The Nature of Politics and International Financial Management Operations, Essay Example

A Study on how Politics affect the Emergence of Financial Crisis

Introduction

Leading a nation towards development includes a distinct focus on the numerous aspect of governance. Relatively, officers sitting in position are expected to take note of every single detail necessary to determine their status and that of their nation in relation issues such as monetary competence and developmental proceedings. People living in every nation are of course expecting much from their governments. Considering what the administrators stand for, they are expected to protect the values that would best serve the concerns of the nation and the people living in it. This is the reason why politicians are asked about their government-agenda when they are still undergoing campaign. Hearing about what they are going to do about particular problems in the society are among the most important issues they have to use to determine the perception and interest that the people would have upon their platform.

Once elected and placed into office, politicians take the necessary routes to make sure that they are able to live-by their promises when they were still campaigning. Nevertheless, the actual governing process is somewhat tricky and complex. Hence, as a result, some officials and administrators take on to account even the less travelled roads to determine the success of their desire to provide the people with good economic standing. Among the most debated issues regarding this is the idea that financial crisis is actually a tool used by governments to redefine the economic structure of their nation and the ways by which the market responds to it. As if to a computer, financial crisis is expected to ‘reboot’ the economic system of nations into a more normal and more functional one that is able to determine the most important values needed to increase the rate of living satisfaction among humans all over the globe. Focusing on the following questions, this presentation shall give attention to the specific issues relating to the causes of financial crisis and how such conditions are being controlled by politics and governance.

These questions are as follows:

1. 1. What are the rational and irrational factors that might trigger a financial crisis?
2. What is, in your view, the most persuasive explanation of the persistence of crisis in liberalised financial systems?

Financial Crisis Defined

Through time, it has been realized that there exists several kinds of financial crisis especially affecting the different aspects of development in the world today. One of which is the banking crisis, whereas extensive withdrawals from people around the globe occur due particular panic among bank enrollees. This crisis is also called bank run. Because of the system of financial management the banks take into account, the massive number of people withdrawing amounts from the reserve makes it hard for the managements to pay out the withdrawals of the depositors. This happened early in the 1930s with the Bank of the United Sates and also with Northern Rock in 2007[1].

Another type of financial crisis is that of the speculative bubbles and crashes which specifically occur when large assets are offered at an overpriced rate in the market. This happens when investors intend to buy stocks that they presume would increase in value in the future. However, when prices fall in the market, and investors seem to find it worthless to hold on to their assets anymore, many decide to sell out the stocks; this would dramatically result to stocks being sold at a lower price, making income-returns possible. Although this situation may be considered rare because of the unpredictability of the stock market value fluctuations, it is not considered impossible. In fact, at present, the United States Housing and Real Estate Industry is considered be undergoing a particular bubble as people are seeing real estate properties as primary assets that would generally increase in value and pricing in the future[2].

The type that was experienced by many during the years 2007 towards the year 2010 is called an international financial crisis. This crisis involves the lowered value for the stock exchange rate where every nation functioning in the international trade is duly affected by the situation. Notably, nations that are having a hard time managing the financial reserves they have because of the crisis are forced to borrow money from the IMF and other international banks. Without the capacity of such nations to pay back immediately, the cash flow is disturbed thus creating imbalance in the entire system of international financial management. During these times, developed countries tent to halt their projects dedicated to national progress, while the under-developed nations even plunge lower into the ground where it is much harder to recover from.

Rational Reasons for the Emergence of Financial Crisis

There are of course other wider types of financial crises, nevertheless, the three mentioned herein are some of the most common ones that people at present could actually relate to. Among these particular types of crises on monetary management and cash flow direction, it could be understood that the most rational cause for such monetary disturbances would be that of the need to reset the economy. Considerably, when a nation is already spending too much and yet not saving in the bank, the government might decide to set up a crisis that would force the people to save up money in the bank. When such movement happens, the capacity of the banks to support national financial and industrial growth would be empowered. How does such movement occur?

Administrators in the government might decide to increase taxes and control the pricing of the non-common products and services offered in the market. With such approach, people would perceive that if they want to get something, they would have to save up for it. As a result, people would spend lesser and save more in the banks[3]. Such movement shall make it easier for banks to regain strength especially in determining options of utilizing their collected funds from depositors and direct the money towards more defined developmental options that could identify their role in the market at a much directive and functional phase. Herein, politics play a great role especially in assessing the capacity of the people to decide on whether or not to buy particular offerings in the market [thus saving their money in the banks].

Another matter considered to be a reason for the existence of financial crisis is the emergence of the fluctuating characteristics of the foreign exchange currency due to the valuation of foreign exchange reserves in the international central bank. Foreign exchange is most often noted as the collective term used to determine the different elements that identify the concept of the different assets that the nation holds on to including monetary assets, gold reserves and the special drawing rights or the SDRs. At present, it also adds into account the distinct involvement of the IMF [International Monetary Fund] reserve positions that the countries are engaged with[4]. These reserved values are kept as part of the determination of a nation’s status in the International Investment Position which is the difference between a country’s external assets and that of its international liabilities. This will specifically identify the position of the nation and the capacity it has to face different challenges in the international market especially involving the concepts of utilizing financial assets for determining progress.

If a nation has much more liabilities compared to that of its reserves, it may be considered ineligible of borrowing specific amount of money for the sake of empowering the process of progress that it wants to embrace[5]. In short the assets of a country could be transformed into monetary values that could support the distinct desires of the nation to progress towards industrialization and other aspects that could increase their economic reputation especially in the international market.

The existence of a strong and functional foreign exchange reserve could be better determined through the flexibility of the assets. This means that the assets are able to follow through the different aspects of economic change that is identified under an international scope. The non-flexibility of the nation’s assets might not be able to allow the condition of development that the assets need to incur especially when it comes to considering the different aspects making up the international economy. As noted, the international economy is characterized by the fluctuating values of the different elements operating in the system. When the economic operations fluctuate, the central bank would need to utilize the available assets of the nations. As they utilize such assets, the reserves increase by percentage as part of the profit-incurring procedure that the economy takes into account. Practically operating like a regular bank, the central bank improves the reserves account of each nation based on the rate of the account of the said country.

Question is what is the right level of foreign reserves that a particular country should acquire? To be able to increase the benefits that they get from the operations of the central bank, a nation’s reserves should actually be able to entail certain costs that would make it possible for the country to retain regulative rate that is able to earn profit from the international system through time. As it is with the banking system, countries that have higher level of foreign reserves have higher capacity of earning more from what they have deposited in the central bank[6]. This is especially true when such reserves are used for other operations that make the reserves useful while it is being kept. Nevertheless, based on economic observations, it has been realized that such level of foreign reserve that a country submits to the central bank do not have a specific impact on the rate of benefit that the countries receive from the system.

It has been realized through time that no matter what the level of the foreign reserves a country owns, it is still the performance of the country in the international trade and the way its economic status competes with the overall economic operations of the world. At times, even though a country may have a relatively small rate of foreign reserve, it is their capacity to manage their monetary reserves and their economic operations accordingly that determines whether or not they are going to be able to accomplish their goals of acquiring a determinable exchange rate in the field of modern international economy.

The utilization of effective interventions often identify well with the concept of developments that could be better identified to assist nations in becoming more productive that specifically infuses the power of the nation to become more effective in determining the value of their money and the reserves that they put off as their contribution to institutions like the International Monetary Fund collections[7]. These reserves play the role of deposited account that allows the nations to become more effective in specifically attaining an economic goal that could provide the nation with the essence of development that they want to incur.

Such performance could be determined through the industrialization activities that one country takes into account against the others. It could be understood that somehow, the concept of proper management and monetary direction that a country takes into account especially involving the idea of making use of the resources that they own for their best benefits could determine the performance of a country accordingly. Six industrialized countries are leading in the competition at present. These countries include Canada, Japan, Switzerland, the United Kingdom, the United States and the greater European Area. These countries have dramatically grown during the past few decades making them more capable of incurring higher benefits from their foreign reserves. Remarkably, among these six countries, Japan and Switzerland incurs the highest benefits from their reserves at an increase of 250% amounting to $1.2 trillion [while Switzerland’s reserves rose up to $460 billion in a decade]. Te other four countries mention also had their own rates of growth during the same time-span. Nevertheless, such growth could be considered normative in rate especially that the said increase in profit could be traced to be following a common pattern of development compared to their other years of performance.

What made Japan and Switzerland incur higher rate of growth and income from the same time schedule? Both countries utilized a strategy that is specifically focused on increasing the value of their currencies. The other four countries among the six incurred relative growth due to improved performance and engagements in the international market.  However Japan and Switzerland took a stand using their own currencies through purchasing foreign currency and selling of their domestic currencies to foreign exchange markets. This made it easier for their currencies to be managed according to the inflow and outflow of both foreign and domestic currencies within their economy.

Through research, it has been found that the currency valuation of Japan and Switzerland is more flexible compared to that of the other countries [Canada, US, UK and Europe] because of the fact that these countries have already agreed to utilize the European Currency as their basic measure of income in the foreign exchange system. Obviously, the strategic approach towards managing the country’s currency has allowed Japan and Switzerland to take on a definite stand towards determining their status in the international market and preempt a sense of domestic growth in relation to their international performance.

On the other hand, a possibly irrational yet specifically obvious cause of financial crisis is that of the occurrence of investor trust-transformation. This occurs when investors’ loyalty and trust in the market diminishes due to the existence of particular risks in the market that they might think is practically hard to contend with[8]. During these instances, investors decide to retract their investments causing stock prices to drop down and business organizations dependent on investments from outside resources to flunk down in relation to their production and development operations in the market.

Both causes could be assumed to be following the concepts of capitalism. In this case, the first scenario is controlled by the market, the people who are existing in the society and are considered to have the monetary reserves that the government needs to be able to assume progress sin consideration with the plans that they have formulated. Most projects of the government need financial support for them to be accomplished. Since the government needs the money, they utilize the power and authority they have upon those who they want to get the resources from. Through utilizing market tools that could allow them to get the attention of the people and get the reaction they need from the public, the government empowers the people to save up on institutions that could provide them with the chance to utilize monetary reserved collected to pursue the projects they have in mind to complete.

As mentioned through the discussion on the first question, among the countries that fully benefit from the options of the functioning operations of the foreign reserve management by the central banks are the six most industrial countries around the globe. Canada, UK, US, Europe, Japan and Switzerland are among the top players in the field. Nevertheless, these countries did not fully get the best benefits from the system as four of these nations were not as risky as that of the other two [namely Japan and Switzerland][9]. Operating in a more competitive and traditional manner, the first four nations gained benefit from the international foreign reserves system through identifying their position in the market with the aim of increasing profits with the aim of specifically increasing popularity in the market with their trading capacities utilizing their products and the competitive stance of governance that they engage in.

Meanwhile, Japan and Switzerland took another route. Being the smallest economies among the six countries mentioned, the administrators of these nations realized that the competition that they have in front of them could not be won through traditional ways alone. While the nations take into account the constant engagement in international trade, Japan and Switzerland took a different approach through utilizing what they have, which is their own currency. Exchanging it and selling it in the international market allowed them to increase the value of their currency. Riding through the waves of currency fluctuation, the administrators and financial managers of the said nations took into account the concept of investment and interest rate management that foreign reserve investors take into serious concern.

Irrational Reasons that Trigger Financial Crisis

On the other scenario, the investors, being the primary private sectors controlling the market are expected to take on personal decisions that cannot be fully controlled by the government. The chain of function that relates the government with the investors and the business operators to which they are specifically engaged with specifically identifies the concept by which the political administrators of the government could actually do something to affect the thinking and perception of the investors especially when it comes to increasing their trust and loyalty rate towards the capacity of the business to perform properly with the market that they aim to operate with. With the adjustment of the government towards the indicative function of the businesses that they are existing with, the political administrators need to utilize the specific tools available for them to access to be able to establish such reputation in front of the investors. One way of doing so is through empowering the people to appreciate the businesses along with the products and the services they offer[10]. With such approach, the investors would realize the strength of the market and the capacity of the businesses to thrive even with the existence of particular changes in the field of international trade operations as well as with the emergence of particular problems that might involve the working functions of the organizations.

Reflective Reaction

Relatively, based from these particular discussions and presentation of facts, it could be realized that the most persuasive explanation of the existence of financial crisis in such a well-developed system of economies and liberalized financial operations would be the fact that the chain of reaction that results from the function of the different actors in the market affect each other especially in relation to the concept of determining the value that each actor considers important. Business operators specifically value profit and the way they are going to earn from their operations. Nevertheless, being able to produce and create business specifically involves the need for monetary funds to be used for the said options of development. Such resource for capital could come from external investors who value the returns of their investment. Being assured that they would earn from their investments or the money that they have placed upfront to support the businesses they want to give attention to. Relatively though, the government earns a lot from the businesses and private monetary institutions such as the banks, hence their existence play a great role especially boosting the capacity of the government to function for the people and for the country as a unified entity that is dedicated towards improvement of the nation. The people, who make up the population of the market that serves as the primary blood of the entire economic structure, are considered as the primary actors that identify the general resource of profit that can provide support to the entire system.

The simple economic setup that arranges the values that these actors take into account especially in relation to the value that they respond to entails to determine the role that each element performs especially when it comes to manifesting a sense of control on how monetary resources are going to be handled accordingly. The decision and perception of each party towards determining how they are to manage the value of the money that they have on hand acts as the primary distinction on how the determination of a financial crisis could be avoided or pursued. The government having the highest power of control among all the parties involved could be seen to have the most implicative capacity in managing not only the flow of the monetary resources but also the manner of behavior that the actors take into account in relation to the said element of wealth.

Conclusion

Through understanding the concepts of financial crisis, it has been understood through this research that financial crisis could be used as an effective tool by administrators to specifically mandate the economic growth of the nation and how it could be directed towards prosperity. Nevertheless, when not handled efficiently, it could be understood that the effects could be drastic especially in the aspect of international economic development. Notably, with the condition of handling monetary resources, administrators could actually gain much better strength from learning through the twists and turns of the international economic systems and make use of effective tools to control the situation in their own nation especially in relation to mandating the utilization of monetary assts of the country.

Considering the different issues that create the distinct line that defines the emergence of financial crisis and how it is able to change the course of economy that the international society takes into account, it is realized through this research that there are different ways by which governments try to identify their way out from such issues. Promoting more concrete procedures of determining the best strategy to take in relation to managing their money and directing their assets towards a more prosperous path, the countries from all around the globe are given a proper chance of engaging in economic progress that would determine their position in the field of global competition.

It could not be denied that somehow, nations, both huge and small, all deserve to receive benefit from the ongoing systems of development in the world especially when it comes to economic progress. However, without specifically giving attention to the way they are to enter the said field of economic competition, nations are bound to experience particular hardships especially when it comes to carrying out particular options of development procedures that might involve risky decisions along the way. Measuring how the risks measure against the benefits is necessary. On the other hand, the emergence of financial crisis may at some point be unavoidable, but it could always be considered manageable with the utilization of right assets and tools on the part of the administrators and financial operators of the nation. The economic system that binds the world will continue to embrace the different elements that could specifically cause financial crises every now and then. Working around them would be the best chance to survive.

Reference

Gamble, Andrew (2009), The Spectre at the Feast: Capitalist Crisis and the Politics of Recession, Basingstoke: Palgrave Macmillan, 13-49.

Kindleberger, Charles P., and Robert Z. Aliber (2011), Manias, Panics and Crashes: A History of Financial Crises, 6^th edition, Basingstoke: Palgrave Macmillan, 1-38;

Reinhart, Carmen M. and Kenneth Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton University Press, 1-20;

Best, Jacqueline (2009), ‘How to Make a Bubble: Towards a Cultural Political Economy of the Financial Crisis’, International Political Sociology, 3(4): 461-5;

Chwieroth, Jeffrey, and Timothy Sinclair (2013), ‘How We Stand Depends on How We See: International Capital Mobility as Social Fact’, Review of International Political Economy, 20(3): 457-485;

Habermas, Jurgen (1976), Legitimation Crisis, translated by Thomas McCarthy, London: Heinemann, 33-94;

Harvey, David (1982), The Limits to Capital, London: Verso, 413-45;

Thompson, Helen (2009), ‘The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac’,Political Quarterly, 80(1): 17-24.

Eichengreen, Barry (2004), ‘Global Imbalances and the Lessons of Bretton Woods’, NBER Working Paper No. 10497, Cambridge, MA: National Bureau of Economic Research.

Obstfeld, Maurice, and Kenneth Rogoff (2009), ‘Global Imbalances and the Financial Crisis: Products of Common Causes’, CEPR Discussion Paper No. 7606, London: Centre for Economic Policy Research.

Wade, Robert H. (2009), ‘From Global Imbalances to Global Reorganisations’, Cambridge Journal of Economics, 33(4): 539-62.

Aizenman, Joshua and Jaewoo Lee (2006), ‘Financial Versus Monetary Mercantilism: Long-Run View of the Large International Reserves Hoarding’, NBER Working Paper No. 12718, Cambridge, MA: National Bureau of Economic Research,

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BiniSmaghi, Lorenzo (2008), ‘The Financial Crisis and Global Imbalances: Two Sides of the Same Coin’, speech delivered on 9 December 2008 at the Asia Europe Economic Forum.

Brender, Anton and Florence Pisani (2010), Global Imbalances and the Collapse of Globalised Finance, Brussels: Centre for European Policy Studies, 27-84.

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[1] Gamble, Andrew (2009), The Spectre at the Feast: Capitalist Crisis and the Politics of Recession, Basingstoke: Palgrave Macmillan, 13-49.

[2] Chwieroth, Jeffrey, and Timothy Sinclair (2013), ‘How We Stand Depends on How We See: International Capital Mobility as Social Fact’, Review of International Political Economy, 20(3): 457-485;

[3] Thompson, Helen (2009), ‘The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac’,Political Quarterly, 80(1): 17-24.

[4] Wade, Robert H. (2009), ‘From Global Imbalances to Global Reorganisations’, Cambridge Journal of Economics, 33(4): 539-62.

[5] Wade, Robert H. (2009), ‘From Global Imbalances to Global Reorganisations’, Cambridge Journal of Economics, 33(4): 539-62.

[6] Wade, Robert H. (2009), ‘From Global Imbalances to Global Reorganisations’, Cambridge Journal of Economics, 33(4): 539-62.

[7] BiniSmaghi, Lorenzo (2008), ‘The Financial Crisis and Global Imbalances: Two Sides of the Same Coin’, speech delivered on 9 December 2008 at the Asia Europe Economic Forum.

[8] Thompson, Helen (2009), ‘The Political Origins of the Financial Crisis: The Domestic and International Politics of Fannie Mae and Freddie Mac’,Political Quarterly, 80(1): 17-24.

[9] BiniSmaghi, Lorenzo (2008), ‘The Financial Crisis and Global Imbalances: Two Sides of the Same Coin’, speech delivered on 9 December 2008 at the Asia Europe Economic Forum.

[10] Best, Jacqueline (2009), ‘How to Make a Bubble: Towards a Cultural Political Economy of the Financial Crisis’, International Political Sociology, 3(4): 461-5