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In Economics, Political Economy on May 30, 2009 at 11:41 pm

An Analysis of the Likely Results of the Interplay of Causes and Effects of the Imminent Global Economic Crisis
by Hansley A. Juliano

The present year of 2009 opened with a plethora of various problems, challenges and apprehensions spanning not just developing and troubled nations but even most of the well-developed capitalist economies of the world. It is no surprise, then, that most societies have, with increasing apprehension and paranoia, dubbed this predicament a “global economic crisis.” It is not without reason that, similar to the proverbial “Tragedy of the Commons,” many nations have started tracing and reviewing their books and logs so as to see where precisely their actions for development have gone wrong, leading them to a probable adverse situation when the crisis strikes at full strength. That many analysts, intellectuals and government officials, more so, have pledged to study things further and find plausible solutions did not dampen people’s fear of being hit hard and experience stunted economic growth and mobility, both personal and communal.

Analyst Ghassan Karam, in an attempt to place into context how all these factors went into play leading to the current crisis, contends that there is no basis in blaming the general consumers; rather, there is a need to reconsider and view the major central banks of the world up-close in order to see what grave misconduct these constitutions have committed, starting a chain of events prone to affecting everyone:

… the real question is not why is it that consumers acted “irresponsibly” by agreeing to take on risk that they could not handle; the real issue is to find out what were the conditions that led the financial institutions to lure the unsuspecting consumer to carry excessive debt burden. Furthermore, the reason the crisis could not be contained had nothing to do with the borrowers and everything to do with the fancy financial packaging and creative marketing techniques that the debt originators resorted to. The urge to come up with the new and, in retrospect, unsound methods of debt financing was driven by greed; the urge to participate in amassing what appeared to be easy – though albeit- unethical profits , arose from the excess liquidity injected into the global financial markets by the major central banks. (Karam 2008).

Following this argument, it appears that the nature of the situation facing us seems to be a matter of finance. As such, the debate arises on whether the current crisis is of a specifically “financial” or a generally “economic” nature. Based from the analysis of Chinese economist He Qinglian, is that an “economic crisis” is based on the collective interplay of technological and industrial incapability or decline, stock mismanagement, erratic evaluation of underperforming loans and, as might be considered the usual suspect, graft and corruption. (Zheng 2008). This is the particular problem being faced since last year by China, which is rather independent but still gravely affected by the current US Financial Crisis. In a way, the same as well might be said of the Philippines, which problems are decidedly home-grown yet is verily beholden to the problems that the United States is facing. It is not without reason that the proverb “When Uncle Sam sneezes, Juan catches a cold” was coined.

A “financial crisis,” however, is better applied in the study of the nature of why situations occur wherein a massive measurement of value is lost in financial institutions or assets. (1) Professor Edsel Beja of the Ateneo de Manila University describes the situation in such a situation as likely to be affected by past crisis. As he posited, “US authorities and market players basically overlooked the integrity of their financial system. After all, the United States had the most advanced financial markets. The optimism became hubris as financial success created an impression of the impossibility of failure. The Great Depression was seen as an isolated incident [italics mine]” (Beja 2008), something which cannot be done so since it was precisely this problem that brought about the protective systems to prevent another financial collapse in the form of the Glass-Steagall Act of 1933 and other similar legislations.

There are additional evidences showing a big possibility that the current situation is indeed a financial crisis. Professor Joseph Stiglitz of Columbia University, in analyzing the aftermath of the East Asia Crisis that was almost directly caused by the policies of the International Monetary Fund (IMF) and the United States Treasury, which state that “full capital account liberalization would help the region grow even faster.” This policy, in his opinion, “was the single most important factor leading to the crisis,” more so when it was persistently pushed to the East Asian countries when they did not actually need additional capital given their high savings rate. (Stiglitz 2002, 99). As we will be seeing later, similar blunders are to characterize the current global financial crisis.

An Issue of Circulation

It is a given that the hub of the current global financial crisis is deemed to be the United States of America, which explains why most of the problems, analyses and situational solutions are being formulated so as to prevent the exacerbation of the situation in that particular country. Karam blasts the “irresponsible behavior of encouraging households to assume debt beyond their means in order to ‘mint’ huge profits from packaging these mortgages into collateralized securities of dubious quality has resulted in creating conditions that do not augur well for the world economy. The drive to enrich the few has bankrupted the many, not because of the irrationality of the borrower, but mainly because of the totally unregulated economy which permitted unfettered socially destructive behavior.” (2008).

Subprime lending, a phenomenon popularized by the media during the “credit crunch” of 2007, involves financial institutions lending in ways which do not meet “prime” standards to an extent which puts the loans into the riskiest category of consumer loans typically sold in the secondary market. (2) Belonging to this are the subprime mortgage loans, defined “by the financial and credit profile of the consumers to which they are marketed.” Supposedly, they are far riskier since “they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history… Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender.” (3) So as to prevent such defaults, credit default swaps or CDS’s have been commissioned to be used as a hedge and protection for debtholders, in particular Mortgage Backed Securities (MBS) investors. (4)

However, the advent of the practice of securitization, a process wherein that those issuing mortgages were no longer required to hold them to maturity, gave a new dimension to the practice of mortgaging. In a way, “by selling the mortgages to investors, the originating banks replenished their funds, enabling them to issue more loans and generating transaction fees. This may have created moral hazard and increased focus on processing mortgage transactions rather than ensuring their credit quality.” Such practices, albeit intending to assure additional security towards lenders and borrowers, actually produced a counter-productive situation. (5) As Wikipedia would reproduce a section of Felix Salmon’s analysis on the situation which sent Wall Street crashing down:

A more direct connection between securitization and the subprime crisis relates to a fundamental fault in the way that underwriters, rating agencies and investors modeled the correlation of risks among loans in securitization pools. Correlation modeling–determining how the default risk of one loan in a pool is statistically related to the default risk for other loans–was based on a “Gaussian copula” technique developed by statistician David X. Li. This technique, widely adopted as a means of evaluating the risk associated with securitization transactions, used what turned out to be an overly simplistic approach to correlation. Unfortunately, the flaws in this technique did not become apparent to market participants until after many hundreds of billions of dollars of ABS and CDOs backed by subprime loans had been rated and sold. By the time investors stopped buying subprime-backed securities–which halted the ability of mortgage originators to extend subprime loans–the effects of the crisis were already beginning to emerge. (6)

Looking Good, But Not so Good

The Philippine situation in the global financial crisis, it seems, was an already precarious one even prior to its obvious emergence last 2007. Stiglitz himself already casted his apprehensions on the conditions of most nations within the East Asia sphere of influence. As he described it, “what had started as an exchange rate disaster threatened to take down many of the regions banks, stock markets and even entire economies. The crisis is over now, but countries such as Indonesia will feel its effects for years.” As his original theses proposed, he imputes a majority of the responsibility for such debacles to the IMF due to its precise duty to avert this crisis, when it fact it even worsened it. (Stiglitz 2002, 89).

Philip Bowring, however, sounds optimistic in his appraisal of the Philippine economy under the tenure of President Gloria Macapagal-Arroyo in spite of pressing political turmoil and a nevertheless increasing rate of poverty, a proven case of unequal practices which shows the disregard for the efficiency-equity dillemma. That such a paradox occurs may as well be described by the means with which the country’s economy is subsisting. Despite its being actually the country’s biggest long-term weakness, the Philippines actually benefits from the continuous supply of “overseas worker remittances, which account for 10 percent of GDP and the bulk of foreign exchange earnings.” In addition to this, he also notices the proliferation of “call centers and business process outsourcing, which should keep growing, albeit more slowly.” (Bowring 2009).

He also praises the efforts that the Philippine government gave in stabilizing the fiscal position over several years, which eventually allowed interest rates to come down. Moreover, it was also noticed that agriculture “has been achieving steady growth of 3 percent a year thanks to increased investment and higher prices.” In total, Bowring judged the situation of the Philippines as “doing relatively well because of its lack of dependence on export manufacturing.” However, it is also deemed its greatest weakness, due precisely to its inability to harness its own labor force at home, relying consistently on the policy of “export labor,” (Ibid.) which though growing popular among Filipino families is almost relatively forced.

Such a situation, though arguably beneficial to the national economy, meets a lot of protest due to the very reasons mentioned above. Nevertheless, it remains a good example on the necessity of allowing major state intervention on the rehabilitation and strengthening of the economic practices and progressions, other than allowing the market to correct itself. Walden Bello, himself a vocal critic of the Arroyo administration, nevertheless is a proponent of the necessity of the role of the state in development which, sadly, despite the various efforts that have been done, remains sorely absent:

With the failure of doctrinaire neoliberalism to both explain and move countries out of underdevelopment, we are beginning once more to appreciate the positive role of the state in development, in its triple role of assisting the market, disciplining the market, and leading the market… The priority accorded to repaying the foreign debt in the context of an economy in crisis deprived the state of financial resources to play its role as the economy’s biggest investor, thus crowding out private investment. This emasculation on the expenditure side was paralleled by a crippling on the revenue side by the collapse of customs revenues owing to aggressive trade liberalization. (Bello et. al. 2009, xxvi).

This particular situation calls to mind the nature of tax havens, areas of jurisdiction where the tax rates are levied low or probably even non-existent. Individuals and/or firms can find it attractive to move themselves to areas with lower tax rates. Such allows for a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. (7) It is probably such a character of wanting limit payment of tax rates that also attracts the proliferation of gray markets, a circumvention of the original purposes for trade of commodities which are nevertheless considered legal, such as the emergence of online shops like eBay. (8) In such situations that give rise to the expansion of informal economic sectors, it is inevitable that there would be a need for regulation which, contrary to traditional beliefs of a self-correcting market, only state authority could curb effectively.

Believable Change or a Crafty Deception?

A recent major development sent the entire global economic community into high hopes in the recently-concluded meeting of the Group of Twenty Finance Ministers and Central Bank Governors (or more popularly known as the G-20) last April 2, 2009. In this particular meeting, a new policy was spearheaded by President Barack Hussein Obama of the United States of America which intends to give the International Monetary Fund its sorely-needed credibility in helping developing countries re-emerge from stagnation (in light of the debacles Stiglitz has described). Pursuing so, IMF must allow “middle- and lower-income countries a greater role in its governance (more votes or more seats on the board or both),” which means an elevation on the part of developing countries in their capability to decide on issues of global trade. Progress on this front, however, seems to “remains glacial; European countries in particular are unwilling to give up their long-standing over-representation.” (Johnson 2009).

If such a reform should push through, it might as well be deemed a success for the attempt to reject neoliberal policies which have held sway in the wake of the end of the Cold War and the re-establishment of US hegemony in the world economy. A policy such as this pushed by the very president of the US will entail a perpetual rejection of the Washington Consensus: that is, the increasingly-odious “set of ten specific economic policy prescriptions that he considered to constitute a “standard” reform package promoted for crisis-wracked developing countries by Washington D.C based institutions such as the International Monetary Fund (IMF), World Bank and the U.S. Treasury Department.” (9) Such requirements include a “very open press, vibrant ‘civil society,’ and democratic processes” (Balisacan and Hill 2003, 37) which, though supposedly present in name, are not actually visible nor felt by the people. In the wake of the administrations of Joseph Estrada and the latter part of Gloria Arroyo’s, many allegations of human rights violations, fraud, graft and corruption and similar crimes have occasionally surfaced with varying intensities.

In the event that such a shift would be enacted and implemented properly in the Philippines, the country could likely free itself from the bounds imposed on it by the WB-IMF-US Treasury, which means it can now actually act independently for its own development. As such, it can now fix its perennial problems such as “the outflow of debt service payments [and] the collapse in customs revenues [that] precipitated the fiscal implosion, which made it even more difficult for government to finance the capital expenditures that were necessary to crowd in both domestic and foreign investment in order to decisively lift the country from the stagnation of the eighties and nineties.” (Bello et al 2009, xxv). A valid and holding fiscal policy serving as a stimulus program (whether it be government spending or tax measures) can then validly support or revive an economy in recession. As an example worthy of analysis, US President Obama

… seeks to make good on some of his signature campaign promises, including an income tax cut for most Americans earning less than $200,000 a year. Under the plan, individuals would receive up to $500 and families up to $1,000 through a cut in payroll taxes on the first $8,100 in income. The money would be delivered through paychecks as a reduction in Social Security withholdings, and is intended to bolster consumer spending by giving a small lift to household pocketbooks. (10)

Developments and supposed “improvements” in the global economic sphere, despite being still relatively small, criticized and dubious, nevertheless gives stakeholders a welcome sigh of relief and hope in the possibility of better policies and events to come. However, complacency is neither a plausible nor ideal policy of dealing with the crisis. In recognizing that the situation is largely financial in nature, it is important that we “take stock of the crisis and recognise that the financial industry is undergoing fundamental shifts, and is not simply the victim of speculative panic against housing loans. Certainly better regulation is part of the answer over the longer run, but it is no panacea. Today’s financial firm equity and bond holders must bear the main cost, or there is little hope they will behave more responsibly in the future.” (Rogoff 2008). The current global economic and financial crises might not actually be resolved the sooner we would want it, but careful and well-planned steps can hopefully speed it up.

It is important to recognize the various lessons of doing away with the prevailing neoliberal policies and modes of action that have stressed the “self-correcting market” paradigm, which seems to have only brought about precisely the current crises of credit, finance deficits and, as a result, economic recessions affecting numerous countries worldwide. The present situation is the best moment for us to once more strengthen the presence of state intervention in economic development. “It is essential to improve the overall performance of government, insulate it from the plunder of oligarchic groups, and promote new types of private sector initiative.” (De Dios and Hutchcroft 2003, 69).


(1) “Financial crisis.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(2) “Subprime lending.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(3) Ibid.
(4) “Subprime mortgage crisis.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(5) “Subprime mortgage crisis.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(6) Salmon, Felix (2009-02-23), “Recipe for Disaster: The Formula That Killed Wall Street”, Wired,
(7) “Tax haven.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(8) “Gray market.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(9) “Washington Consensus.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).
(10) “Economic Stimulus,” The New York Times, May 14, 2009 (accessed 17 May 2009).


Balisacan, Arsenio M. and Hal Hill, “An Introduction to the Key Issues,” in The Philippine Economy: Development, Policies and Challenges. Arsenio M. Balisacan and Hal Hill, eds. Ateneo de Manila University: Quezon City, 2003: 3-44.

Beja, Edsel Jr. L. “Lessons from the US Financial Crisis.” Philippine Daily Inquirer, October 4, 2008. (accessed 12 May 2009)

Bello, Walden, Herbert Docena, Marissa de Guzman and Marylou Malig. The Anti-Development State: The Political Economy of Permanent Crisis in the Philippines. Anvil Publishing: Pasig, 2009.

Bowring, Philip. “The Philippines; Looking Good for Now.” The New York Times, May 5, 2009. (accessed 12 May 2009).

De Dios, Emmanuel S. and Paul D. Hutchcroft, “Political Economy,” in The Philippine Economy: Development, Policies and Challenges. Arsenio M. Balisacan and Hal Hill, eds. Ateneo de Manila University: Quezon City, 2003: 45-73.

“Economic Stimulus,” The New York Times, May 14, 2009 (accessed 17 May 2009).

“Financial crisis.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).

“Gray market.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).

Johnson, Simon. “The Last European: Why the G-20 Was a Success.” The New York Times, April 3. 2009. (accessed 17 May 2009).

Karam, Ghassan. “Root causes of the global financial crisis.” Ya Libnan, June 25, 2008. (accessed 12 May 2009).

Pielbags, Andris. “Financial crisis and climate change: lessons to learn.” (accessed 12 May 2009).

Rogoff, Kenneth. “Is there an exit strategy?” September 8, 2008. (accessed 17 May 2009).

Stiglitz, Joseph. Globalization and Its Discontents. W.W. Norton & Company: New York, 2002

“Subprime lending.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).

“Subprime mortgage crisis.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).

“Tax haven.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).

“Washington Consensus.” Wikipedia, the Free Encyclopedia. (accessed 12 May 2009).

Zheng, Maria. “China: Not a Financial but an Economic Crisis.” The Epoch Times, November 3, 2008. (accessed 17 May 2009).

  1. Hi, interest post. I’ll write you later about few questions!

  2. I really like your post. Does it copyright protected?

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