Term Paper- Poli 363

Professor Harold Chorney

Sonia Adzoavi Tsoekewo Amedome-

ID: 6908071

TOPIC

Explain the origins of the recent financial crash. What role did

deregulation and laissez-faire play in this crash. What has been the

experience of financial panics and crashes in history?

In the financial crisis that began in 2008 in the United States

(U.S.), millions of people in America and all over the world lost their

houses and employment. A crisis that arose in the U.S. soon turned

global. The laissez-faire approach promised success for all; yet, this

financial crisis, apparently the worst recession since the Great

Depression proved the contrary.

Economic crises also known as financial recession or depression are

defined as two consecutive quarters of falling Gross Domestic Product

(GDP)1. It implies scarcity of capital, the rise or fall of prices leading

to inflation or deflation, government deficits and high rate of

unemployment. One major financial crisis in the economic history is the

Great Depression of 1929. Aside from its numerous impacts, the First

World War left hegemonic powers with significant war debts and weakened

financial institutions. Laissez-faire is an economic ideology of Adam Smith

(1723-1790), a modern classical economics who believed that modern free

market system; division of labor and the invisible hand theory would give

1 Blink, Jocelyn, and Ian Dorton, Economics: course companion. Oxford: Oxford University Press, 2007, p. 192

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a more efficient economic system2. Laissez-faire implies no government

intervention on the market system apart from guaranteeing law of

contracts; leaving consumers and producers make their own decisions and

thus maximizing their profits.

Laissez- faire was the traditional strategy in managing American

depressions before 1929. Commercial banks were too speculative in the

pre-Depression era. Regulators failed to separate commercial banking and

investment banking so commercial banks took on too much risk with

depositors' capital3. Following the Great depression of 1929, the Glass

Steagle Act was adopted in 1933 to address inappropriate banking system4.

It separates investment and commercial banking activities. Yet policy

makers, once again basing themselves on the laissez-faire approach abolished

the act in 19955. The Federal Reserve in the United States (U.S.) combined

commercial banking and investment banking. This symbolizes the basis of

the following financial crash of 2008. It encouraged perversely capital

mismanagement and financial lobbying. Government non-interference and

regulators’ lack of foresight encouraged large influential financial

institutions lobbying to shape financial policymaking.

2 Ibid. p.83 S. Kroszner , Randall , and Raghuram G. Rajan, "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933”, American Economic Review, 01 (0): 54, p.14 Blink, Jocelyn, and Ian Dorton, Economics: course companion. Oxford: Oxford University Press, 2007, p. 1925 Ibid, p. 5

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Laissez-faire obsession adding to excessive greediness played a major

role in creating this crisis. It encouraged deregulation of financial

markets. It has been argued that laissez-faire generated the lack of “quality

control”, the market failed to provide restraint as needed6. Investors and

producers, in quest of profit maximization, produced in high quantity

highly risky assets that gave normal returns7. This led to the meltdown of

the market as they finally found themselves with countless toxic

mortgages worth billions of dollars8. Likewise, representing major

obstacles to regulations on the financial market, large financial

institutions lobbied on mortgage lending and securitization issues and

implemented skyrocketing subprime loaning strategies that stimulated the

collapse of global credit markets9. There were no more trust and assurance

that trigger the banking system so financial panics on the market arose.

This essay will discuss in four major sections the origins of the

financial crash of 2008 and analyze how state financial and economic

interdependency has turned a crisis that began in America global. The

first section illustrates how the recession arose in the U.S. In respect

of the level of dependency of states on the U.S, the following section

will illustrate how the crisis began in United Kingdom (U.K.) and Canada

6 Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton & Co., 2010. Print, p.137 Ibid8 Ibid9 Ibid

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and the impacts on their economy. The next section will assess how the

crisis arose in France and how it affected the French economy. Then it

will address Asian emerging economies states such as Japan and China. The

last section will examine the effects of the crisis on African states.

Termed a ‘Made in USA’ crisis by Stiglitz, the 2008 financial crisis

is an outcome of the abolition of the Glass Steagle Act (1933) that

allowed a deregulated market flooded in liquidity and low interest rates

and a global real estate bubble10. After the Great Depression, Regulation

Q of the banking Act of 1933 restricted interests rates that banks could

charges on deposits accounts11. It regulated the banking system in such a

way that prevents exorbitant rate levels and made a special distinction

for mortgage lending institutions12. Likewise, aimed at preventing

conflicts of interests and excessive risk-taking in the combination of

both banks, the Glass Steagle Act of 1933 effectively established a firm

separation between C-banks and I-banks in the financial world. It

successfully minimized failures in the banking system throughout the mid-

twentieth century13. Still, as early as 1960s, banks began lobbying

Congress to loosen these restrictions to counterbalance rising

competitions on the international financial market and prevent capital10 Ibid, p.111 Sherman, Matthew, "A Short History of Financial Deregulation in the United States”, Center for economic and policy resaerch 01 (2009): 54, Print, p.6 12 Sherman, Matthew, "A Short History of Financial Deregulation in the United States”, Center for economic and policy resaerch 01 (2009): 54, Print. 213 Ibid

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drain14. Banks feared that domestic companies would drain their capital to

foreign countries that adopt financial deregulation15. Most leaders in the

government shared the free market philosophy of deregulation16. To their

fortunes, Alan Greenspan (1926-Present) was appointed as the chairman of

the Federal Reserve (Fed) in 1987 and reinterpreted the Glass-Steagle Act

(1933). It allowed financial institutions to diversify their investment

operations and banks to deal in certain debt and equity securities17.

During his era, Greenspan passed the Riegle-Neal Interstate Banking and

Branching Act of 1994, which eliminated previous restrictions on

interstate banking and branching18. In 1996, the Fed passed a risky rule

that allows bank holding companies to own investment banking operations

that constituted as much as twenty-five percent of their revenues19. The

Glass Steagle Act (1933) finally crumbled in 1999 when the Fed passed

Congress the Financial Modernization Act (1999) commonly known as the

Gramm-Leach-Bliley Act. It revoked all restrictions and permitted full

combination of banking, securities and insurance operations for financial

institutions20. Financial lobbyists succeeded in establishing a

14 Ibid15 Ibid, p.916 Ibid17 Ibid18 Ibid19 Ibid20 Sherman, Matthew, "A Short History of Financial Deregulation in the United States”, Center for economic and policy resaerch 01 (2009): 54, Print p.10

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significant deregulated financial system that eventually allowed the

formation of ‘mega-banks’.

Moreover, given the high influence of financial lobbyers outlined in

the previous paragraph, regulators did little to manage risks, allocate

capital and mobilize savings while keeping transactions costs low. The

Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal

National Mortgage Association (Fannie Mae) in the U.S. encouraged banks

to lend to under deserved communities21. This lack of regulation on the

financial market encourages the formation of a ‘housing bubble’22. The

U.S, wealthiest country in the world was leaving beyond its means, and

the strength of the world’s economy depended on it. Rich Americans saved

substantial amounts while poor Americans had a large negative savings

rate, creating a large economic gap and increasing debts23. In addition,

there was the ‘mortgage scam’24. Wall Streets firms only focused on

maximizing their profits and failed to offers good mortgages, which would

have no hidden cost, low transactional costs and interests, protection

against the risk of a loss in home value or the risk of job loss25. Banks

failed to offer mortgages that would encourage homeownerships. Mortgage

21 Ibid, p. 1222 Stiglitz, Joseph E., Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton& Co., 2010. Print, p. 7623Sherman, Matthew, "A Short History of Financial Deregulation in the United States”, Center for economic and policy resaerch 01 (2009): 54, Print, p. 1024 Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton& Co., 2010. Print, p. 7625 Ibid

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loans were repackaged through securitization that is when assets are

pooled together and repacked into securities, creating liquidity and

enabling smaller investors to make profits and financial firms to

maximize returns26. It supported never ending fees which supported

unprecedented profits, which in turn engendered unheard-of bonuses27.

Theses loans carried low interest rates during the first years, after

which rates rise at higher levels. Consumers were not made aware of the

complex financial arrangement they entered into28. Mortgage lenders

maximized their profits by using subprime loans to encourage lower-

income, higher-risk borrowers (with lower credit ratings) who would take

longer to pay back their debts29. In addition, there were so called ‘liar

loans’, with which individuals needed not to prove their income before

being granted loans30. All these flawed incentives created false hope for

consumers who continued to take higher risks and buy increasingly toxic

assets.

Consequently, when the bubble broke, people lost their saving and

their houses so there was no money so investment decreased, demand for

goods reduced and unemployment rate increased. Homeowners owe more on

26 Ibid, p. 1227 Ibid, p. 7928 Sherman, Matthew, "A Short History of Financial Deregulation in the United States”, Center for economic and policy resaerch 01 (2009): 54, Print, p. 1229 Ibid30 Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton& Co., 2010. Print, p.86

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their mortgages than the value of their houses. The ‘housing bubble’

affected the financial system because people invested a lot in their

house mortgage, and as the price of the houses fall, they loose not only

their savings but also saw their houses devaluate. Whilst the

residential real estate was unfolding, demand fell and there were less

borrowing. Demand deficits created unemployment in the housing sector and

the collapse of American business31. Reports of growing sub-prime mortgage

accounts in the U.S in 2006 and early 2007 resulted in an initial

reduction in wholesale credit markets between summer 2007 and summer

200832. Notwithstanding this, market panics seemed to be controlled until

the shock losses revealed at Fannie Mae and Freddy Mac, Lehman Brothers,

and American International Group (AIG) in August and September 200833.

With the failure of Lehman Brothers and Goldman Sachs in late 2008, that

demonstrated that no counterparty was too ‘big’ or important to fail,

tensions worsened among creditors34. As the implications of the crisis

have become clearer, confidence and reliance among enterprises of

financial markets were being continuously eroded. Responsive measures

worsen the situation. The government, which at that time was the Bush

administration, proceeded to bailouts that turned to be a failure as it

31 Ibid, p.1332 Walker, George A, “Financial Crisis-U.K Policy and Regulatory Response”, International Lawyer, 44.2 (2010):751789, Academic Search Complete, 10 March 2013.33 Ibid34 Ibid

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lent to large firms rather than small and medium-sized firms, which are the

basis for job creation so unemployment rate continue increasing.35.

Besides, one might argue that the banking system failed to provide an

efficient payment mechanism and its essential societal functions of

managing risks, allocating capital, and managing savings, while keeping

transactions cost low. Instead, through the laissez-faire system, it generated

risks, misallocated capital, and encouraged unnecessary indebtedness

while imposing high transactional fees on consumers. More expressively,

in spite of providing adequate and reasonable mortgages, it ensure

profits maximization instead, at the expense of buyers who eventually

became incapable of paying back their debts. Adding to this, the

repeated rescues from the government encourage banks to continue being

reckless, and regulators underestimated that situation, mistakenly

thinking that the system would be self-regulatory as the laissez-faire

philosophy promises. Laissez-faire allowed complex financial instruments to

be labeled as safe and all the while, regulators failed to intervene.

Financial institutions’ excessive greed shape lending policies and house

prices began to inflate considerably, creating the ‘housing-bubble’.

Also, having the assurance that the government would rescue them when

they fail, biggest banks grew larger, became too big to manage while

taking all the high risks to maximize their profits. Named the ‘moral35 Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton& Co., 2010. Print, p. 30

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hazard’36, this encouraged corruption in leading financials firms and led

to their collapse. Deregulations generated a complex financial mechanism

that encouraged misallocation of capitals on the financial market.

Regarding misallocation of resources, one should recall the few

related events in American economic history, the fall of prices of techs

and the rise of oil prices that were addressed with inadequate measure,

which turned out to be costly for the state. Prices of Techs fell in

March 2000 and as the economy at that time was based on those; the fall in

prices led to a fall in the economy and created a short recession37. Oil

prices started to rise started after the invasion of Iraq in 2003 and the

burden on monetary policy was increased. The U.S. spent hundreds of

billions of dollars importing oil instead of spending that money to meet

domestic needs. After the Iraq war started, the oil prices rose from

thirty-two dollars in 2003 to one-hundreds and thirty-seven dollars in

200838. Still, although revenues were stagnated, Americans were encouraged

to borrow and spend as if the economy was not declining39. These are few

cases that illustrate other costly mistakes government regulators made.

In the continuum, having considered the origin of the financial

crisis of 2008, it is also reasonable to look at its impacts on global36 Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton& Co., 2010. Print, p.8337Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton & Co., 2010. Print, p, 238 Ibid 39 Ibid

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economic stability. Failures outlined in the previous paragraphs have

contagious impacts throughout the world. Termed the contagion effect that

is when the impacts of investments banks on the economy are positively

correlated to its economic weight, its failure affects considerably not

only the country but also all economic or financial partners and hence

affects the whole world, financial deficits spread throughout the world.

The U.S having the biggest insurance and automobile company so put too

much trust widest banks. One failure in regulations and financial

policies has resulted in continuous impacts on other companies and firms

in the country and thus all around the world40. In October 2008, the

collapse in stock markets became a alarming global phenomenon; indices

all over the world were down by between thirty-tree and seventy-one

percent including Canada at -32.8 percent, Euro zone -48.3 percent,

United Kingdom (UK) -39.9 percent, China -65.8 percent, Hong Kong -54.6

percent, Japan -50.0 percent41. The crisis expanded during 2007 and 2008

when banking partners lost trust in each other and in their credit-

default insurers; major U.S. and European banks were so cautious that a

North Atlantic credit clash began42. In fact, the problem of the British

40 Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton& Co., 2010. Print, p.14-1541 R.Chorney, Harold, "After the Crash:Rediscovering Keynes and the origins of quantitative easing(2nd posting),"haroldchorneyeconomist, 9 Mar. 2013. <http://haroldchorneyeconomist.com/2011/06/03/after-the-crashrediscovering-keynes-and-the-origins-of-quantitative-easing-2nd-posting/>.42 G. Anderson, Richard , and Andrew W. Mullineux. "British Banking in Crisis."Economic Synopses 16 (2009): n. pag.http://research.stlouisfed.org/. Web. 10 Mar. 2013, p. 1

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banks for example is the same scenario as that of American banks,

exorbitant mortgage-backed securities. Within the United Kingdom, the

first victim from the crisis was Northern Rock Bank, which had only 22.4%

of wholesale cover with the rest of its capital coming from

securitization, covered bonds, and wholesale borrowing that disappeared

with the reduction in wholesale lending43. It finally had to be

nationalized. Adding to this, Bradford and Bingley, which had been one of

the leading creditors in the higher risk buy-to-let and self-

certification mortgage markets had to be sold to the Spanish bank,

Santander, with the government taking on responsibility for its £50bn

mortgage book44. Regarding property performance, the IPD All Property

Total Return Index for the UK was -24 percent for 2008; House prices have

also fallen dramatically through 2008. The average house price in the UK

fell by 14.7% over the course of 2008 to £156,82845. The downturn in both

the commercial and residential markets combined with the limited

availability of credit and constricted lending measures have contributed

to a dramatic fall in both transactions and development activity46.

Addressing these issues were quite costly to the government. The bank of

43 Walker, George A, “Financial Crisis-U.K Policy and Regulatory Response”, International Lawyer, 44.2 (2010):751789, Academic Search Complete, 10 March 2013.44 Ibid.45 Adair, Alastair , Jim Berry, Martin Haran, Greg Lloyd, and Stanley McGreal. "The Global Financial Crisis: Impact on Property Markets in the UK and Ireland."Real Estate Initiative 01 (2009): n. pag.http://news.ulster.ac.uk/. Web. 6 Mar. 2013, p.146 Ibid, p. 5

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England had to adopt quantitative easing by injecting seventy-five

million pounds of additional money supply by buying up financial assets

from the private sector to keep interest rates low, increase liquidity,

the money stock and thereby support aggregate demand47. Since the British

financial sector plays a greater role British economy, the cost of

bailouts were greater than in the U.S. Yet, unlike the Bush

administration, the British government ensured there was accountability,

the heads of bailed-out banks were replaced and the British government

bought considerable shares in central banks in order to ensure

appropriate regulations on financial market48. France on the other hand

faced a decrease in foreign trade49. Exports shifted from 35 000 million

Euro to 27 000 million Euro per quarter in early 200950. Domestic

consumption decreased as the price of houses kept fluctuating. French

banks went bankrupt which causes capital scarcity and firms collapse.

Unemployment rate rose up to 9.5 percent in 200951. The financial

interdependence between firms and banks in Europe, especially for the UK

and France intensified impacts of the crisis on their economy.

47 R.Chorney, Harold, "After the Crash:Rediscovering Keynes and the origins of quantitative easing(2nd posting),"haroldchorneyeconomist, 9 Mar. 2013. <http://haroldchorneyeconomist.com/2011/06/03/after-the-crashrediscovering-keynes-and-the-origins-of-quantitative-easing-2nd-posting/>.48 Ibid49 Dumoulin , Etienne, and Khalik Salmank, "The current financial crisis and its effects on the French economy", Mittuniversitetett 01 (2009): 1-45. Print, p.2450 Ibid, p. 2551 National Institute of Statistics and Economic Studies, Labour Force Survey, France 2009

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On the other hand, unlike the European and U.S. financial system, the

major Canadian financial institutions were in a much better position than

their American and European counterparts regarding their degree of

exposure to indebtedness so defaulting or declaring bankruptcy is

unlikely in Canada52. Most banks in Canada had a large and weighty deposit

base53. Canadian financial institutions were smart enough to put a damper

on the growth of subprime mortgage system generated by the U.S54. The

Canadian government also adopted the quantitative easing approach. It

injected liquidities while broadening the range of securities held under

resale agreements to help financial markets run efficiently55.

Nevertheless, global capital scarcity makes access to capital difficult

and costly for all financial institutions including Canadians. This

affects Canadian household and business credit terms. Two surveys carried

out by the Bank of Canada among businesses and senior loan officers

reports that credit terms have been tightening significantly for

businesses over the past few quarters56. Moreover, as the Canadian economy

is mostly driven by domestic demand, the tightening of credit terms would

52Durocher, Benoit, "The impact of the financial crisis in Canada", Desjardins Economic Studies 01 (2008): pag.http://www.desjardins.com. Web. 10 Mar. 2013.53 Booth, Laurence. "Structured Finance-subprime, market meltdown, and learning from the Past." Thefinance crisis and rescue: what went wrong? Why? What lessons can be learned? Toronto: University of Toronto Press, 2008. 33-51. Print, p. 4354 Durocher, Benoit . "The impact of the financial crisis in Canada." Desjardins Economic Studies 01 (2008): n. pag.http://www.desjardins.com. Web. 10 Mar. 2013.55 Ibid56 Ibid

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slower growth in consumer spending and might thus create significant

slowdown in consumer spending and investment57.

Additionally, regarding emerging economies, thousands of export-

oriented industries in countries like China could no more pay their

workers so ten millions migrants had to return to their home provinces,

creation a fast growing unemployment rates and impoverishing Chinese

workers58. In 2008, China made considerable losses as it invested in

Western companies contracts and China saw its domestic economic

inequality worsen 59. However China was not so integrated in the global

economy. Foreign-funded banks were represented only 2.4 percent of

Chinese domestic total bank assets and so, played a minimal role in its

financial system, China has only gradually pursued liberalization of its

domestic financial sectors, limiting deals of financial innovations such

as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations

(CDO) and held a high level of international exchange reserves which

would save high borrowing costs to fund its government spending or

generating a balance of payment crisis, China kept experiencing a growing

GDP during the financial crisis60. Its counterpart, Japan saw its economy

57 Durocher, Benoit. "The impact of the financial crisis in Canada." Desjardins Economic Studies 01 (2008): n. pag.http://www.desjardins.com. Web. 10 Mar. 2013.58 Schmidt, Dirk, "The Financial Crisis in China ", Chinapolitik 67 (2009), www.chinapolitik.de. 11 Mar. 2013.59 Ibid60 Ibid

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deteriorate in the fourth quarter of 2008 and the first quarter of 2009,

resulting in a negative GDP growth of less than -10.0%61.

As a result, the economic deterioration in leading economic powers

affected African economy. Almost all leading commodities such as copper,

aluminum, platinum, lead, steel, tin, zinc coffee, wheat, corn, sugar,

cheese, milk, corn oil and soybean oil also fell in price62. The

Organization of the Petroleum Exporting Countries (OPEC) cut its

production quotas during this earlier period but prices still

fell63Chinese trade partners and foreign direct investment beneficiations

in Africa saw their economy topple over. Declining trade flows created a

slowdown in capital inflow in Africa. All incomes sectors were affected.

Regional leaders of growth were the first affected. The financial sector

in South Africa faced a downfall of asset prices, dramatic rises in the

cost of capital, and a considerable reduction in lending which resulted

in sharp downturns in the retail and manufacturing sectors64. The mining

sector experienced a big fall in output and employment due to lower world

61 Waisako, Tokuo, "Challenges for Japanese Macroeconomic Policy Management." Policy Research Institute, Ministry Finance (2010), 6 Mar. 2013, p. 162 Chorney, R., Harold, "After the Crash:Rediscovering Keynes and the origins of quantitative easing (2nd posting),"haroldchorneyeconomist, 9 Mar. 2013. <http://haroldchorneyeconomist.com/2011/06/03/after-the-crashrediscovering-keynes-and-the-origins-of-quantitative-easing-2nd-posting/>.63 Walker, George A, “Financial Crisis-U.K Policy and Regulatory Response”, International Lawyer, 44.2 (2010):751789, Academic Search Complete, 10 March 2013.64 Committee of African Finance Ministers and Central Bank Governors, “Impact Of The Crisis On African Economies Sustaining Growth And Poverty Reduction- African Perspectives and Recommendations to the G20 ”, 2009, p.4

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demand65. Between May 2008 and March 2009, South Africa’s JALSH index has

fallen by about forty-six percent and the Rand depreciated by twenty-

three percent against the US dollar66. Investment, output and government

revenues have fallen due to deteriorating hydrocarbons prices. Oil and

gas represent thirty percent of Nigeria’s GDP and over ninety percent of

its exports67. As the regional engines of growth weakened smaller

neighboring economies that are mineral resources dependent and

politically fragile states, worsened. Countries like the DRC faced high

economic and political uncertainty, increasing poverty and unemployment

rate 68. Botswana has experienced a severe decline in industrial

production, export and government returns due to its high dependence on

diamond exports, representing 35 to 50 percent of government revenues69.

Payments fell from USD 61 million in 2008 to USD 39 million in January

2009 in Kenya70. Tourism receipts were down thirteen percent in the fourth

quarter of 2008 compared to 200771. Reporters stated that stocks of

foreign exchange reserves deteriorated so much in Democratic Republic of

65 Ibid66 Ibid67Committee of African Finance Ministers and Central Bank Governors, “Impact Of The Crisis On African Economies Sustaining Growth And Poverty Reduction- African Perspectives and Recommendations to the G20 ”, 2009, p.468 Ibid, 569 Ibid70 Committee of African Finance Ministers and Central Bank Governors, “Impact Of The Crisis On African Economies Sustaining Growth And Poverty Reduction- African Perspectives and Recommendations to the G20 ”, 2009, p.171 Ibid

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Congo that there were high chances of basic commodities becoming scarce72.

In Angola, government revenue for 2009 is expected to be twenty-four

percent lower compared to 200873. Lastly, the financial crisis has

intensified the impacts of the food crisis74. Africa was the most affected

by the financial crisis because in addition to being developing states

that are highly dependent on exports of natural resources, African

countries were integrated in the global economy and were the major

benefiters of foreign direct investment and international aids.

In conclusion, the financial crash of 2008 is embedded in the

laissez-faire system that dominated the western financial market. With

the deregulated system, American consumers found themselves trapped in

assets backed securities and collateralized debts obligations that

construct the ‘housing bubble’. This risky mortgage system led to the

collapse of leading financial institutions in the U.S. and throughout the

world. Capital became scarce and indebtedness was a big issue. Due to

fast the growing globalization that increase states’ dependency on each

other, the collapse of leading financial institutions in the U.S. led to

the downfall of all other economic powers. Developed countries such as

U.S, UK and France saw their banking system crash and market fail.

Emerging powers such as Japan experienced a significant GPD deficit.

72 Ibid, 273 Ibid, 474 Ibid, 5

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Although China’s exports declined, its financial system was not dependent

on the global system so disturbances did not have major impacts of China.

Having a more secured and less risky mortgage system, Canada too was less

affected by the crisis. African states, however, were the most impacted

due to their high dependence on exportations of natural resources and

foreign direct investments. The financial crash showed how an economy is

not entirely self-regulating system. The system needs to be highly

regulated in order to prevent financial lobbyism and excessive

deregulation. More government intervention is needed for adequate and

effective regulatory policies on the financial market. Banks should no

more be allowed to grow too large to be managed in order to prevent

previous financial problems to reoccur.

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21

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