Neo-Liberalist vs.

Realist:
The Global Financial Crisis Question
An Analysis of its Causes, Effects and Possible Solutions

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University of the Philippines Visayas

Cebu College
Lahug, Cebu City

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A Research Paper submitted to the

Social Sciences Division
In Partial Fulfilment of the Course Requirements
for Political Science 182

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Researchers:
Ferrer, Euvic M.
Pescadero, Cris Virgil M.
Tumulak, Karla Marie T.

____________________________________________

Adviser:
Prof. Mae Claire Jabines
19 October 2009

The Global Financial Crisis | 1

Chapter I
INTRODUCTION
This chapter discusses the essential background of the study, the problem and
as well as the scope of the problem and the limitations of the study being set upon by
the researchers. This chapter provides the essential preliminaries for this research
paper and will serve as the foundation of the study.
Rationale
The last quarter of the past year was the time when the world faced a new
problem in terms of finance and banking, especially in the United States of America
and its cohorts.
The rest of the world outside the territorial realms of these economic
superpowers has felt the reverberating effects of this predicament. As well-known
political scientist would describe, When America sneezes, the rest of the world
catches the flu. Its about time that the world cross fingers now that its more than
just USA who has this sneezing problem.
This research study will expound on the problem called the Global Financial
Crisis. The study encompasses a simplistic explanation of how such problem came
into being. It is but noteworthy to check the real roots of the problem to understand
how economists and politicians act to solve and alleviate the problem the crisis offers.
However, its more than just revisiting past activities in the international and
domestic scene, for the case of the US, to understand the crisis. As the extent so far
has reached countless of countries outside the American continent, the researchers opt
to analyze the problem in the light of established patterns and theories in international
politics.

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Theories in international politics, especially the Neo-Liberalist and Realist
theories, would help analyze in a causal and thematic way how and why the crisis has
grown in the past year, how and why it spread to a number of casualties outside the
country/ies where it originated, and most importantly, how, and even why, can the
problem be solved, or at the very least, how its effects can be minimized
continuously.
In addition, the theories of international politics, as it understands the problem,
can help in handpicking generic means for the crisis to be avoided from resurfacing.
Understanding the patterns of crises can help in totally ending the cycle (or pattern) of
crises, if that is even possible.
It is a big challenge for a student of political science to understand an
international predicament as big as this in the lenses of international politics theories,
but it is also interesting and enlightening how such problem persists in a world where
leaders do not just haphazardly jump into conclusions. The global scope of the crisis
makes its possible for it (the crisis) to persist in areas never thought of. This makes
the issue big, so big that one cant just let it pass.
In a period where power continuously shifts, as Alvin Toffler would claim it,
its not impossible how the downfall of power can also shift and glide smoothly to
areas where it has been missed the most.
Statement of the Problem:
The study is concerned with identifying the issues (causes, effects, etc.)
covered by the Global Financial Crisis. It also seeks in understanding these
information in the lenses of established theories on international politics. Further, the
study aims to answer the following specific queries:
1. What is the Global Financial Crisis?

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1.1 What are the probable causes of the Global Financial Crisis in the
perspective of:
a. Neo-Liberal Theory of International Politics; and
b. Realist Theory of International Politics?
2. What are the effects of the Global Financial Crisis?
3. What are the probable solutions of the Global Financial Crisis in the
perspective of:
3.1 Neo-Liberal Theory of International Politics; and
3.2 Realist Theory of International Politics?
4. Taking everything into consideration, what policy can be recommended to
solve the Global Financial Crisis, or at the very least, alleviate its harmful
effects?
Objectives of the Study:
The study is focused on identifying the cause and effects of the crisis and how
these can be understood through the lenses of established theories of international
politics. Further, it aims to achieve these specific objectives:
1. To give a background on the Global Financial Crisis, and
2. To identify the probable cause/s of the crisis as perceived by Neo-Liberals and
Realists.
3. To determine its effects to the USA and the world in general.
4. To enumerate probable solutions to this crisis as postulated by the theories of
Neo-Liberalism and Realism.
5. To provide a sound solution to this crisis from the positions of the Neo-Liberal
and/or the Realist.

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Significance of the Study
The study is significant as it provides an analysis of a current issue that is
international in scope. The Global Financial Crisis, as an international question, has
manifested its wrath in countries outside where it originated. This makes the problem
a good case to study in international politics. Moreover, this makes the analysis of the
problem through established theories of international politics important so as to help
in providing solutions to its resolution, or at the very least, in alleviating the burden of
its negative effects.
Specifically, the study is significant for:

The United States of America and other World Economic Superpowers

Understanding the study is important to these world powers. Employing

theories and patterns in international politics would be even more significant as it

will help in providing plausible solutions to the crisis that has shaken their
economy, ergo, influencing how they deal with their policies.

The Rest of the World

The global economic superpowers had drawn the destiny of the rest of the

world with the trade system that they have been employing. Globalization, the
current trend in the global economy, has dragged the rest of the world in the
problem with the crisis. This makes the analysis of the issues of the Global Crisis
important to the other countries. Such analysis is needed for them to understand
the problem so that they are able to protect themselves and, if the crisis has struck
them, that they are able to know how to get out of it, if that remains an option.

Contemporary Political Scientist and Theorists in International Politics

The Global Financial Crisis is a contemporary international politics problem

and for the political scientist and the avid theorists, this crisis is significant in

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redrawing patterns and trends in the international scene. Moreover, the application
of already established theories in this global crisis tests the applicability of these
theories in recent developments in the political scene, most especially in
international politics.
Scope and Limitations of the Study
This study is limited to the origin, cause, effect and probable solution of the
Global Financial Crisis that hit the economic system by 2008. Although reports were
made that the crisis started out in 2007, the researchers focused on the 2008 activities
of the crisis for it was during this time that such world predicament have reached a
mature scale. This was also the time when world leaders employed poltico-economic
solutions to solve the effects of the crisis.
The researchers placed emphasis on the United States of America because
basically, it was where the crisis started. Explaining the origins of the crisis would
entail a thorough analysis of how the US economy performed. However, the
researchers did not isolate the analysis of the crisis to US alone. The researchers will,
on the later part of this study, will pinpoint other countries such as European, Asian
and developing countries.
The global economic system participating in globalization is herein referred to
as system level. It is then safe to say that the actors considered are those capitalist
countries engaged in free trade with each other, including the United States of
America.
The researchers limited the study to the analysis in the perspective of the NeoLiberal and Realist.

The Global Financial Crisis | 6

Theoretical Framework
The following theories and concepts serve as guide for the study especially in
understanding the global financial crisis. The study looks into the causes and
recommendation of possible solutions through looking into the perspectives of the
different theories of international relations.
Realism
Realism, a dominant theory used in the study of international relations
emphasizes on the propensity of conflict which rests on the pessimistic belief of
human nature i.e. human nature is essentially constant and could not easily be altered
Also, states promote different national interests hence there is no essential harmony
of interests among states. Realists describe the international stage as a dog-eat-dog
world hence power determines the survival of the fittest. Realists place power
relations as a major determinant in the conduct of interactions between and among
world actors (state and non-state) in the international stage. "Power, struggle, selfhelp system, self-interest. systemic anarchy and balance of power" are key concepts in
the theoretical paradigm of realism. Realists argue on the anarchic nature of the
international system where states promote their national interests and are pessimistic
on the presence of international organizations. Realism defines national interest as
whatever enhances or preserves a states security, its influence, and its military and
economic power (Rourke,2005: p.19). Although realists recognize the presence of
supranational ideas, they place primacy on the assertion of national interests by state
actors. According to realists, states are the main actors in the international stage and
political leaders work for the promotion of their national interests. The ethic of
responsibility espoused by realism rests on the notion that political actions are judged
based on specific merits rather than universal standards. The self-help system of

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realism stipulates that each state must rely on its own resources to survive and
flourish (Rourke, 2005: p.18). The balance of power is considered to be the most
effective technique to minimize the propensity of conflict in the international stage.
Power is approximately equally distributed to powerful state actors to strike a
"balance in the power relations in the international stage and to prevent the
emergence of a world hegemon. The balance of power serves as the regulatory
mechanism that reduces the propensity of conflict among states which is due to the
absence of international political institutions and legal systems in the international
system.
Neo-liberalism
Neo-liberalism, another dominant theoretical paradigm in the study of
international relations promotes economic integration and cooperation among states
resting on the optimistic belief of human nature i.e. humans cooperate to achieve
mutual benefits. Unlike the realists, neo-liberals believe that an anarchic international
system hinders international cooperation and the institution of effective international
organizations helps in the promotion and growth of cooperation, facilitating the
"operation of reciprocity" as states receive mutual benefits through political and
economic cooperation.
Increased economic interdependence among countries and the spread of global
culture promote the spirit of cooperation and solidarity among states in the
international stage. International cooperation hinders the chances of conflict between
states since states acknowledge that the benefits of economic cooperation and
integration outweigh the costs. The remote possibility of war among advanced
industrial economies is linked with the belief that as states become globally integrated
and entrenched in a "web of economic and social connections", the costs of

The Global Financial Crisis | 8

interrupting these ties likely prevent unilateral decisions undertaken by states.
Furthermore, neoliberals believe that "countries will have to surrender some of their
sovereignty to international organizations in order to promote greater cooperation and,
if necessary, to enforce good behavior" (Rourke,2005:p.22). Increased cooperation
goes hand-in-hand with the spread of liberal values, promotion of free trade and free
markets, and establishment of international institutions. According to Stephen Walt,
in his article International Relations: One World, Many Theories the "globalization of
world markets, rise of transnational networks and non-governmental organizations,
and the rapid spread of global communications technology which are undermining the
power of states and shifting attention away from military security toward economics
and social welfare". Neo-liberals believe that states recognize competition and the
establishment of amicable relations with other states is a universal norm in the
international system.
Capitalism is considered as the economic system espousing the neo-liberal
values of free enterprise and free market. In a capitalist system, the private firms and
individuals own the means of production and the exchange of goods and services is
facilitated through a complex network of market system. Adam Smith, a major
proponent of the capitalist paradigm believed that the interaction of cooperation,
competition, private property and self-interest with a significant role played by the
"invisible hand" will propel markets and contribute to the development of the society.
Under the capitalist system, the government is limited to its supervision of regulatory
mechanisms i.e. defense from external threats and guarantee the rights of private
property.
The idea of free markets advocated by the capitalist system has led to the
increased economic integration among states operating through the neo-liberal values

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of cooperation and free trade. In the context of a globalized world, world economies
are becoming increasingly integrated and movement of goods and services flow freely
across national boundaries. This situation is what Alvin Toffler mentioned in his
book, Powershift as a shift towards the 'super-symbolic economy" of increased
political, economic and cross-cultural interactions, rise of transnational actors and the
removal of impediments to international trade. Globalization is characterized by the
pursuit of economic liberalization, global integration, proliferation of information
technologies and rapid Westernization of the international community.
Conceptual Framework

Figure 1. Conceptual Framework of the Study

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The Global Financial Crisis is the subject of the study. There are three aspects
by which the subject is being studied: the causes of the crisis, the effects of the crisis,
and the solution to the crisis.
The researchers employed the Realist and the Neo-Liberalist theories in
analyzing the causes of crisis. The causes of the crisis are being looked into the state
and systems level, considering the lens through which it is viewed (whether NeoLiberal or Realist). The causes of the crisis serve as the basis for the solutions
suggested through the Neo-Liberal and Realist concepts in the systems level. Based
on the solutions suggested by the Neo-Liberal and Realist thoughts, the researchers
were able to provide solutions to the existing economic crisis, considering the
concepts and solutions as provided by the Realists and Neo-Liberalists.
Definition of Terms
1. Leverage

- Wall Street term for debt (Zakaria 24)

2. Default

- faults within the mortgage system

3. Mortgage

-a loan to finance the purchase of real

estate, usually with specified payment
periods and interest rates.
(investorwords.com)

4. Collateralized Debt Obligations

-An investment-grade security backed by

a pool of bonds, loans and other assets.
CDOs do not specialize in one type of
debt but are often non-mortgage loans or
bonds. (investopedia.com)

5. Cooperation

- association of states for benefits

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6. Mutual Benefits

- cooperation among states to achieve

growth and development

7. Hegemony

- presence of world superpower

8. Anarchy

- the absence of world government

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Chapter II
DISCUSSION AND ANALYSIS OF THE STUDY
This study includes the discussion on the background and history of the crisis,
its cause/s and effect/s. It also provides the theoretical analyses of the crisis.
Historical Overview of the Study
In the middle of 2007 to 2008, the global financial crisis started to show its
symptoms. It was during the last quarter of 2008 where the crisis escalated and its
drastic effects reverberated throughout the global economy, causing the collapse of
financial institutions and world governments bailing out their financial systems.
The global financial meltdown, which started with economic breakdown of the
United States swept throughout the global market and affected world economies
causing a ripple effect around the world. The severity of the crisis led most
economists to describe today's financial crisis as the worst economic crisis the world
has experienced since the Great Depression of 1929 and the Asian Financial Crisis of
1997.
There's no such thing as free lunch
"Americans have consumed more than they produced
and they have made up the difference by borrowing" ( Zakaria 24)
Following the economic boom with the onset of globalization, a financial
bubble economy emerged and has now reached its limits. The roots of the global
financial crisis can be traced back to the subprime mortgage crisis of the US housing
market when the housing values fell as supply increased over demands. When the
homeowners realized that their income could not suffice the payment for their housing
mortgage and that the mortgage value was bigger than the value of their houses, they
decided to abandon their payment for housing mortgages. Housing investors sell their

The Global Financial Crisis | 13

mortgages to investment banks (e.g. Lehman Brothers) who securitize the mortgages
(e.g. Collaterized Debt Obligations) and sell them to other banks and investors.
Likewise, some banks loaned to other banks to continue securitize their loans.
As the defaults rose, housing investors panicked and tried to sell Collaterized
Debt Obligations (CDOs) to other investment banks who refused to buy the
mortgages because of their standing loans to other banks. Eventually, the stock prices
of the lenders sank and bad debts and investments piled up, the housing market fell
causing ripple effects of bankruptcy to investors and banks. The crisis of credit and
leverage affected the different industries of US and caused a wide-scale economic
downturn of the US stock market which spilled over to other world economies.
How it spread worldwide
"What made America's recklessness truly dangerous is that we exported it"
(Stiglitz 27)
The United States as the primary advocate of globalization has infected the
rest of the world economy with its credit crisis. "Thanks to globalization, Wall Street
was able to sell off its toxic mortgages around the world." (Stiglitz 27) Exports kept
the US economy afloat despite the internal crisis experienced by the United States.
The internal economic crisis experienced by the US economy weakened the US dollar
and affected the European economy since the United States is the primary market of
European countries. The export market of the Europe was greatly affected by the
economic crisis of US. Struggling to save its export market, US exported its toxic
mortgages to other countries and the European financial institutions were greatly
affected. Due to bad mortgages exported, the economic crisis has spread from the
United States to Europe. Bad mortgages and investments forced European banks to go
bankrupt with national governments releasing bail outs/ recovery packages to its

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financial institutions. The banking system of European countries virtually collapsed
and countries like Iceland who are largely dependent on their financial sector fell and
cried for bail out to the International Monetary Fund (IMF) and other countries to
save its economy.
In due time, developing economies felt the knock-off repercussions of the
systemic financial crisis which has wrecked the economies of the developed states.
The fire that spread from America to Europe soon affected the developing countries
as the Third World economies were closely linked to First World economies. The
intertwined financial and economic systems of the world caused reverberating
economic downturns worldwide. The effects of the global financial crisis reached the
shores of Asian countries. Although Asian countries are believed to be decoupled
from the Western financial systems, the crisis implies that an integrated global
economy means that everyone is affected i.e. Asian countries like China, India and
Japan whose economies are strongly linked to Western economies. The products and
services produced by Asian countries are global and economic recession in the West
follows a slowdown in Asian economies and a risk of wide-scale unemployment.
The Bail Out Plan
The severe effects of the financial crisis are felt worldwide and national
governments are attempting to save their economies through releasing stimulus
packages. A series of economic alternatives were laid down the table to offset the
drastic effects of the crisis which include "increase borrowing, reducing interest rates,
reducing taxes, and spend on public works such as infrastructure. (Anup Shah,
http://www.globalissues.org/article/768/global-financial-crisis). The total amount of
bail out plans of governments increased and some nations opted for the
nationalization of their banks. According to Anup Shah, the US has laid its US$700

The Global Financial Crisis | 15

billion bail out plan however banks were still hesitant to lend money hence the US
Federal government announced an additional US$800 billion stimulus package in
November 2008 which was allocated to "buy mortgage-backed securities and
unfreeze the consumer credit market". Bloomberg reported that the total US stimulus
package has reached US$9.7 trillion by February 2009.
Similarly, European countries have released large amounts of bail out
packages to its financial institutions. Tax cuts were also implemented to help the
economy cope with the global economic crisis. States like South Korea, China, Japan
and England have reduced their interest rates. International banking institutions like
the International Monetary Fund and the World Bank lent large amounts of economic
resiliency plans to help struggling economies affected by the global financial crisis.
Causes and Effects of the Global Financial Crisis
"The United States has gotten the wake-up call from hell.
But it could be a blessing in disguise" (Zakaria 25)
Excessive leveraging of investments and covering pile of debts through
restructuring them into loan securities (Collateralized Debt Obligations) as a way to
disguise the costs have been considered the heart of the global financial crisis. The
failure of the banking system and a deregulated financial system has brought the
global economy to the dilemma we are facing right now. An economic crisis which
started in the United States spread like an epidemic infecting the rest of the world
with its toxic investments and bad policy regulation practices. The global financial
crisis revealed the dangers of an integrated and closely intertwined global economy
where an economic downturn of a superpower like the United States will likely affect
the rest of the world.

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"The crisis exposed fundamental weaknesses in financial systems worldwide,
and despite coordinated easing of monetary policy by governments, trillions of dollars
in intervention by central banks and governments, and large fiscal stimulus packages,
the crisis seems far from over." (Nonta, 2009: 2)
The global financial crisis is largely attributed to the credit crunch. The
pervasive effects of the economic crisis have led to the downfall of markets and world
economies. The global financial crisis which first affected the industrialized countries
spread quickly to emerging markets and developing countries. Stock markets
plummeted and some of the world's established banks and investment companies
collapsed and called for bail out. Companies called for bankruptcy or were either
rescued through bail out plans. The flow of credit froze and consumer spending
shrank. In an inextricable global economy, enmeshed in a web of social, economic
and political connections, exclusion from the global economic crisis is inconceivable.
A crisis which started in the developed countries has plunged other world economies,
one after another, into a deep recession.
Discussion and Analysis
This study aims to analyze the problem in a systems and state level. However,
the researchers see the impossibility of detaching one from the other. In analyzing the
systems level, it is inevitable that state level be considered in the analysis, and vice
versa, hence, the researchers has presented an integrative and intertwined analysis of
the state actor and the system where it belongs.
The Neo-Liberal Perspective
The Neo-Liberal school of thought believes on the concepts of cooperation
and integration, and on a high optimism for a world system. It views cooperation
based on mutual benefits as the means to minimize the possibility of conflict and/or

The Global Financial Crisis | 17

the preservation of peace in the world system. Integration, according to the NeoLiberalists, is a ladder to growth and development.
This school of thought is realized through the capitalist economic system and
is further promoted in the world system through globalization manifested by the
increased economic integration, proliferation of information technologies and the
free-flow of goods and services notwithstanding territorial boundaries among states.
The Global Financial Crisis, born on the American coasts, was transmitted to
the different parts of the globe because of the concepts of capitalism and
globalization. United States exported its toxic mortgages to its foreign markets, the
only means of the federal state to survive the domestic crisis.
In light of the neo-liberalist thought, the problem of the global financial crisis
is attributed not to the nature of the economic system which is coherent with the
neoliberal values of economic integration and liberalization, but to the elements that
can be detached from the system i.e. the financial sector. Neoliberals claim that the
problem of the global financial crisis is basically linked with the internal flaws in the
financial sector e.g. excessive leveraging of investments and covering pile of debts
through restructuring them into loan securities (Collateralized Debt Obligations) as a
way to disguise the costs.
Given the existing internal flaws of the financial sector and putting into
consideration the neoliberal characteristic of the economy of US and its surroundings,
the problem is likely to escalate on a global level as manifested by the recent
developments of the global economic crisis. Bad investments and mortgages
restructured into loan securities which were exported from the United States to its
foreign markets explain further the consequential effects of the crisis abroad.

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As a supplement, Stefan Melnik, in his personal discussion contribution,
provides that:
The current crisis does not represent a crisis for liberalism as anti-liberals would
like. It is a crisis not of the free market or of capitalism as such, but of the
financial sector. The crisis is best tackled by reforming the financial sector in
accordance with market principles. (Melnik, 1).
Neo-liberals proceed by proposing the maintenance of the neo-liberal economic
system but with the inducement of reforms addressing the problems mentioned within the
financial system. Furthermore, neo-liberals suggest a continuous flow of money and boost
the economy.
In the systems level, neo-liberals will most likely propose for a continued and
reinvigorated cooperation among states. In a global scale, the strengthening of
international organizations is essential in the promotion of international cooperation.
International cooperation identifies the problems and solutions where the solutions are
transformed as international norms which set the patterns and trends in the international
system. International organizations highlight these norms in its core objective of solving
the problems. To illustrate:

Figure 2. The Neo-Liberal Solution

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The Realist Perspective
The Realist school of thought espouses the concepts of power urge, power
position, and anarchy in the international system.
Realists would argue that states should pursue national interests in its relationship
with other international actors. Realism is highly pessimistic of a world order; hence, an
anarchic structure in world affairs is a situation that state actors have to deal with.
Given the anarchic structure of world systems, power relations is the best means
to achieve national interest. Power position becomes more than just an end of the states,
but it is employed as a means for survival and promotion of secondary interests including,
but not limited to, security and the maintenance of power. National interest becomes the
morality that statesmen follow which is entirely different from the morality that
individuals think of.
The global crisis, in the lenses of the realists, is brought about by the
preponderance of neo-liberal ideas that results to a domino-effect among states.
On a state level, deregulation by the government and addiction to noninterventionist economic policies of the government has led to an uncontrollable
accumulation of debt and mortgage that, as pointed out earlier, resulted to the domestic
crisis felt by the United States of America.
The American society faces issues of over consumerism, meaning, consuming
more than what one can afford. A shopper purchases through credit and this has resulted
to a society that has accumulated material belongings by debt.
The neo-liberal concept of a world economy has readily transferred the burden of
the American society to a global society following the paths of cooperation, integration
and interdependence. The global financial crisis revealed the repercussions of an

The Global Financial Crisis | 20

integrated and closely interlinked global economy where an economic downturn of a
superpower like the United States will likely affect the rest of the world.
It is highly realist when one argues that the US is improving its power position in
the international scene. The level of influence it casts on individual state actors outside of
its realms, not to mention the obvious dependence by developing countries to the US,
manifests the level of power the US have over a significant number of states. Pfaltzgraff
and Dougherty quoted Nicholas Spykman saying that states must make the preservation
or improvement of their power position a principal objective of their foreign policy.
(Dougherty and Pfaltzgraff, 1971).
The US Government, and its foreign cohorts, has espoused Globalization in aide
of having the world at the palm of their hands. The US Government has played both the
game of the Realist and the Neo-Liberal power position and globalization.
However, the neo-liberal means (Globalization) of US to achieve their realist ends
(advantageous power position) backfired and has threatened its status as a world power.
The threat to its power position has developed from its own creation. The American
Dominance is being put to a test by the crisis and its power position, juxtaposed with
other relatively powerful and emerging powerful states, is shaky. The realist will be quick
to note that the US created a monster that might spell its destruction.
On the state level (outside of the US), there is an observable degree of
dependence by the other states to US. This is manifested by how a significant number of
states have felt the reverberating effects of the Global Financial Crisis.
European countries are reported to have released large amounts of bail out
packages to aid its ailing financial institutions. Asian countries experience problems of
continued unemployment.

The Global Financial Crisis | 21

These are manifestations of the clear power position the US has acquired in the
past decades / centuries and the dependence or interdependence that states exercise in the
international scene. The weakness in the US economy has reached farther than as was
expected.
Spykman contends that states exist because they are strong or have other states
protecting them. Consequently, weak states, or those states that depend on the protection
of mother states would experience a plunged in their status of existence the moment the
mother states experience a predicament as big as a financial crisis.
The only way for realists to solve this problem is paradigm shift. There is a need
to rethink the neo-liberal non-interventionist economic system for the states, including
USA. At the onslaught of globalization, one cannot help but agree to the fact that it is
hard and suicidal to abruptly pull out of the system of free trade especially in the midst of
a crisis. Change should not be abrupt; rather, its injection should be slow and sure.
States should try to come up with a more regulated economy, more transparent in
dealing with debts.
States should become less dependent to other states. Low economic dependence
should be advocated by states to minimize the effect of bigger states should crisis occur.
Further, states should learn to exert national interest and boost confidence in
dealing with another state. Building a superpower to opposite existing superpower/s is
helpful in promoting balance of power. Through this, one sees the escape from a world
implicitly ruled by a world hegemon.
The interdependence among states as explained by globalization had really good
effects in the day-to-day activities in trade. However, the emergence of this crisis makes
states rethink their strategy. One cannot afford to be engaged in a system where there is a
lot to gain but everything to lose. The rule in realist international politics is for the state to

The Global Financial Crisis | 22

assert ones national interest and power position. Its all about a multiple powers to offset
power tripping by one state and its dire effects on the other.
Practically, cutting ties with the world in terms of economic cooperation is not a
good option especially when one is still hurt with the crisis. The state needs to recuperate
and reinvigorate its status and eventually rethink the neo-liberal positioning of its
economic and international system.
However, one asks, how does a state recuperate in the language of the realists?
Solution
The neo-liberals would surely espouse the strengthening of an international
organization to espouse the norms that will help the problem. Realists on the other hand
would discourage such for the very reason that it might just exacerbate the crisis.
The researchers find it hard to pinpoint a specific, clear cut theory for the solution
to this problem. However, they have discovered a lot of things.
First, the world system where this economic crisis operates is highly neo-liberal in
structure. This opens up an analysis that there is a problem with the statues quo, ergo, one
would necessarily and normally change it. However, neo-liberals argue that the problem
does not lie on the system itself but with elements that can be detached from the neoliberal structure. The problem lies with how the people inside the system employed the
concept of debt, mortgage, and materialistic consumerism.
Second, the realists will always underscore the problem with the attachment to a
cooperative system such as that espoused by neo-liberals. However, one sees that
globalization has become the means for the US to achieve a powerful position, to
maintain it and to apply that power. Therefore, in the realist school of though, US is
turning out to be the best student.

The Global Financial Crisis | 23

Third, the researchers have perfectly seen how there is no presence of a clear cut
school of thought in international politics. One can exist with the other, and for the case
of the US way of maintaining superpower status, one (neo-liberal) can support and
materialize the objective of the other (realist).
The researchers now reach to a solution that is devoid of a paradigm hegemon.
The researchers aim to establish a solution will be based on pragmatism less on ideology.
But this is not to say that ideology is absent. There is just that need to harmoniously bind
both the realist and the neo-liberal.
The global financial crisis has exposed the world to the dangers of
unfettered markets brought about by increased global integration of economies and the
slow erosion of national boundaries. The destructive effects of the global financial crisis
which caused ripple of repercussions spread like an epidemic affecting almost all states
involved in the globalized economic system.
Neo-liberals suggest for the maintenance of the system and the correction of the
flaws within the system i.e. enhanced cooperation among states highlighting the role of
international organizations. Realists, on the other hand, advocate for the re-thinking of the
non-interventionist policies of the United States and establishment of a better regulated
and transparent economy in the international system with less economic dependence
among states.
The researchers have come up with the solution of a more regulated financial
system underscoring the role of the states to provide stimulus packages to offset the
effects of the economic crisis and the promotion of less dependence among states
whereby state actors reinvigorate their stand in promoting national interest.
In the state level, a more regulated financial system would help in the recovery of
affected states from the global economic crisis. As the realists pointed out, the problem of

The Global Financial Crisis | 24

the crisis lie in the deregulated nature of the economy (i.e. US market economy). Joseph
Stiglitz, recommends possible solutions to fix the problem of the global financial crisis.
He mentioned that states should "recapitalize the banks and provide new money to make
up for the losses they incurred on their bad loans". (Stiglitz 28) The researchers found this
solution as essential to solving the problem of the crisis since it will help in the
recuperation of the banks who have suffered great losses due to the economic crisis. The
provision of stimulus package of the states to its ailing financial institutions would help in
the incremental process of reviving the economy and stabilizing the economy. Joseph
Stiglitz, also recommends for the passage of a stimulus package which would "increase in
investments in infrastructure and technology" (Stiglitz 28). Increased in investments in
technology and infrastructure would promote future capital ventures that will enhance the
economy in the long run hence benefitting the state.
These solutions are essentially important especially for the US market economy to
recover and fix the problems of its financial system. The global financial crisis sent an
implication of the possible decline of US' economic and political dominance in the world
stage. For the US to remain as a superpower and a strong force in the international stage,
it needs to rethink its economic policies and correct the flaws of its market system which
has dragged the whole world into this mess.
In the system level, promoting less dependence among states would help avoid
future problems that can affect states at the global scale. In the events of world problems
like the global financial crisis, the degree of effect to the states would be less and
minimize the ripple effects of the problem. Nevertheless, the researchers recognize the
existence of economic interdependence in a globalized world.

The Global Financial Crisis | 25

Chapter 3
SYNTHESIS, CONCLUSION AND RECOMMENDATIONS
This chapter discusses the integrative summary of the study. It includes the
synthesis of the analysis of the crisis through the theories of Neo-Liberalism and
Realism. Further, the chapter provides the conclusion of the study.
Synthesis
The researchers discussed the background of the crisis. The roots of the global
financial crisis can be traced back to the subprime mortgage crisis of the US housing
market when the housing values fell as supply increased over demands. It reached the
global scale
Exports kept the US economy afloat despite the internal crisis experienced by
the United States. The internal economic crisis experienced by the US economy
weakened the US dollar and affected the European economy since the United States is
the primary market of European countries. The intertwined financial and economic
systems of the world caused reverberating economic downturns worldwide.
The analysis of the crisis can be synthesized as follows:
Table 1. Cause-Solution Matrix

Problem
Neo-Liberal

Solution

-on the state level, internal -maintain the

economic

flaws within the financial system but correct the

system not with the neo- identified

flaws

e.g.

liberal characteristic of the excessive

leveraging

of

economy.
-these

investments and covering

flaws

were pile

of

debts

magnified in the system restructuring

through

them

into

The Global Financial Crisis | 26

level.

loan

securities

(Collateralized

Debt

Obligations) as a way to
disguise the costs.
-on

systems

enhanced

level,

cooperation

among states, creation of

an economic norm.
Realist

-the neo-liberal nature of -on the states level, rethink

the economy.

the

non-interventionist

-on the state level, non- economic policy.

interventionist,

-better

deregulated,

transparent economy.

nontransparent

system of states in terms of

-on the system level, the economic.

interdependent,

characteristic

and

economic -rethink the interdependent

system.

cooperative,

regulated

globalized
of

the

economic world system.

The Global Financial Crisis | 27

Conclusion
This study is aimed at understanding the Global Financial Crisis, its causes,
effects and possible solutions of this crisis through the Neo-Liberal and Realist
Theories.
The researchers, in their analysis of the study, have identified three striking
features of the crisis:
First, the world system is a conceived materialization of the neo-liberal concepts
of interdependence, cooperation and globalization. These neo-liberals claim that the
problem of the crisis is not founded on neo-liberal principles but on the flaws of
detachable elements such as financial sector, mortgages and debts.
Second, the realists will always underscore the problem with the attachment to a
cooperative system such as that espoused by neo-liberals.
Third, the researchers have perfectly seen how there is no presence of a clear cut
school of thought in international politics. One can exist with the other, and for the case
of the US way of maintaining superpower status, one (neo-liberal) can support and
materialize the objective of the other (realist).
These ideas prompted the researchers to identify solutions that are of both realist
and neo-liberal persuasion.
On the state level, a more regulated and transparent economy is required to help
in the recovery of economies from the global financial crisis. States should employ
stimulus packages to restart the flow of capital, thus, enhancing the economy. Essentially,
there is a need to rethink the existing economic policies of the United States for it to
maintain its status as a superpower in the international stage.
On the system level, less dependence among states should be employed in order
to minimize the propensity of greater damages should the crisis bloom to a more mature

The Global Financial Crisis | 28

level. The researchers recognize the existing neo-liberal nature of the economic system;
hence, the solution is limited to decreasing dependence so as to minimize the ripple
effects of the problem.
One can easily point out that the solutions provided by the researchers are not
devoid of neo-liberal and realist concepts. This means that in both form and structure,
realism and neo-liberalism can be seen.

Recommendations
After the researchers concluded and analyzed the study, the following
recommendations were identified:
1. Analysis of the crisis through other theories of the international system
2. Deepening of the analysis to provide proactive measures to avoid future crises
3. Analysis of the effects of the crisis on other states and transboundary entities

The Global Financial Crisis | 29

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Stiglitz, Joseph. The Way Out. How the Financial Crisis happened, and how it must
be fixed. Time. 27 October 2008. 26-28
Zakaria, Fareed. There is a Silver Lining. Newsweek. 20 October 2008. 23-25.

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