Market Challenges, Risks, and Policy: The Attempts to Regain Global Stability After the Financial Crisis

Market Challenges, Risks, and Policy: The Attempts to Regain Global Stability After the Financial Crisis

Adam Christopher Wood (Harvard University, USA)
Copyright: © 2018 |Pages: 26
DOI: 10.4018/978-1-5225-4026-7.ch009

Abstract

This chapter first examines what caused the need to regain global stability after the financial crisis. The author provides a brief refresher of how the market crash in 2008, and subsequent Great Recession, was initially fueled while honing in on the allocation of “the fuel” coupled with the repeals of bicentennial-long legislation and the associated dangers of these economic policy changes. Notations from Nobel laureates and interagency economists from the IMF and World Bank aid in identifying the consequences of these policy decisions while simultaneously illustrating the enhanced risk within a variety of markets. Next, the author discusses the current state and relative stability of the financial markets, economic policy, and the risks associated therein. Lastly, this chapter provides recommendations for the future of monetary and fiscal policy, globalization, and what the government (and Wall Street) must consider should they seek to attain long-term financial stability from an international perspective. Monetary and fiscal policy decisions implemented and in-progress by the Federal Reserve are fastidiously examined throughout this chapter.
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Introduction

This chapter first covers what caused the Great Recession within the financial markets, economic policy, and risks associated with that policy while noting the history of economic policy and financial innovations dating back to 1980. This portion of the chapter also includes notations on the financial services industry, economic policy repeals, brief leverage analysis, and a review (concurrence) of the Financial Crisis Inquiry Commission’s analysis, in that, the Financial Crisis of 2008 was, in fact, avoidable (“Financial Crisis Inquiry Report Commission”, 2011). Quantitative easing will be notated, the current bull market, and what is required to achieve global financial stability in the future from the perspective of the United States.

Regaining financial stability implies that the markets have yet to achieve the coveted stability it so frequently seeks. What’s fueling the markets today in 2017 is not what fueled them in the earlier 2000s or even the mid-1990s, but the rhetoric is verisimilar.

The 2016 US Presidential Election OF Donald Trump did nothing to drive U.S. market indexes to all-time highs; rather it was merely the market expectations predicated on a campaign promise of a $1 trillion dollar infrastructure bill, which is still sorely needed. The pulling out of the Trans-Pacific Partnership (Baker, 2017), withdraw from the Paris Climate Accord (Epstein, 2017), and threats of governments shutdowns, all while antagonizing enemies, and alienating the United States’ allies has been the economic policy of incompetence of the Trump Administration. What’s more important; however, is how the world arrived at this level of instability, as transitions of power are only one variable in the complex equation.

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1979 Through 2006: The End Of Stability And Era Of Deregulation - Reagan, China, And The Crisis

To begin, it’s most important to understand how the actors within the financial markets, banks, and governmental agencies arrived at the prestigious addresses they reside today. Only when the historical context has been sufficiently provided can one grasp why Wall Street’s economic power yields its current level of governmental control and the like. However, before investigating, analyzing, and proving that Wall Street is not the enemy in this chapter, we must review what stability is, who contributed to it before the crisis, and those who subsequently came into the monetary fold, seemingly making all that was good and stable in the international political environment evaporate little by little as if it never existed in the first place.

Merriam-Webster’s Definition of Stability (Merriam-Webster, 2003):

Stability

plural stabilities

1: the quality, state, or degree of being stable: such as

A: the strength to stand or endure: firmness

B: the property of a body that causes it when disturbed from a condition of equilibrium or steady motion to develop forces or moments that restore the original condition

C: resistance to chemical change or physical disintegration

Nearly every notation within this section is a disruptive property of stability.

Paul Volcker, one of the premier American economists of this generation, helped clear the table of high inflation that plagued the US and its respective trade partners for a majority of the 1970s and early 1980s. During his tenure as Chairman of the Federal Reserve from 1979 to 1987, Volcker consistently invoked monetary policy curb inflation, at one point raising the Federal Funds Rate to over 20%5. Although the Federal Board of Governors and Fed Chair Volcker’s monetary policy was relatively unpopular within the Reagan administration, those policies provided the US, her trade partners, and citizens with the strength to endure global shocks for nearly fifteen years even while China reinvested their manufacturing proceeds into the US Housing Market (Anand, 2017). Unfortunately, the stability that Paul Volcker brought to the Federal Reserve, and, by extension, the positive externality it yields in both monetary policy (established by the Fed) and fiscal policy (established by Congress) were simply not good enough for President Ronald Reagan’s Wall Street.

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