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America and Multilateralism: A History

Perhaps it is safe to surmise from the very beginning that there does not appear to be a country in the world that is not affected or has not been affected in one way or the other by the United States of America. Short of this, there most certainly does not remain in existence a country, people or society which has no knowledge, however limited, of the United States of America. No single day passes without the American power being addressed or diagnosed in one capacity or the other by the global media. Over time, but in particular, in more recent times, no other country’s political, domestic, economic defence or capabilities and abilities have been more studied or discussed than the extent at which America has been. In actual fact, it is safe to surmise that very few political issues today provoke such strong and diverse responses as the role of the United States of America in its attempt to re-shape world affairs.[1] The recent terrorist attack on America of grave consequences, its reaction to it and the wars in Afghanistan as well as Iraq have intensified the debate about the nature and prospects of American super power. There remains a school of thought that continues to celebrate the United States’ achievements in proclaiming as well as bringing liberty, democracy and prosperity to every corner of the world. Others are more inclined towards condemnation of America’s pursuit of hegemonic status and its attempt to impose a single economic system and a narrow set of moral belief on other nations around the world. Whichever school of thought one belongs to re America’s performance on the international podium, most have arrived at the conclusion that the history of the twenty-first century will be determined to a large extent by the way American power is used, and by the way in which other major political players on the international front react to it. The nation has often been referred to as an imperial, an empire or hegemony. Most people still continue to perceive America as that democratic land of roses where ‘anything can happen’. Some still believe in, especially those outside the shores of the country and straining to one day be admitted into the great country, what they call the ‘American Dream’. It is supposedly a country where ‘anything is possible’. Often times however, America is no longer beheld with rose tinted spectacles. Given its recent history world over, this is hardly a surprise of any significance. The word which best comes to mind when America, that great nation is under discussion as it constantly is for diverse reasons, is hegemony. What, it might be useful to enquire at this juncture, is hegemony? In lay man’s terms, hegemony, succinctly put, is leadership by predominance (some might even say aggression) of smaller and weaker states or nations by naturally bigger nations in an effort to achieve world domination. Does America therefore stand rightly accused of attempting to dominate the world through its conceptualisation of global politics, foreign policies and armed forces, or at least to dominate those nations which are considered smaller and weaker? It is common knowledge that while some countries practice communism or socialism, America was and remains a capitalist country where the motto right after ‘In God We Trust’ is a universally accepted but unspoken ‘survival of the fittest’. In the introductory words of G. John Ikenberry in his book ‘America Unrivalled’, “The pr-eminence of American power today is unprecedented in modern history. No other great power has enjoyed such formidable advantages in military, economic, technological, cultural or political capabilities. We live in a one-super power world, and there is no serious competition in sight”[2]
These words immediately bring to mind perhaps the most controversial wars of all times and America’s gargantuan contribution or one might even dare say blatant single minded orchestration of the same, the Iraqi invasion (and on-going war till date) in 2003. It is worth reminiscing at this juncture how the world watched and waited with bated breath while the United Nations deliberated on whether or not the United States should be granted the authorisation to invade Iraq based on its reports about the so-called axis of evil and the weapons of mass destruction they supposedly had in the making which it further claimed posed un-foretold threats to the international world. It is yet another point in favour of the argument that America is fast becoming or indeed has all but attained the status of an hegemonic state that President George W. Bush announced to the world that regardless of the UN’s decision and that of its Member States, America will forge ahead in war against Iraq and Afghanistan, alone if they had to. In his exact words, “…when it comes to our security, we really do not need anyone’s permission”[3] It was later argued that it would appear that even the United Nations, a so-called world moderator and international emblem of peace, is nothing but yet another tool in America’s already brimming tool box. Although at the time, this announcement from the Bush Administration sounded as arrogant and ‘above the law’ as it really was, there were many who felt America would be justified in its decision in the wake of the September 11 attack. September 11 2001 (hereafter referred to as 9/11) brought about the turning point in history, international law and the use of force against terrorism. The words of an American man considered very patriotic indeed comes to mind at this controversial stance of George W. Bush re brushing off the world’s opinion and/approval to its use of force in the name of fighting terrorism. The man, none other than Richard Holbrooke, former United States ambassador to the United Nations, who once stated after careful observation, one should imagine, that the Bush administration threatens to make a “radical break with 55 years of a bipartisan tradition that sought international agreements and regimes of benefit to us”[4] Many years, loss of lives both civilian and military, reports of horrible treatments meted out to prisoners of war (PWO) by the American soldiers against every rule of Humanitarian Law and the Geneva Convention, America’s refusal to withdraw its troops even after the fall of Saddam Hussein (its greatest enemy) the question on everyone’s lips is whether the war was indeed for all the altruistic reasons quoted by America in its rather fabricated reports or for more reasons closer to home. The question can even be posed all the way back to Operation Desert Storm in the same Iraq in 1993. Did America invade Iraq on both occasions for economic gain and ultimately to place itself as the world’s super power. Although it appears now to the world that the Bush administration is the one responsible for dramatically drawing America away from multilateralism, a look back into the Clinton administration will confirm that this is not remotely true. Under the Clinton administration, America neither waited for the United Nation’s approval/authorisation before deploying the North Atlantic Treaty Operation (NATO) to Serbia in 1999 nor prior to its bomb attack on Iraq in 1998. There were also other Conventions, Acts and Treaties America rather conspicuously refrained from signing or ratifying such as the banning of further use of Land Mines (the Ottawa Convention of 1997). The difference perhaps would be where the Clinton administration adopted diplomacy in its delivery of such unilateral decisions; the Bush administration simply forges ahead with no regard for the world’s opinion, approval or in most cases disapproval.
In the era immediately after the World War (II), America’s strength was not only viewed during the war with the deployment of its armed forces, which later formed an alliance with the United Kingdom amongst others (the allied forces) but also after the war in its attempt to rebuild Germany as well as other war torn countries in the war aftermath. In this, America had strategised and was apparently successful in ensuring that the world did not revert to its closed regional dealings of the 1930s prior to the war. The founding of the United Nations on 24 October 1945 also saw to it that the beginning of what is now known as globalisation was established. A post war era of multilateral character and significance was thus built around economic and security agreements such as the Bretton Woods Agreement on monetary as well as trade relations among nations. The American-led NATO security pact followed much later. This international order which came into existence after the war (World War II) was effectively one which was multilateral in character. A more open system of trade and investments began to emerge, largely encouraged by America. Economic and security matters as well as political relations became indistinguishable and indivisible among nations in what is best described as an open world market or globalisation. This is evident in the General Agreement on Tariffs and Trade (GATT) as well as the Bretton Woods agreement earlier mentioned. An alliance tie emerged between the United States and the Great Britain in particular and the European continent in general in a scenario one could simply put in lay man’s terms ‘rub my back and I will rub yours’. America’s economic as well as security assistance to the Asian region is also worth mentioning. America ensured and continues so to do, that weaker and smaller states are afforded security assistance, protection and granted access to its markets, technology and country in general. In the wake of America’s Green Card Lottery scheme, the support and admiration of other smaller states for which the scheme was intended and who continues to benefit from the same was firmly secured. In a similar vein after the world war, citizens of many nations flocked in their thousands to America from world over and started life over again after the war. In what is not unlike the stone age ‘trade by barter’ arrangement, the participating states in turn continue to ensure that political stability is maintained in their relationship with the United States, making available to America their diplomatic, economic and logistical support in return. For instance, America has training grounds in Saudi Arabia and Kuwait, perhaps as a lasting result of Operation Desert Storm.
Going back in history however, it remains indelible that there were 5 world super powers including America itself. How then can Ikenberry infer that America has no competition in sight in its steady climb to the top in the international hemisphere? Who were the other four super powers and what became of them? The five major contenders when the United Nations was founded in 1945 were Russia, Great Britain, China, and France. It is accurate to say that the cold war put paid to Russia’s contention with America. The Great Britain, as exhibited more recently under the Tony Blair administration is more or less a lap-dog to American’s policies and remains a rather very friendly ally than a potential contender. Yet it will be nothing short of fallacious argument to say that America has no contender or is without competition in one form or the other. Worth remembering as well is Germany and France’s initial reluctance as well as refusal to throw their weight behind the Iraqi invasion in 2003. America’s hegemonic state is therefore not without challenges as well as challengers, it is however the multifaceted character of America’s power that makes the country so far reaching, daunting, provocative and formidable to less equipped and smaller countries. The collapse of the Soviet Union in the Cold War saw an acute decline in rival ideologies and even tighter alliances formed between the United States and other regions. Following the Cold War, America continued to grow from strength to strength. In the 1990s its economy was commendably and successfully restructured. Also growing in significant progression alongside its economy is its armed forces and global recognition as a state to reckon with. By the turn of the millennium, America’s economic and military growth had wedged a seemingly insurmountable gulf between itself and other major players in world politics. While the late 90s saw Japan’s economy grow by 9 per cent, the European Union altogether by 15 per cent, American economy grew by a significant 27 per cent, nearly doubling and tripling that of the other regions.[5] This did not go unnoticed by the rest of the world. In fact literally doffing his hat to the United States in a speech in Paris (1999), the French Foreign Minister, Hubert Vedrine, observed that the growth witnessed by the world in America “is not comparable in terms of power and influence to anything known in modern history”[6]
America’s devotion to its armed forces can by no means be ignored. America boasts an army that is better equipped and out numbers the armed troops of well over 14 countries put together. There are training grounds for the United States army in well over 40 locations world wide. This automatically means that when another weaker or slightly less advantageous state envisages itself in trouble, the first point of call for protection and assistance, when and if necessary is the United States of America. In its usual confidential, bordering on arrogant manner America’s National Security Strategy declared to the world that their forces will be strong enough to dissuade potential adversaries/would-be challengers from pursuing a military build-up in hopes of surpassing, or even remotely equalling, the power of the United States.[7] It is not impossible or even unthinkable for America to utilise its military capacity to impose its policies on other states in different regions of the world. It has been observed already that America spends on its armed forces more than the next fourteen countries combined and that the U.S. military expenditures will shortly be equal to the rest of the world combined.[8] Another scholar of repute, Paul Kennedy, also surmised that it is already the case that all the other navies in the world combined could not dent American maritime supremacy.[9] Still on the issue of security, expressing his own opinion and an opinion apparently shared by many others world over, Barry Possen has suggested that the United States’ command of the sea, space, and air forces is the ‘key military enabler of the U.S. global power position’.[10] Assuming its economic growth remains as healthy as it has been since the 90s, the concentration of world military power may continue for several decades yet. Even at the current level of U.S. capabilities, it is the general view that ‘the United States can shoulder the burden of maintaining global security without much help from Europe’ or the rest of the world for that matter.[11]
It begins to appear obvious that perhaps America’s initial support for multilateralism in international trade and globalisation was borne of a grander strategic move to acquire and retain more power while legitimately promoting international reliance of one state on the other, one region on others for support, growth and assistance. A quick glimpse at major historical turning points such as 1919, the end of World War II in 1945 and the period immediately after the Cold War all but confirms this logic. It would appear that America promoted multilateralism in such a strategic way so as to signal restraint and commitment from other states.[12] This precipitated the acquisition of support, if not actual trust, acquiescence and cooperation of other weaker states. But surely when one country is placed so much higher than others in the case of all animals are equal but some more than others, there naturally arises the problem of balance of power or even equality before the law. What the majority of member states may attempt with the United Nations and come out facing adverse repercussions for is the same thing the United States will not only attempt but carry out and come out smelling of roses. For the sake of this discussion, should one be given to a flight of fancy however fleetingly and imagine or a moment that a member state such as Ghana or Nigeria threatens the use of force against Cameroon and declares to the world that the same will be effected whether or not the United Nations and indeed the world approves of its actions. At the very least, economic sanctions will immediately be placed on such a country. However in the name and under the umbrella of 9/11 it would appear that America is permitted to do and undo whatever catches its fancy and of course promotes its economic as well as military growth. How else can one begin to explain the issue of thousands held prisoner at the US military operated prison and indeed a recreation of Camp Delta, Guantanamo Bay, for years with neither charges nor trial in the name of fighting terrorism? America claims not to have jurisdiction in Cuba to try these prisoners yet it has the power and the authority to imprison them in Guantanamo Bay. What, one is right to ask, happened to the universal (at least in democratic states) ‘writ of habeas corpus’? Another example of America’s marked shift from multilateralism to unilateralism and establishing itself as a super power above the rest of the world is again glimpsed shortly after the controversial invasion of Iraq in 2003, when America was quick to submit allegations against North Korea as well as Iran for also becoming threats to the international community as they were manufacturing nuclear weapons. In an ironical twist however, in 1998, Japan, perhaps once one of America’s closest allies, was reportedly furious with America when its officials unilaterally decided that funding for North Korean Nuclear reactors was to continue despite Japan’s complaints that North Korea was firing missile over its territory.[13]
What then can possibly put an end to America’s domination of the international stage and its rise towards a super power of hegemonic characteristics? It has been established that the two most important factors in the growth of any nation; its economy and defence, remain the two areas where America continues to excel and prosper rendering it even more of a force to reckon with by other nations of the world. Is it then any wonder that many are of the school of thought that it is only a matter of time before America seeks to completely dominate the world and by so doing, simply crush out weaker states of the world. It is enough to alert the world that more than any other administration before it, the Bush administration is significantly departing from materialism especially on agreements dealing with arms control and proliferation. Multilateralism, as Ikenberry’s book posed the debate, does indeed seem to be on the decline in America’s policy and political stance. It has become to America a selective game where multilateralism is embraced when it adds to the muscles in its already bulky biceps and unilateralism at every other turn. As America continues to systematically depart from multilateralism and promote more unilateralism in its foreign policies and decisions on security affairs affecting not only its boundaries (assuming such a word as ‘boundary’ exists in the American dictionary) but also spread ashore to other nations of the world, the world may very well be moving rather rapidly towards the final unravelling of America as a hegemonic nation. What and who in the world can then possibly challenge America’s hegemony? Surely it would take a large scale war or a crucial global economic crisis to challenge or even come close to threatening America’s hegemony. While this might be very well put and even precise in theory, surely either option will definitely have grave repercussions on the international community.
However, Ikenberry argues in his book, ‘America Unrivalled’, that there are limits to the United States’ hegemony such as it stands at the moment. He is of the opinion that a complete hegemonic order would require not just preponderant capabilities but also some significant degree of acquiescence on the part of other states, especially the other major players in world politics for the maintenance of such order. Following the Cold war, America acquired the support and cooperation of one of the major players in that region, Japan. Japan was once America’s closest ally as a result of this, however even Japan is becoming resentful, as presumably are the rest of the world, at America’s increased unilateralism (as in the North Korean case mentioned above) and the selective choice of multilateralism only when it favours the nation in one form of economic or security purpose or the other. It is therefore not impossible that other major players in the world, on examining their alternatives on how to best rid America of its hegemonic status and by so doing release the unsuspecting world from American domination, may very well challenge its hegemonic position. Capitalising on the regional and international relationships once promoted by America, the other major super powers in the Asian Region and the European Union could orchestrate an over throw of America’s position as an hegemonic state or at the very least challenge the same. Not ignoring the power and importance of smaller or weaker states however, they would quite naturally also have to be involved. This however would be an all scale war, the magnitude, repercussion and significance of which will tremble the world perhaps more than every previous wars put together! Any would-be hegemonic challenger would most naturally have already arrived at the very same conclusion. Apart from the fact that every single one of these would-be challengers rely on the United States for one aspect of its sustenance or the other, it would take a lot of consideration, meetings, strategising and concrete persuasion to convince every member state of the necessity of such a global war. With its present and ever growing resources both at home and abroad, it is therefore only a matter of time before America, at whom the war is intended, becomes aware of the plans and builds up enough or adequate defence against the same. While it is not impossible that several nations of the world may come together and challenge America’s build up to hegemony, to say that the world may never recover from such a large scale war may perhaps be the understatement of the existence of mankind. In a brief state of fantasy, were one to assume that this large scale war does take place and does remove America from the pinnacle of power it currently occupies, there is no telling how many decades or even centuries it would take to rebuild a world of international trade and globalisation. Another danger in that is another country seizing the opportunity and rising very rapidly to the throne of hegemony, in this instance however, a country not so democratically inclined as America, for instance, China. The world as we know it now may cease to exist as a result of such a war. It is now 2008 yet traces of the Second World War still remain evident in some areas in the Eastern part of Germany as one imagines it does in other affected parts of the world. If the argument here is then that a full blown war against America’s hegemony may do the world greater harm than good, what then can possibly stop America’s climb to the top of the world?
As mentioned earlier, the strength of any nation lies in its economic as well as military growth. One, quite naturally, is not devoid of the other however as training camps, gears and facilities will be difficult to procure without a booming economy. Should the world then experience a global economic crisis, the like of which it is yet to ever experience, perhaps this will in a way also bring America to the same level as other countries or at least less dominant? In this present day, at least the European Union and America are experiencing an economic crisis that has been likened to the worst in many decades till date. The Great Britain’s Royal Bank of Scotland recently announced that the country is indeed in recession. China and Japan have also reported major decline in sales and poor performances on their Wall Street equivalent. Japan has actually announced to the world, like Great Britain, that it is indeed in the middle of a torrid recession. While this economic crisis may very well be unpleasant and indeed wrecking a lot of harm on the economy of the countries involved, it will take much more than this to cripple America or to reduce its hegemonic status. Even at this point in time, the US Dollar continues to rise against the British Pound and the Euro. Should the world experience an economic crisis of such negative significance that all the major states as well as even the ones considered smaller and weaker are effectively affected, America’s hegemony, in my humble opinion, will most certainly be thoroughly challenged. This will be brought about by the fact that the international community in a bid to survive and revert to some semblance of normality will be forced to depend one on the other for that means to survival, America included. Such a scenario will almost take the world back in history to the early days when the advantages of globalisation and inter dependence of nations on one another was first discovered. Such an economic crisis will render it almost impossible for states to continue to concentrate on military training and equipments. One should imagine that nations will be more concerned with the immediate welfare of their people such as housing, medical care and social services as undoubtedly unemployment will rise astronomically in the face of an economic crisis of any significant magnitude.
From everything hereinabove appearing and the examination of different (learned) opinions as well as scenarios, it is therefore perhaps appropriate to conclude by agreeing with the debate that should a full blown war orchestrated by would-be challengers of America’s hegemonic state fail, surely an economic crisis of significant global scale will not only challenge but also probably, however temporarily, bring an end to America’s hegemony. America will be forced to revert to the multilateralism way of international politics and to abandon unilateralism in a bid to promote globalisation and a closer knit international community.
Bibliography John, G. Ikenberry, ‘America Unrivalled: The Future of the Balance of Power’ (Cornell University Press, 2002)
John, Ikenberry, ‘Is American Multilateralism in Decline?’ Perspectives on Politics 1:3 (2003)
‘Hegemony or Empire’ The Redefinition of US Power under George W. Bush, Edited by Charles-Philippe David and David Grondin (2006)
Richard Little, Michael Smith, ‘Perspectives on World Politics’
Ikenberry, G. John, ‘Liberalism and Empire: Logics of Order In The American Unipolar Age’, Review of International Studies (2004)
Stephen M. Walt, ‘Keeping the World “Off-Balance”: Self-Restraint and U.S. Foreign Policy’, in Ikenberry, America Unrivalled, pp. 121-154.
Charles A. Kupchan, ‘Hollow Hegemony or Stable Multipolarity?’, in G. John Ikenberry (ed.), America Unrivalled: The Future of the Balance of Power (Ithaca, NY: Cornell University Press, 2002), p. 72. According to Kupchan, the European Union is emerging as the main competitor of the United States in a future multipolar international system.
Whither American Power? David Held and Mathias Koenig-Archibugi Published in: American Power in the Twentieth-First Century, edited by David Held and Mathias Koenig-Archibugi, Cambridge: Polity Press, 2004.
Kennedy, Paul, ‘The Rise and Fall of the Great Powers’ 1987
[1] David Held and Mathias Koenig-Archibugi, ‘Whither American Power?’ In American Power in the Twentieth-First Century
[2] G. John, Ikenberry ‘America Unrivalled’ Pp 1
[3] Quoted in Balz 2003, A1
[4] Purdum 2002., 1
[5] Ikenberry
[6] Quoted in Craig R. Whitney, ‘NATO at 50’ With Nations at Odds, Is It A Misalliance? New York Times 2, 1999
[7] President of the United States, The National Security Strategy of the United States of America (Washington D.C.: White House, September 2002), p. 30.
[8] G. John Ikenberry
[9] Paul Kennedy, ‘The Greatest Superpower Ever’, New Perspectives Quarterly, 19 (2002).
[10] Barry R. Posen, ‘Command of the Commons: The Military Foundation of U.S. Hegemony’, International Security, 28 (2003), pp. 5-46, p. 8.
[11] On the durability of U.S. supremacy see William C. Wohlforth, ‘The Stability of a Unipolar World’, International Security, 24 (1999), pp. 5–41.
[12] Argument was developed by Ikenberry 2001
[13] Marshall and Mann, ‘Goodwill Towards the United States is Dwindling Globally’

US Global Financial Crisis: Timeline of Causes and Effects

The global financial crisis of 2008-2009 began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank. In September 2008, the crisis deepened, as stock markets worldwide crashed and entered a period of high volatility, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks.
The crisis in real estate, banking and credit in the United States had a global reach, affecting a wide range of financial and economic activities and institutions, including the:
Overall tightening of credit with financial institutions making both corporate and consumer credit harder to get;
Financial markets (stock exchanges and derivative markets) that experienced steep declines;
Liquidity problems in equity funds and hedge funds;
Devaluation of the assets underpinning insurance contracts and pension funds leading to concerns about the ability of these instruments to meet future obligations:
Increased public debt public finance due to the provision of public funds to the financial services industry and other affected industries, and the
Devaluation of some currencies (Icelandic crown, some Eastern Europe and Latin America currencies) and increased currency volatility,
In the years leading up to the crisis, high consumption and low savings rates in the U.S. contributed to significant amounts of foreign money flowing into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 resulted in easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally.
While the housing and credit bubbles built, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments.
Cause Of The Financial Crisis
Various causes have been proposed for the crisis, with experts placing different weights upon particular issues. The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets. However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking. The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and write downs and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.
Beginning with failures caused by misapplication of risk controls for bad debts, collateralization of debt insurance and fraud, large financial institutions in the United States and Europe faced a credit crisis and a slowdown in economic activity. The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities. Moreover, the de-leveraging of financial institutions further accelerated the liquidity crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund.
Ultimately, looking for a cause of the current financial crisis, it is critical to remember that organizations failed to do a number of things:
Truly adopt an enterprise risk management culture.
Embrace and demonstrate appropriate enterprise risk management behaviors, or attributes.
Develop and reward internal risk management competencies, and
Use enterprise risk management to inform management decision-making in both taking and avoiding risks.
Enterprise risk management to be effective must fundamentally change the way organizations think about risk. When enterprise risk management becomes part of the DNA of a company’s culture, the warning signs of a market gone astray cannot go unseen so easily. When every employee is part of a larger risk management process, companies can be much more resilient in the face of risks. It is an important lesson to learn now, before the cycle renews itself and businesses find themselves facing the next cycle of business failures, lapses in risk management and shortcomings in governance. The cycle does not have to repeat itself as it always has in the past. Enterprise risk management is an important key to preventing it. Enterprise risk management, when designed and implemented comprehensively and systemically, can change future outcomes. When it is practiced fully, enterprise risk management does not just help protect businesses from setbacks, it enables better overall business performance.
Effects Of The Financial Crisis
Economic Effects And Projections
Global Aspects
A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse. The continuing development of the crisis prompted fears of a global economic collapse. The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. The United Kingdom had started systemic injection, and the world’s central banks were now cutting interest rates.
Regulatory Proposals And Long-Term Solutions
A variety of regulatory changes have been proposed by economists, politicians, journalists, and business leaders to minimize the impact of the current crisis and prevent recurrence. However, as of April 2009, many of the proposed solutions have not yet been implemented. These include:
Ben Bernanke: Establish resolution procedures for closing troubled financial institutions in the shadow banking system, such as investment banks and hedge funds.
Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance. Re-instate the separation of commercial (depository) and investment banking established by the Glass-Steagall Act in 1933 and repealed in 1999 by the Gramm-Leach-Bliley Act.
Simon Johnson: Break-up institutions that are “too big to fail” to limit systemic risk.
Paul Krugman: Regulate institutions that “act like banks ” similarly to banks.
Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to “discourage them from becoming too big and to offset their competitive advantage.”
Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification.
Eric Dinallo: Ensure any financial institution has the necessary capital to support its financial commitments. Regulate credit derivatives and ensure they are traded on well-capitalized exchanges to limit counterparty risk.
Raghuram Rajan: Require financial institutions to maintain sufficient “contingent capital” (i.e., pay insurance premiums to the government during boom periods, in exchange for payments during a downturn.)
A. Michael Spence and Gordon Brown: Establish an early-warning system to help detect systemic risk.
Niall Ferguson and Jeffrey Sachs: Impose haircuts on bondholders and counterparties prior to using taxpayer money in bailouts.
Nouriel Roubini: Nationalize insolvent banks. Reduce mortgage balances to assist homeowners, giving the lender a share in any future home appreciation.
Timeline Of Events
Mar-2000 Dot-com bubble peak
Jan-2001 First Cut in Fed Funds rate for this cycle (from 6.5% to 6.00%)
Stock market downturn of 2002
Jun-2003 Lowest Fed Funds rate for this cycle (1%)
Late 2003 Lowest 3mo T-bill rate for this cycle (0.88%)
2003-2004 Prolonged period of low Fed Funds and positively sloped yield curve
Jun-2004 First increase in Fed Funds rate for this cycle (from 1% to 1.25%)
2003-2005 Period of maximum inflation of the United States housing bubble
2004-2006 Slow rise in Fed Funds rate with positively sloped but narrowing yield curve
Feb-2005 Greenspan calls long-term interest rate behavior a “conundrum”
Jun-2006 Fed Funds reach peak for this cycle of 5.25%
Oct-2006 Yield curve is flat
Events Of 2007
March, 2007 Yield curve maximum inversion for this cycle
August, 2007: Liquidity crisis emerges
September, 2007: Northern Rock seeks and receives a liquidity support facility from the Bank of England
October, 2007: Record high U.S. stock market October 9, 2007 Dow Jones Industrial Average (DJIA) 14,164
Events Of 2008
January, 2008: Stock Market Volatility
February, 2008: Nationalisation of Northern Rock
March, 2008: Collapse of Bear Stearns
June 27, 2008: Bear Market of 2008 declared
July 1, 2008: Bank of America buys Countrywide Financial
July, 2008: Oil prices peak at $147 per barrel as money flees housing and stock assets toward commodities
September, 2008: Emergency Economic Stabilization Act of 2008
September, 2008: Troubled Assets Relief Program
September, 2008: Bankruptcy of Lehman Brothers
September, 2008: Federal takeover of Fannie Mae and Freddie Mac
September, 2008: American International Group#Federal Reserve bailout
September, 2008: Merrill Lynch sold to Bank of America Corporation
September, 2008: Morgan Stanley and Goldman Sachs confirmed that they would become traditional bank holding companies
September, 2008: partial nationalization of Fortis holding
October, 2008: Large losses in financial markets world wide throughout September and October
October, 2008: Passage of EESA of 2008
October, 2008: Iceland’s major banks nationalized
November, 2008: China creates a stimulus plan
November, 2008: Dow Jones Industrial Average (DJIA) touches recent low point of 7,507 points
December, 2008: The Australian Government injects ‘economic stimulus package’ to avoid the country going into recession, December, 2008
December, 2008: Madoff Ponzi scheme scandal erupts
December, 2008: Belgium government resigns as a result of Fortis nationalization
Events Of 2009
January 2009: Blue Monday Crash 2009
January 2009: U.S. President Barack Obama proposes federal spending bill approaching $1 trillion in value in an attempt to remedy financial crisis
January 2009: Lawmakers propose massive bailout of failing U.S. banks
January 2009: the U.S. House of Representatives passes the aforementioned spending bill.
January 2009: Government of Iceland collapses.
February 2009: Canada’s Parliament passes an early budget with a $40 billion stimulus package.
February 2009: JPMorgan Chase and Citigroup formally announce a temporary moratorium on residential foreclosures. The moratoriums will remain in effect until March 6 for JPMorgan and March 12 for Citigroup.
February 2009: U.S. President Barack Obama signs the $787 billion American Recovery and Reinvestment Act of 2009 into law.
February 2009: The Australian Government seeks to enact another “economic stimulus package”.
February 2009: 2009 Eastern European financial crisis arises.
February 2009: The Bank of Antigua is taken over by the Eastern Caribbean Central Bank after Sir Allen Stanford is accused by U.S. financial authorities of involvement in an $8bn (£5.6bn) investment fraud. Peru, Venezuela, and Ecuador, had earlier suspended operations at banks owned by the group.
February 23, 2009: The Dow Jones Industrial Average and the S