Financial Crisis of 2008
The economics professionals during the global financial crisis underestimate the dimensions of the issue once it unfolded. Gerald (2010, p. 120) traces the deep roots of the failure in the lack of understanding and the misallocation of research in economic efforts. Bondt (2010, p. 140) claim that the economists in this period disregard the construction models that can drive an effective result in the world-markets. The economic profession fails to communicate the shortcomings and the limitations of the preferred models to the public to depict transparency. Prior to the financial crisis, economists largely rely on the construction models that disregard the heterogeneity in decision-making, revise forecasting and capacity building, and the change in the social context to drive results in the asset and world markets. A casual observer can highlight the models failure to account for the actual evolution in the real-world economy. The field of academia fails to carry out research concerning the inherent occurrences of financial crises. The economists do little or no exploration to the system indicators and some of the ways of preventing the malady from occurring. Most of the economic models in the financial literature and macroeconomics hardly mention “system crises.” Most of the economic models do not offer a solution of addressing the phenomenon and mitigating it. A systematic failure in the economic profession lives the world in the dark with no theory to assist and solve the financial crisis. Markets and economies tend to illustrate inherent stability with sporadic instances as they wander off the track. The intermittent instances lead to many economists failing to warn policy makers of a threatening system crisis. The unfolding of the financial crisis in 2008 forces the economists to abandon their standard models as they plan to apply other remedies. An exceptional time such as this one demands an exceptional model to provide guidance in the development of policy and regulation. Economists confine themselves to macroeconomic models in the OECD states that remain perturbed by financial shocks. The models neglect the economic dynamics in the intrinsic system. Some of the economists depict literature against an impending storm as they mention of an increase in systematic risk, in the analysis of risk management. Bondt (2010, p. 141) argue that it is the duty of the government to caution shareholders by providing affordable insurance measure against a systematic crush. Bebchuck (2008, p. 14) observes that investors are risk averse due to their improbable attitude of the likelihood of a Great Depression. The motivation of economics in the academic discipline comes from the phenomenon such as unemployment, boom and bust cycles, and a financial crisis. The confinement of theoretical models without the consideration on the defects hurt the average taxpayer in the economy. The failure depicts deep methodological roots in the allocation of the few resources that have shortsightedness. Walton (2008, p. 67) claim that the reduction of economics in the study of optimal decision has specific choice issues. Economic research often loses track concerning the inherent dynamics in the economic system and the instability that will follow in the complex dynamics. An inadequate definition of economics leads the researchers to neglect the coordination of all stakeholders in the view of possible failures. The analysis of the issue requires a unique strategy other than the one depicted in a prominent economic model. Most of the financial economists tend to develop a theoretical model basing on the financial structure that has high, unrealistic restriction to assure stability. The financial economists do not give warning to the public concerning the fragility of the models. Lack of understanding on the possible failure of an economic model can lead to the financial crisis.
The properties of the recent financial crisis appear as a boom and bust pattern that repeats the cycle in different periods, in economic history. The origin of the boom opens up new channels of investment while developing new financial products. Most of the previous crises occur due to overinvestment and the possibilities of new physical investment. The global dimension of the 2008 financial crisis is due to increase connectivity of the well-established financial system.
In conclusion, most of the economic profession tends to ignore the financial system interconnection. The research on the history of the financial instability, overinvestment, and the economic slump do not appear in most of the economic model of the economists that can provide information concerning the crisis. Economists use an ineffective paradigm to depict some of the changes in the network infrastructure in the financial system. The macroeconomic analysis is yet to incorporate the connection of the network structure in the economy
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