How can the interdependent nature caused by globalization cause the system to break down? What is an example of this kind of breakdown in the system and what action was taken to try to fix it?

Question

What will be an ideal response?

Answer 1

Answers will vary but correct responses should include: Fragility can arise in a highly complex system, because where the parts are interdependent, a failure in one can cause breakdown in others. The businesses that benefited from the global economy could therefore imperil it by irresponsible risk-taking. A series of colossal failures among credit institutions in Europe and the United States in 2008–2009 exhibited the results. The collapse of the value of key securities in the United States provoked an uncontainable global credit crisis. International collaboration mitigated the effects. But the failure of the system was so acute that electorates worldwide lost confidence in laissez-faire and clamored for a return to regulation. The sudden switch from easily available credit to tight conditions triggered recession and mass unemployment—reaching nearly 10 percent in the United States and 20 percent in parts of Europe—and threatened the world with economic stagnation. Among the consequences, the downward revaluation of real estate and the repossession of mortgaged houses left hundreds of thousands of people homeless. There were, in theory, two possible ways out of the crisis: Classical economics dictated budget-cutting to restore confidence in governments´ long-term ability to repay their debts. This was the method that Republican politicians in the United States preferred and that European countrieschose. The alternative was to revert to the so-called Keynesian program from which the world had turned in the 1980s: massively increasing government spending in order to support economic activity and generate jobs. In practice, all governments had to try both methods simultaneously, but the question of where the balance lay seemed crucial. President Obama opted for increased spending. The problem was, however, that the costs of the wars the United States had started in Iraq and Afghanistan, together with overoptimistic tax cuts, had already swung the budget into serious deficit and the U.S. treasury into penury. The world doubted whether any strategy would work in the circumstances. The United States´ credit rating fell. The government´s debts were—according to some pundits—sustainable only because China was the main creditor, and could not afford to see the United States collapse. Despite the unfavorable global circumstances, China (together with India, Brazil and most other Latin American countries) succeeded in continuing to grow its economy, while that of the United States stagnated.