The Geographies of the Global Financial Crisis Essay

The Geographies of the Global Financial Crisis

Introduction

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The global economic and financial crisis which started in 2007/2008 is a lasting crisis of a spatial and political economy. Geographer’s interest is focused on the engagement of the political economy in the past three decades that might have contributed to this situation. An understanding of this economic and financial crisis is a good understanding of linkages that exists between the local and the global[1]. In the same line, an analysis of the geographies of the financial crisis would ultimately seek to strengthen the dynamics and prospects across different states, regions, and financial centers[2]. Several factors in the economy interact to shape the geography of the financial crisis both locally and on the international fronts.

This paper seeks to review the world of economic and financial flows, instruments, and intermediaries, as well as how these are related to the geography of inflation, deflation, mortgage foreclosures, government programs, and bank bailouts. It explores how the geography of finance is associated with the production of financial crises as well as how the geography of global finance is related with finance of regions, nations, and individual investors. In addition, it examines the workings of international finance, the different financial crisis perspectives and their various policy outcomes, and the localized effects of the geography of finance.

The international financial system and its continuous dependency on the basis of trading across space as part of a search for the yield created a topological map. It brings both the developed and emerging financial centers into shared spaces of financial interdependency. Consequently, spatial interconnectivity is seen to be a self a standing cause; one through which this global crisis was produced[3]. In this case, it becomes a potential area of focus for geographers more so as part of a greater project focused on heightening the profile of the discipline’s analysis.

One of the basic problem geographers have is the one of financial globalization as it is a process that reconstructs the significance of the national scale. The cause and implications of the crisis have clearly demonstrated the relevance of financial geography. As Craciun and Ochea, note, the immediate responses to the financial crisis have been naturally geographical as illustrated by the role of the state as a regulatory agent in solving the future impacts of the crisis[4] . Moreover, the anticipated post-crisis situation is equally dependent on geography. In the same line, this is clearly demonstrated by the case of the public debate led by the central bankers, world leaders, and many others in regard to the need for negotiation and implementation of midway regulation.

There has been an ongoing heated discussion globally concerning the similarities and differences between the more recent crisis and the past ones. There is, however, more than agreement that the recent crisis differ both in scale and intensity. Another aspect of this ongoing discussion is focused on the global spread and cost of the crisis.

As Aalbers contends, the current financial crisis is in record to have originated in the U.S and proceeded to a highly integrated global economy[5] . The rapid spread of the crisis across the globe was speeded up by the presence of sophisticated financial instruments together with massive international financial flows. Consequently, the impact of this global crisis was a sharp decline in global activity. Although the recession led to this financial crisis displays similar patterns with previous recessions, there has been equally various and doubtful convergence factors. More specifically, the current recession has been associated with some serious financial disruptions including equity prices busts, credit crunches, outright banking crises, and house price busts.

The globalization and harsh financial crisis included breakdowns and disruptions of several markets in 2008. The main difference between this and previous crisis can be said to be the widespread use of opaque and complex financial instruments; in other terms the connection  across financial markets both nationally and globally were dysfunctional. The current recession in U.S is clearly a good example in a number of aspects[6]. The sheer size of the financial market in U.S as well as its central role as an investment destination to a great extent contributed to the spreading of the crisis. Moreover, any shocks on the U.S financial markets are likely to have a global repercussion.

The crisis equally contributed to the massive imbalances in other countries. This is because of the closer international financial integration and the financial and macroeconomic conditions. It in turn resulted in the spread and emergence of the global crisis. It also revealed the limits of policy measures in addressing financial fall downs and the need for greater coordination between financial policy and macroeconomic policy[7]. In this context, prudential regulation should introduce a macro system-wide dimension. By and large, the global nature of the crisis has demonstrated a proposition that financially integrated markets in addition to their numerous benefits also have risks. In addition, it has also illustrated that the international financial architecture is far from achieving a closely-integrated financial system.

The current financial crisis is said to have originated in the mortgages and housing markets spreading through to other financial markets. Previously, most lenders of mortgage were local or regional institutions. Currently, most lenders are national lenders investing into the global credit market. The main focus here is on the fact that most lenders compete for the same credit resources in the global market. Prior to the financial crisis of the 1980s, loans granted by savings and loans institutions were based on the savings[8]. In other words, savings and loans were made in the same geographical markets. In this context, the nature of S&L working locally was seen as problematic with the solution being to connect the local markets in order to spread risk.

As a result, there was a decrease in interest rates because of the increased market efficiency. After the S&L crisis, security was favored by regulation through Fannie Mae and Freddie Mac and also through private labels.

Securization equally implied that mortgage lenders could operate on the basis of the new business model which entails taking mortgages off balance. It enabled non-banks to venture into mortgage market and introduced more equity for more credits. As such, mortgage portfolios could then be sold to investors anywhere across the world. Investors then thought that mortgages portfolios were a low risk investment that had lots of money waiting to be invested. This caused a great appetite for the residential mortgages-backed securities (RMBS). In other words, the globalization and financialisation of the mortgage market was shaped by a combination of the S&L crisis, the bank merger wave, the entry of the non-bank lenders, and the demand for the low-risk investments[9].

The onset of the credit crisis in the year 2007 is associated with the rise in the foreclosure and default rates and the lowering of the housing prices. The implication of this was that the mortgage market was not as low risk as it was previously thought. Consequently, the value of the RMBS equally fell more drastically. This situation is attributed to a number of factors including the fact that many people had mortgages granted without down payment and also because RMBS were sold with expectation of high returns[10]. The high returns were based partly on high interest and partly on speculation increasing the value of the RMBS beyond their actual worth. In a few words, it can be argued that in addition to underestimating the risks, returns were equally overestimated.

The impact of the partly national and partly local problem in the housing market eventually became a global problem affecting even other credit markets. Major players in the RMBS market invested with borrowed money. The crisis did not only hit Wall Street, pension funds, and European banks, but also individual investors and towns across the globe.

A good example of geography’s role in the crisis is illustrated by the losses incurred by Middle East and Asian wealth funds known to have brought into the bulge bracket several investment banks at the very top of the cycle[11]. Since the year 2000, these agents have become major investors in firms that were domiciled in the homelands of the international finance. The investment of these big investments banks was steered by their reputation rather than their intimate knowledge of their financial positions and asset books. This aspect led to great losses that have been felt long after in the Middle East and Asia.

Another illustration is presented by the case of the city of Narvik in the North West Norway. The town’s municipal authority was reported bankrupt in 2008 despite its rather perceived distant from London or Wall Street[12]. Apparently, the crisis was caused by the issuance by a US bank Citigroup of investments in residential mortgage backed securities which had in the sub-prime meltdown become worthless.

The down fall and default crisis at the origins of the credit crunch hit households across America. The rise in the default rate commenced several years back in the Rustbelt with records of housing prices going up while unemployment went up. The result of combination of shortage of employment and housing prices falling is evident with few chances of finding a new job coupled with high probability of inability to pay mortgages[13]. This implies that banks were likely to experience higher foreclosures because of defaults.

The Future of Financial Crises

It is postulated that just as the 1980s financial crisis brought about bank unions and acquisition wave, the current crisis will in turn bring about a new merger and acquisition wave. Recently witnessed is the collapse of financial institutions and banks which are then getting bailed out and publicly owned. Big corporations are growing bigger, partly attributed to the government initiated mergers and acquisitions. Examples of banks that have grown bigger recently include the JP Morgan Chase Bank and Bank of America in U.S, Banco Santander of Spain which has been buying foreign and national banks and recently the acquisition of Sovereign Bancorp of U.S, and in U.K the Alliance & Leicester[14].

Another consequence could be a shift in ownership of financial institutions. For instance, Abu Dhabi Investment Authority is currently the largest shareholder of Citigroup[15]. As a result, there could be a shift in the dominance of the financial centers. The financial crisis is likely to accelerate the trend towards a shift in the financial centers.

In the same line, it is imperative to note that there are currently more secondary financial centers across the globe with the centers of greater importance being found outside of Europe and North America. Meanwhile, considering the extent to which U.S and America have been hit by the current crisis, emerging economies in Asia are rapidly growing and the shift is likely towards them. As the Asian economies continue to grow, their current account surpluses are equally growing and Asian money more important globally. For instance, while the U.S has continued to experience shortfalls in current account over the years, several Asian countries continue to enjoy surplus with China and Japan having the highest surpluses worldwide[16].

Conclusion

In conclusion, it can be argued that the current global financial crisis is changing the world in many ways and at many levels. Consequently, financial globalization implies that the effects of the financial crisis are likely to be felt across the world. However, the effects differ from one place to another. In addition, financial institutions and individual investors around the world are affected the crisis.

References

Aalbers, Manuel. 2009. “Geographies of the financial crisis.” Area 41, no. 1: 34-42.

Christophers, Brett. 2009. “Complexity, finance, and progress in human geography.” Progress In Human Geography 33, no. 6: 807-824.

Crăciun, Liliana, and Manuela Violeta OCHEA. 2014. “The dimensions of the global financial crisis.” Theoretical & Applied Economics 21, no. 1: 121-130.

Kovacevich, Richard. “The financial crisis: why the conventional wisdom has it all wrong.” The Cato Journal no. 3 (2014): 541.

van Hulten, Andrew. “Remapping the Fiscal State After the Global Financial Crisis.” Economic Geography 88, no. 3 (July 2012): 231-253.

[1] Kovacevich, Richard. “The financial crisis: why the conventional wisdom has it all wrong.” The Cato Journal no. 3 (2014): 541.
[2] van Hulten, Andrew. “Remapping the Fiscal State After the Global Financial Crisis.” Economic Geography 88, no. 3 (July 2012): 231-253.

[3] Aalbers, Manuel. 2009. “Geographies of the financial crisis.” Area 41, no. 1: 34-42.
[4] Christophers, Brett. 2009. “Complexity, finance, and progress in human geography.” Progress In Human Geography 33, no. 6: 807-824.
[5] Aalbers, Manuel. 2009. “Geographies of the financial crisis.” Area 41, no. 1: 34-42.
[6] van Hulten, Andrew. “Remapping the Fiscal State After the Global Financial Crisis.” Economic Geography 88, no. 3 (July 2012): 231-253.
[7] Crăciun, Liliana, and Manuela Violeta OCHEA. 2014. “The dimensions of the global financial crisis.” Theoretical & Applied Economics 21, no. 1: 121-130.
[8] Aalbers, Manuel. 2009. “Geographies of the financial crisis.” Area 41, no. 1: 34-42.

[9] Christophers, Brett. 2009. “Complexity, finance, and progress in human geography.” Progress In Human Geography 33, no. 6: 807-824.
[10] Crăciun, Liliana, and Manuela Violeta OCHEA. 2014. “The dimensions of the global financial crisis.” Theoretical & Applied Economics 21, no. 1: 121-130.
[11] van Hulten, Andrew. “Remapping the Fiscal State After the Global Financial Crisis.” Economic Geography 88, no. 3 (July 2012): 231-253.
[12] Crăciun, Liliana, and Manuela Violeta OCHEA. 2014. “The dimensions of the global financial crisis.” Theoretical & Applied Economics 21, no. 1: 121-130.
[13] Christophers, Brett. 2009. “Complexity, finance, and progress in human geography.” Progress In Human Geography 33, no. 6: 807-824.

[14] Kovacevich, Richard. “The financial crisis: why the conventional wisdom has it all wrong.” The Cato Journal no. 3 (2014): 541.
[15] Crăciun, Liliana, and Manuela Violeta OCHEA. 2014. “The dimensions of the global financial crisis.” Theoretical & Applied Economics 21, no. 1: 121-130.
[16] Christophers, Brett. 2009. “Complexity, finance, and progress in human geography.” Progress In Human Geography 33, no. 6: 807-824.

 

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