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The Current Economic Crisis and Lessons for Economic Theory Essay

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Updated: Feb 5th, 2019

Introduction

The global financial crisis has greatly challenged the economists, financial institutions and political leadership. The effects that arose from the crisis still affect some regions of the world to date. This is typical of the austerity measures taken by some of the western economies.

In fact, the effects of the global financial crisis caused a series of economic bubbles that threatened the stability of the European Union. In this light, the following paper will discuss some of the critical tenets in Stiglitz’s article shown as the title of this paper. The article is presented in a simple, friendly format, yet the issues addressed are principles according to which modern economies function.

Although economy recovery cuts across the globe, there is a constant fear that the world could slip back to the recession, especially after the threats posed by debt default and the need to curb the amount of debt for the U.S., amidst threats of war and poor global banking practices, are a great concern to economists. However, Stiglitz attempts to shed some light on pertinent issues and possible approaches that can address these problems. This may offer a glimmer of hope to the modern day uncertainties in the economy world.

The synthesis of the article

Stiglitz presents a systematic analysis of the global economic crisis in which he reveals the cause, the reality and the aftermath of the economic crisis (Stiglitz 281). The historical perspective of the global recession informs the failures of the economists and financial institutions to prevent the crisis. Some of the vital principles of practice were overlooked as the recession took shape. In this respect, the paper focuses on two aspects.

First, as a matter of urgency, there is a need to refine the principles and the practices of the banking sector as this sector plays a critical role in the economy of every nation. The second aspect is the need to synthesize the lessons learnt from the crisis and how they affect intellectual processes of teaching and learning. On the same note, there is a need to re-evaluate what the nations pass on to the next generation both professionally and scholarly (Stiglitz 281).

In the view of Stiglitz, the recent economic depression began in the United States and later on, affected the rest of the world (Stiglitz 282). The global effect of the recession could not subside by taking a global approach. The feeble globalization principles forced each nation to react to the situation at an individual level. Even more, the recession affected the countries at varied degrees. Therefore, different countries overcame the crisis at different times (Stiglitz 282-283).

In this respect, the United States employed a number of strategies to address the looming crisis. The first initiative against recession was the stimulus program. In this arrangement, the government increased its debt from about $5.7 trillion to an increasing figure of over 10 trillion dollars (Stiglitz 284).

Stiglitz believes that stimulus programs should have been anchored on building human capacity in skills and training, building a social and physical infrastructure and coming up with novel technologies (Stiglitz 284). There is a need to stabilize the economy by reducing expenditures by an estimated figure of 5 to 6 percent of the GDP (Stiglitz 284).

The second initiative was to understand the fundamental problem of recession. Putting more money into the economy systems would not offer a solution without addressing the specific issues in the financial sector. Therefore, identifying the causes is an independent point of consideration.

The third initiative was to use the information drawn from the problems to reorganize the financial sector (Stiglitz 285). Reorganization of the financial sector involved an elaborate and systematic plan of actions touching on all the ancillaries of the sector and projecting the plan into the future (Stiglitz 291).

As the article draws to the end, Stiglitz synthesizes the role and position of the economists before, during and what they ought to do afterwards (Stiglitz 293). In this part, the article details the scholarly, professional and principle perspectives of the lessons learnt from the economic crisis. The article is philosophically and empirically critical regarding the objectivity of the theory of the invisible hand and the modern economy theory of imperfect information (Stiglitz 293).

There is a need to analyze, compare and contrast the ageless principles and theories employed in economics and narrow down to how they affect real economic indicators. Such indicators include, taxation, mortgage industry, bonds, the trends in the financial markets, GDP of regions and countries, inflation, trends in investments, budget deficit and policy formulation (Stiglitz 293).

Understanding the reality of recession in perspective of the economic theories

The effects of financial crisis are far-reaching, not only geographically but also across time. Five years after the economic depression, most investors still do not have the confidence and certainty in where to invest and how to manage their finances. Studies show that massive investment may come with its own risks and this is possibly why most investors are hesitating (Green para. 3). Therefore, it is vital for investors to learn from the past and distribute their risks by increasing their investment portfolio (Green para.10).

The challenge comes from the fact that recession may begin with a given economic sector but may affect many sectors either directly or indirectly. The same phenomenon affects the economic practices of governments and institutions. The financial effects of recession are objective and not imaginary. Stiglitz observes that the effects experienced by the US and the entire globe had nothing to do with the invisible hand as Adam Smith had stated in the classical economic theory (Stiglitz 293).

A critical analysis of the causes and effects of the economic recession reveals the need to re-evaluate the enduring economic principles and theories. That is because the economic indicators and empirical relations of economic parameters fail to accurately predict recession.

They also fail to systemize the cause of the effects from one form of investment to another or in different industries. In effect, most economists believe that lack of empirical clarity and certainty, with regard to recession, is a function of imperfect information. This is the dominant aspect in the modern economy theory (Stiglitz 293).

Studies show that a direct instruction to a financial institution may affect the decisions the institution makes with regard to financial indicators (Global inflation Para.5). But the challenge still remains on whether this turns out to be the invisible hand.

It should also be observed that other than instant, direct influence on financial policies, financial institutions apply policies which effects become manifested later on and in a direct way. This is the case of Investment bank Lehman Brothers Holdings. Short term bailouts by the government or other financial institutions cannot address the effects of bad policies and failed implementation of these principles (Green Para.1).

The stimulus programs and government institutional bailout usually function according to the same principle of offsetting the current crisis, with the view to stabilize the situation over time. In such a case, investment in infrastructure, building a robust work force and developing better technologies are beneficial over time (Stiglitz 282).

Financial bailouts and stimulus programs, plunged into consumerism, are ultimately detrimental to the economy. The institutions increase in liability with a reduction in assets and thus, face high inflation. The problem of inflation not only lies in bad investment policies of stimulus funds, but it is also rooted in the monetary and fiscal policies of the institutions and the government (Global inflation Para. 4).

In perspective, poorly formulated stimulus programs and borrowing for consumerism do not solve challenges of recession. Governments may fail to curb on borrowing figures, or give more funds to the affected institutions but these may not make them fit to survive. The question of a country, institution or organization surviving from recession is evident in the social application of the Darwinian Theory of natural selection.

If the countries are not bailed out and stimulus programs fail to rescue institutions, they are bound not to survive. Therefore, recovery plans from recession must be rooted in informed institutional policies, principles and theories. Quick bailouts and direct instructions may not bear long term fruits as far as curbing recession is concerned. This requires intensive, strategic research and implementation. Scholars and the government need to shoulder the responsibility of preventing and overcoming economic depression

Works Cited

“Global inflation. Back to the 1970s?” The Economist. 2004. Web.

Green, Kelly. “What we learned from the financial crisis”. Wall Street Journal. 2013. Web.

Stiglitz, Joseph. “The Current Economic Crisis and Lessons for Economic Theory”. Eastern Economic Journal 35.10(2009): 281-296. Print.

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