Essay Topic: Outline the major arguments put forward to explain the emergence of the 2008 crisis. Discuss in detail the two that seem most relevant together with the supporting evidence about their validity

The world economy witnessed its most dangerous crisis in 2008 since the Great depression in the 1930’s. The contagion, which began in the United States when the housing prices finally turned assertively downward and spread quickly to the entire financial sector in the U.S and then to other financial markets abroad through financial and trade linkage . The financial crisis prompted in the early 2006 when the subprime mortgage began to show an increasing rate of mortgage defaults which later increased higher than normal rate in the late 2007, and on September 15,2008, one of the biggest investment banks in the world, failed, Lehman Brothers (2008financialcrisis, 2015). This essay would look at the major factors that explains the emergence of the 2008 crisis and also critically discuss in details the two most relevant arguments with supporting information and data that proofs its validity.

Various arguments were proposed to explain the emergence of the crisis, which are; capitalist instability, financial deregulation and innovation, debt and crisis and rising inequality. The financial crisis shows inherent instability of capitalism; John Maynard Keynes believed that it was necessary to use monetary and fiscal policy to tame instability because he sensed that the market economy was unstable, this system became the pillar after the Great Depression and was a success this success later was carried to extreme and became overgrown and highly wasteful. Financial capitalist revolted against higher rates of inflation in the 1980s by forcing government to adopt restrictive policies, especially tight monetary policy (this is higher interest rates) and the result was less inflation and a return to higher unemployment, this shows that government policies have affected the combination of unemployment and inflation at specific times. Milton Friedman later came up with the neoclassical theory that states that the market economy should be kept free from government intervention and regulation to enable more efficiency and stability. This thinking has been carried too far by the Bush Administration of 2001to2008, which has sought to do away with regulations and allows securitization of debts and everything else imaginable, these workings of market was spread globally. It is however fair to say that what led to the financial crisis can be a grand experiment of global scale aimed at the creation of the laissez-faire ideal comprehended by the neoclassical school (Katsuhito, 2008).