The Interactions Between Political Economy and Global Financial Crises: A Case Study of the 2008 Global Recession

Abstract

The 2008 Global Financial Crisis was one of the biggest shocks in the history of modern economics, and it revealed the lack of strength of the global economic structure. Besides the financial catalysts of the crisis, it is increasingly being viewed through the prism of political economy, where the regulatory regimes, institutional frameworks, and the state-market interactions played a central role in the development and exacerbation of the systemic instability. This paper examines the connection between political economy and the world financial crisis using the example of the 2008 recession. This paper is founded on a political economy qualitative case study approach. It incorporates the secondary data, which is policy reports, institutional publications and the available empirical studies to assess the role of the regulatory frameworks, policy of financial liberalisation and mechanisms of global governance in the dynamics of the crisis. The comparative institutional analysis is also used in the study to comprehend cross-country transmission effects. The results suggest that financial market deregulation, along with disjointed regulatory frameworks in key economies, were key contributors to excessive risk-taking and bubble formation of assets. The downfall of major financial institutions like Lehman Brothers caused a very quick contagion effect, which proved the interdependence of the global financial system. Moreover, central banks and international responses in the form of policy measures in order to stabilise markets revealed imbalances in international financial regulation and uneven recovery patterns of economies. The paper concludes that the crisis in 2008 cannot be explained in the absence of the structural political economy that influenced the behaviour of the financial sector and policy reactions. It explains why more powerful international regulatory coordination is necessary, institutional responsibility, and transformed financial governance frameworks to reduce future systemic risks. The example of the 2008 recession, therefore, gives important insights into the ongoing tension between market liberalisation and financial stability in the world economy.