Network of Asian Social Democrats

by: Fawaz Abd Aziz

Roots and Spread of Financial Crisis

After the sub-prime mortgage crisis in the US first burst into the headlines of mainstream newspapers in June 2007[1], there have been two general categories of the many discussions that have taken place regarding the roots of the global financial – and now, economic – crisis, both of which views are important but do not usually get discussed together. It is crucial to see the importance of their interaction – the dynamics of one on the other – rather than either in isolation.

One view can be labeled the ‘temporary excess’ point of view which, to put it plainly, argues that greed leading to excessive risk-taking, lax regulations, excessive overzealous brokerage and rating agencies caused the crisis we have on our hands today. To resolve the crisis, therefore, efforts should be made to fix, ‘tweak’, and improve upon the technical aberrations of what is – to those who subscribe to this view – an otherwise perfect financial system. This view is not completely incorrect, though it is incomplete.

The other view, the ‘aggregate demand generation’ point of view believes there is as a root cause – a  systemic, structural flaw in the whole system of capitalist-driven finance that led to the global financial crisis. We believe that flaw lies in the problem of income inequality. As we shall see below, tackling the root, structural cause is of utmost importance if we are to prevent – or at least mitigate – future financial crises of the nature we are going through today. As Thomas I. Palley, the then-assistant director of public policy of AFL-CIO, put it when talking about yet another financial crisis that occurred in the US eight years ago:

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[1] The crisis in the financial sector was foreseen by a number of analysts – such as Jomo KS, others in the United Nations and International Monetary Fund, Nobel laureate Joseph Stiglitz and analysts such as Nouriel Roubini – and forgotten, whereas the structural crisis was warned about by many others – such labour rights advocates such as the International Labour Organisation and the AFL-CIO – and ignored.

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