National Bureau of Economic Research, Article Review Example

A chapter by Richard Cooper entitled “Living with Global Imbalances” provides support for the belief that current economic conditions cannot continue to prevail when economic growth and prosperity are the desired outcomes. Many experts argue that expanding the savings capacity of Americans is limited in its current state, and that increased savings opportunities must be explored to ensure that future generations are protected from unnecessary financial risks (Cooper 96). However, individual savings accounts do not create the type of volume that is necessary to invoke serious economic change; rather, the federal government must also take responsibility for this practice and improve its own savings ability through the federal budget (Cooper 97). At the same time, it is evident that the United States’ average life expectancy is on the rise, which leads to a potential decrease in investment due to fewer members of the younger population (Cooper 99).

From a foreign perspective, it is perhaps difficult for some countries to consider increasing their investment in the United States, perhaps due to increased attention and focus in response to economic conditions (Cooper 101). At the same time, many countries are likely to benefit from these investments in different ways, and could capture some of the revenue that they have lost over time (Cooper 101). Although the United States has experienced tumultuous economic conditions in past decades, the nation remains one of the most lucrative and wealthy nations in the entire world (Cooper 101). Therefore, it is likely that considering an investment in the United States is a desirable alternative for many foreign countries seeking to improve their own economic stability (Cooper 101). The United States’ ability to lend to foreign nations is not an unlimited practice; however, it is likely that this process will continue for the foreseeable future because numerous opportunities remain in this area (Cooper 101).

One of the key fiscal problems to consider in the United States is that continued borrowing and lending to foreign countries does not equate with existing revenue and earnings, thereby leading to a substantial deficit that is difficult to reduce (Cooper 105). As a result, it is important for the United States to limit its excessive spending and to recognize its true challenges in supporting a fiscally responsible society (Cooper 105). If government leaders make decisions, such as slashing budgets in needed areas and spending excessively in non-essential areas, then it is likely that the federal deficit will continue to expand at alarming rates. Therefore, it is necessary for U.S. leaders and economists to make decisions that will have responsible fiscal impact, and to determine different methods of shaping the economy in a positive manner that will have long-term successful results.

An article by Razin and Rosefielde entitled “Currency and Financial Crises of the 1990s and 2000s addresses some of the most important economic crises which occurred during these decades, and what transpired after these events took place. To be specific, the 1990s brought upon a crisis for Japan of epic proportions, when a bubble economy tore apart any semblance of stability within the Japanese market (Razin and Rosefielde 503). This bubble led to severe changes in pricing, thereby leading to serious economic decline and a detachment from GDP (Razin and Rosefielde 503). As a result of this pricing bubble, the housing market declined significantly and rapidly, and banks were providing loans in significant numbers (Razin and Rosefielde 503). When the bubble burst and no financial gain was to be found, it was the responsibility of borrowers to pay back their loans with interest, even if this led to bankruptcy (Razin and Rosefielde 504). After a period of time, Japan recovered from this disaster and is once again a fierce competitor in the global economy, but not without its lessons learned and revised practices to prevent this type of circumstance from happening anytime in the future (Razin and Rosefielde 504).

In 1997, Asia experienced a challenging financial crisis that perpetuated disastrous foreign currency implications that were felt worldwide (Razin and Rosefielde 507). As a result, banks could not keep up, leading many businesses to shut down and to a serious surge in unemployment (Razin and Rosefielde 507). The causes of this meltdown included surges in GDP growth and the belief that this growth would continue without consequence, which led to the region’s downfall (Razin and Rosefielde 507). At the same time, trade exports declined substantially during this period, stock and real estate prices plummeted, and other factors contributed to the disaster that took place (Razin and Rosefielde 507).

In 2008, the worst financial crisis to hit the global economy since the Great Depression took place, when deregulation was on the rise, the collapse of the American automobile industry was imminent, subprime mortgage lenders finally saw the light, and banks were visibly shaken, with no guarantee that they would be able to fulfill their financial obligations (Razin and Rosefielde 518-519). Therefore, many large companies, such as Lehman Brothers and Bear Stearns were headed for disaster, while others, such as GM and Chrysler, were provided with bailout funds by the federal government to restore confidence in the auto industry (Razin and Rosefielde 518-519). Each of these examples provides further evidence that the global economy faced critical challenges, and that these activities must be conducted wisely and with great caution to achieve success.

In recent years, exchange rates have fluctuated dramatically in the wake of difficult and complex economic conditions. As a result, Asia has experienced a severe decline in the valuation of its currency, as well as subsequent economic turmoil (Pesenti and Tille 3). One perspective of this crisis argues that if currency rate policies are not consistent with existing fiscal policies, currency-based turmoil is likely to occur (Pesenti and Tille 4). When policy makers and economists foresee one future, but the reality is quite different, then there is likely to be a dramatic decline in the ability of that economy to recover, particularly when currency rates are more vulnerable than anticipated (Pesenti and Tille 4). In addition, banks who work extensively using foreign currency also face significant risks, and are required to act accordingly (Pesenti and Tille 6). In some cases, regardless of the economic outlook, some banking institutions will continue to finance high-risk lenders and other borrowers because there is the expectation that government leaders will intervene and protect these institutions from full closure or decline (Pesenti and Tille 7). When economic disasters spread to a global scale, it is often the result of trade, financial collaborations, and fluctuating currency rates, which may devalue one country’s currency so much that it is deemed useless (Pesenti and Tille 7). Under these different conditions, it is not surprising to discover that dramatic fluctuations in currency are instrumental in shaping how an economy responds to a crisis, and which steps are taken to ensure that these risks are minimized as best as possible (Pesenti and Tille 7). The devaluation of currency plays an important role in economic relations and the ability of some countries to recover from poor economic conditions, and also plays a role in shaping economic recovery (Pesenti and Tille 7).

The presence of a global economy is not without its challenges with respect to market fluctuations and other related conditions. The term “financial instability” is used widely in discussing the global economy, and is often utilized in such a way as to determine whether or not an economy survives a crisis in a respectable manner (Mishkin 3). Financial instability is largely based upon controlled risk that still provides a return on investment; however, this is not always the case, as those who are considered the highest credit risk are likely to borrow anyways, without any realistic expectation to pay back the funds (Mishkin 4). This type of activity is known as adverse selection, while moral hazard represents the risks associated with knowingly investing in high risk situations without any real promise of rewards (Mishkin 4). Under these circumstances, lenders and investors must do their homework and research their possible customers as effectively as possible to predetermine the risks associated with doing business with these individuals or businesses (Mishkin 6). This enables banks and other investors to better weigh their options before making any financial decisions (Mishkin 6). When banks and investors become more critical of their potential customers and with good reason, there is likely to be less lending and investing, which may lead to economic decline (Mishkin 6). In other words, when these institutions are more careful, the economy may suffer if money is not actually changing hands (Mishkin 6).

In response to the challenges of financial instability, it is necessary to evaluate such factors as interest rates, which generally have a negative impact when these rates rise (Mishkin 7). In addition, those with better credit and who could secure a loan are less likely to borrow under these circumstances, thereby leading to less fluidity within the market (Mishkin 7). In general, it is necessary for all financial institutions to exhibit financial knowledge, practicality, and wherewithal when working under economic duress, because it may be difficult to overcome these circumstances without facing difficult economic decline. Banks and other financial institutions must develop strategies in order to cope with periods of financial instability, because this practice is common in periods when economic decline is evident. These institutions must determine how to best approach conditions of economic turmoil so that they are able to sustain some semblance of stability until these conditions are resolved in an effective and reasonable manner.

References

Cooper, Richard N., 2007. “Chapter 5: Understanding Global Imbalances.” From Globalization and Growth Implications for a Post-crisis World. World Bank Publications, pp. 95-108.

Mishkin, Frederic S. “Global financial instability: framework, events, issues.” Journal of Economic perspectives, 13.4(1999): 3-20.

Pesente, Paolo, and Cedric Tille. “The Economics of Currency Crises and Contagion: An                       Introduction.” FRBNY Economic Policy Review, September 2000, pp. 3-16.

Razin, Assaf, and Rosefielde, Steven“Currency and Financial Crises of the 1990s and 2000s. CESifo Economic Studies, 57.3(2011): 499-530.