer systems. These methods include: the purchase of asset in the future on agreed price for the present, the federal reserve then accepted to underwrite securities, not on the basis of savings deposits, other more appropriate methods such as hedging was also adopted. Consequently, financial institutions resulted in not depending on savings but instead started borrowing from each other and in turn sold the loans in the form of securities; hence, leaving the risk of this loans solely on the investors.
Steger and Roy (2010) state that a monetary policy by Greenspan that pushed for low interest rates, free flow of credit forced banks to look for capital by purchasing high risk loans from brokers who had been attracted by false promises of greater commissions. Then, they applied for house mortgages, which at the end proved to be fruitless. The financial institutions came up with a method by which the high risk loans were put together with the less risky ones and then sold to other investors who were less keen. This was aimed at reducing the risks involved. The approach was called collateralized debt obligations. According to Steger and Roy (2010), investors continued buying these collateralized obligations because first of all they concealed the high risk rate of the securities thus a higher chance of making a profit. Secondly, the unmatched reputation of giant financial institution reduced the percentage of uncertainty.
Steger and Roy (2010) state that this high returns from new securities attracted the attention of more investors all over the world hence hastening globalization. Unfortunately, this did not come without a negative impact which was witnessed during the mid 2007. The ever booming financial steamroller started regressing, real estates in America that were overvalued dropped drastically leading to a fast rise in foreclosures. Investors started realizingthe serious effect of security markets, thus losing their confidence in it. Eventually, the value of security mortgages fell forcing banks to desperately clear debts appearing on the institutions’ balance sheets. This forced some of the most reputable financial institutions in America to declare a state of bankruptcy or be saved by the nationalization drive that had not been utilized since the Great Depression.
Steger and Roy (2010) argue that this forced most of the industrialized nations to inject into its financial economy markets billions of US dollars of bailout packages in the hope to aid giant financial institutions which could not be left to fail. However, this turned out to have a negative impact on this conglomerates as they lost even more money having not been declared bankrupt. This has the taxpayers who happen to shoulder the trillions used to bailout these institutions can feel this effect today and will in the future. One of the major effects of this failing system was the ways in which the banks were trying to reconstruct their capital base and at the same time could hardly afford lending out huge amounts of cash. This automatically created accredit freeze, which affected majorly individuals and businesses that depended on this credit for their activities.
Steger and Roy (2010) further demonstrate that the credit freeze had a negative impact in that profitability of most businesses forcing most of them to cut down on their production and also were forced to lay off most of their workers. This led to a higher unemployment rate worldwide as prices of market stocks dropped extensively. On the other hand, the countries’ economies dropped as they fell deeper into recession. This was the first time world foreign trade collapsed since the Second World War. Unfortunately, reports by the key financial institutions indicated that the most affected would be the developing countries.