Lessons from the Wall Street Crisis
Reasons for Risky Behavior of Financial Traders
This paper seeks to assess the persistent risky behavior by financial traders and lessons from the Wall Street crisis.
The tropical storm began in 2007 when two hedge funds who invested in assets guaranteed by subprime loans needed to sell $3.8 billion of obligations. Within minutes one of the most important banks on Wall Street was forced to sell itself to JP Morgan Chase at $2 per share, when in the prior 48 hours it was valued at $30 per share. (Marazzi 2011) By 2008 a snowball of bankruptcies occurred in the United States of America. Major institutions such as Freddie Mac, AIG, Lehman Brothers, Bank of America, and Fannie Mae collapsed. Tenants of globalization such as capital mobility, ideology such as neo-liberalism, and financialization facilitated the global domino effect of the crisis. In 2008 the Wall Street crisis was global and was knighted the “crisis of crises…of a violent finance”. It is a systematic crisis which collapsed under the pressures of its own contradictions, it can be said to question the very limits of capitalism. (Marazzi 2011) There are vast explanations accounting for the Wall Street Crisis, it is disputable whether it was caused by state or the market fault, although evidence have shown that both played critical roles. ("Development-led globalization: Towards sustainable and inclusive development paths" 2011) This paper will illuminate the vibrant financial innovations, financial operations, and new national market policy which have been mainstreamed by Anglo-American globalization and access the persistent risky behavior by financial traders.
The term financialization has numerous definitions. Some define financialization as representing the explosion of financial trading with a myriad of new financial instruments. (Epstein 1998) Krippner believes financialization is a ‘pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production’. (Epstein 1998). It is evident that the growth and power of finance is of significant importance in the global economy. The dual power of deregulation of global finance and microelectronic evolution has reshaped the world and transformed the lives of millions. (Wayne 2006)
“In 1980 the daily average of foreign exchange trading totaled $80 billion, today it is estimated that more than $1.9 trillion changes hands everyday on global currency markets. Approximately 50 times greater than the total value of all goods and services traded globally each year.”
The world witnessed the rise of a violent finance!
Duménil and Lévy take a much more definitive stand to demonstrate the power of finance:
‘Neo-liberalism’ is the ideological expression of the reassertion of the power of finance …although the return of finance to hegemony was accomplished in close connection with the internationalization of capital and the globalization of markets…it is finance that dictates its forms and contents in the new stage of internationalization…
Susan Strange state that in the new world order power has been shifted from the accumulation of gold, land, and armies to control of capital. Short-term speculation has become the single-largest component in the flow of international investments. The Washington Consensus encouraged deregulatory financial activities, which are vehicles for financialization. The Bretton Woods institutions suggest that further liberalization of the capital and markets are necessary. (Wayne 2009) In the contemporary global economy finance is the epiphany of power. “Money chasing money has eclipsed productive investment as the engine of the global economy.” New financial innovation has encouraged investment in the symbol economy instead of the real economy, whereby “the volatile flow of currency...
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