The world faces a new global financial crisis

The world faces a new global financial crisis

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Shatha Khalil *
The potential for a global economic crisis is still in place. Excessive confidence in the market was the main cause of the financial crisis in 2008 when most countries ignored the crisis amid of the extravagant optimism that led automatically to excessive speculation and risk and the result was the big crisis that hit the global economy ten years ago.

The causes of the global crisis:
Many specialists believe that the most important causes of the global crisis can be summarized as follows:
• The nature of the global financial system prevailing in the world, especially in the United States and the European Union (the capitalist system), which gives full freedom in economic and financial transactions without the intervention of the state, and allow uncontrolled speculation of shares, which led to the raising of market prices in a large and illogical way.
• The irresponsible and crazy speculation in oil prices, which pushed prices to reach a fantastic value.
• Lack of specific and limited rules for banks to regulate credit and lending operations, making banks to carry out credit and lending operations largely at a high risk.
• States did not initially intervene in saving many banks and companies from bankruptcy, on the grounds that the state did not intervene in the economy (economic freedom).
• The inability to predict at present the causes of the global financial crisis, and that there are several factors contributed to this crisis, including: high oil prices, rising stock prices, and inflation.
• The large expenditure on wars and the increase in military spending, which led to the lack of spending in development.
• Increase losses due to natural and environmental problems and disasters due to global warming.
• Employment of the economy in the service of political and military objectives rather than economic and social development.
• Administrative and financial corruption and the emergence of a lot of fraud and cheat around the world.
In the same context – the global crisis, Jacques Attali, President of the European Bank for Development in the nineties, stressed that financial crises are not excluded in light of the growth trend that is taking place, and there are indicators, most notably: inflation rates of debt recording high rates , the public and private debt in The wealthiest forty-four countries amounted (235%) of GDP, while only 190% in 2007 , before the recent financial crisis, in addition to the overvaluation of corporate assets and the falsification of their prices through mergers.
Attali added, that the likelihood of loosening the restrictions of US banking legislation established in the wake of the financial crisis in 2007 suggests new risks, which Trump has adopted and talked about on more than one occasion. For these reasons Attali sees panic as inevitable whether it comes after a month or a year or ten years, once creditors realize that their debts will not be returned to them, panic will erupt.
The panic wave may be triggered by an accident in Italy, America or China then central banks are rushing to cut down their free loans to banks. Governments and businesses recognize the costs of their growing loans. Some of these companies and governments will be subject to a great austerity, triggering crisis and unemployment and lower purchasing power as governments, individuals and companies can prepare and anticipate this crisis by rapidly reducing debts of their variable interest rate debt (depending on the type of exchange they get) and selling such debt at the highest prices. But if these steps are spread all over the world, it will contribute to erupt the crisis rather than reducing it. Therefore, the time has come to collectively seek to reduce debt and to establish financial legislation that is committed at the international level.
While Ken Rogoff, professor of economics at Harvard University see , global central banks frequently have a burden of the most sensitive tasks during financial crises, and most importantly the situation in the two central banks (the US Federal and Central European ), the situation may be a little murky, The recent crash on the New York Stock Exchange was happened at the same day that Jerome Powell took over as Federal Reserve Chairman, replacing Janet Yellen, who was following a very cautious policy, while Powell , appointed by Trump , might not follow the same route, but rather he will probably resort to expansionary monetary policy.
The ECB is very close to ending quantitative easing, which means the steps taken by the central bank of a given country to stimulate the economy. The countries that usually follow quantitative easing are countries whose economy is suffering from economic recession or stagnation , as QE is the process of injecting money into the market in the form of financial assets, the aim is to flood the market with funds and increase liquidity,.
German financial minister, Wolfgang Schaeuble warned in an interview with the Financial Times last October that the global economy may be experiencing a new financial crisis because central banks are pursuing expansionary monetary policy, which could lead to new bubbles similar to those that have occurred in the year 2008.
While ECB President Mario Draghi says there is still a need for “generous” cash easing , because any premature or hasty move could derail the work done by the bank, but the decisive factor in this matter is how financial markets are ready to accept the end of the Quantitative easing policy , because lack of preparedness means a financial shock that may result in a major crisis.
US Treasury Secretary Stephen Menuchin said at the World Economic Forum in Davos, Switzerland, this year, that “the dollar’s decline has benefited the trade balance.” Many people are almost convinced that this is a declaration of a global trade war, a dollar will be the most important weapon in it, as the dollar’s cut has boosted the competitiveness of US exports, but this war, which will begin with the currency war, will affect the European, Japanese and Chinese exports, or in other words, all global economies, which naturally drives the global economy to a global financial crisis that will not be less severe than the 2008 crisis.
The matter that Raise more concerns resulted from political errors in the United States and China, which could lead to a global economic crisis.
At the beginning of this year, 2018 , the trade war began where the US International Trade Commission took measures related to Chinese products such as tool boxes and silicon manganese, leading to a heavy charge on those imports from China. It is clear that the White House, led by Trump, to take action against imports of solar cells, steel and aluminum from China, is a move aimed at the intellectual property system, and the practice of forcing the transfer of technology by foreign companies operating in China, will this war be ended to an economic disaster ?!

Economists argue that trade war will affect global trade in general and will not only support US exports, because the war is not only one party, which is definitely raising a panic in the markets, which prompted Jacob A. Frenkel, the chairman of the JPMorgan Chase International to warn that the currency war for commercial purposes could destroy the world economy, pointing out that it should be prevented “at any price,” explaining during the statements to “Bloomberg” agency that the war currency is a reflection of protectionism in monetary policy.
Christine Lagarde , managing director of IMF, said the global financial crisis will remain a milestone for the generation involved in .
Lagarde stressed the need to take advantage of the global financial crisis on the tenth anniversary of the announcement of the fourth largest US bank, “Lehman Brothers,” bankruptcy, after the loss in the mortgage market, especially after the market share was of high-risk mortgages in the USA (40%) of total mortgage-backed securities by 2006, after this type of loans were virtually non-existent in the early 1990s.
The collapse of Lehman Brothers created a collective approach to withdrawing deposits from the financial system, causing a systemic crisis , the result was that Twenty-four countries were victims of banking crises , and the economic activity is no longer in place, and the repercussions of the crisis still exist today.

“The heavy economic costs of people, made them feel angry about the rescue of banks and their impunity, and have been influential factors in the emergence of the anti-globalization reaction, especially in developed economies, and the loss of confidence in governments and institutions,” Lagarde said.
“Ten years after the collapse of Lehman Brothers gives us an opportunity to assess the actions taken to address the crisis over the past decade,” Lagarde added.
Therefore, the countries of the world must unite and try to find a solution that contributes radically to solving this crisis as soon as possible, and the need to eliminate the causes and avoidance in the future, to prevent its emergence again.

When the global economy is heading towards recession and stagnation , governments are unable to implement their development policies, making financial institutions and banks to be tightened and may not finance and lend , and this, in turn, limits development and construction, thus reducing the demand for many different materials and products which led to the decline in national income levels and per capita income around the world, which in turn reduces the levels of welfare and spending capacity, low purchasing power, low demand for various products, and this in turn reflected on the different production units, which makes it dispense with a lot of Workers.
Here, the countries of the world must unite and try to find a solution that contributes radically to face any financial crisis that could affect the economies of the world.

Economic Studies Unit
Rawabet Center for Research and Strategic Studies