Sample Economics Essay Paper on Economic Brief

            The finance industry is characterized by some of the most powerful and influential national, regional and multinational entities with the financial clout to influence policies. The industry’s key players include banks, insurance companies, credit unions, investment funds, and accountancy firms. Some of these companies are owned by governments while a great majority and private entities with significant operational autonomy. The industry specializes in offering a broad range of services including wealth management, financial advisory, investment and management, banking, and insurance services. The sheer size of the financial industry and the power the industry wields play a vital role in determining economic and business cycles including the devastating economic recessions which have hit many economies, regions, and global markets and economies in the recent past.     

Financial crises are seemingly omnipresent; a danger always lurking in the background and ready to pounce at the slightest of opportunities. Historically, regions and economies or states have been plagued by financial crises which have sent the markets crumbling. In some cases, the government has been forced to chip in to save various industries and organizations from the clutches of collapse under the heavy burden of bankruptcy. Despite its historical robust growth and enviable position as one of the premier economies in the world, the United States of America has had its fair share of financial crises with the most recent being the 2007 – 2008 economic depression which spread beyond the U.S. borders. While economists and policymakers who carried out a postmortem on the global economic depression pointed to irrational and exuberant subprime lending as one of its primary triggers, they also noted that deregulation of the financial industry played a key role in instigating the financial crisis (Huwart and Verdier 133, 134).

In particular, the deregulation of the financial industry in the U.S. led to capital inflows to the country especially in the form of foreign direct investment (FDI). Initially, the cash flow was moderate which led to significant economic gains in increased investments in the American economy. However, this trend soon took a dangerous turn with the government lowering interest rates. The country’s financial sector was globalized leading to free entry of even more foreign investors seeking for cheaper investment vehicles especially in the housing sector. Both local and foreign investors were enticed by the credit government and financial institutions-facilitated credit. The financial institutions were buoyed by the free movement of capital into the country and resorted to subprime lending. There was excessive concentration on the property industry by both investors and financial institutions. These institutions and borrowers, encouraged by inadequate supervision by the government and the Federal Reserve, assumed that property values will always take an upward trajectory.    

Chart 1: The correlation between the reduction of interest rates and liquidity in the lead up to the 2007 – 2008 financial crisis

Source: Huwart and Verdier (134).

The resulting high levels of liquidity led to imbalanced economy whose nadir was the bursting of the property bubble and financial losses amounting to billions of dollars. Many financial institutions closed shop while property closures became the lasting symbol of failed economic policies and short sightedness by both the government and players in the financial industry. The government had to spend billions of dollars to bail out several bankrupt financial institutions to save thousands of jobs and revitalize the economy. More striking was that the failures by the U.S. government to regulate the financial industry were not confined to the country; the crises spread globally due to the interdependence of global economies.  

In conclusion, the global financial crises of 2007 – 2008 exposed the volatility of capital flows from foreign direct investment and the dangers associated with industry deregulation. The government should exert a measurable level of control of industries especially the financial industry to stem the dangers associated with imbalanced economic activities.

Work Cited

 Huwart, Jean-Yves and Verdier, Loïc. “Chapter 8: The 2008 financial crisis – A crisis of globalisation?”, in Economic Globalisation: Origins and consequences. OECD Publishing, Paris, 2013. DOI: