Global Financial Crises

11 Key excerpts on "Global Financial Crises"

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  Globalization Revisited

  • Grahame Thompson(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  4 Globalization, finance and the ‘crisis’ A critical assessment Introduction This chapter signals a move away from broadly geopolitical matters concerning globalization to concentrate upon more specific socio-economic issues associated with international financial and economic relationships, particularly in a post-crisis world. But this and the following three chapters do not offer yet another full account of the ‘financial crisis and its aftermath’. Rather they approach this through an examination of whether such a crisis should, in the first instance, be viewed as a ‘global’ one, and then to assess the political response to this in terms of reform of (in particular) the financial system, governance initiatives, economic policy consequences, etc. Measuring the extent of globalization as a general phenomenon is multifaceted and complicated (OECD 2013, Vujakovic n.d.). One of the most widely referred to indicators is shown in Figure 4.1. This comprises an index compiled by the Swiss Institute of Technology, which breaks globalization down into several separate dimensions – social, political and economic – as well as showing an overall aggregated measure. These dimensions are themselves the result of aggregating several separate variables; weighting them and rendering the results into a composite index (see KOF 2013: Appendix, ‘Variables and weights’). As is evident, using these measures there can be seen a steady rise in the extent of globalization from 1980 until the economic crisis of 2007–8 – at which point growth slowed and slightly reversed (we return to this slowdown/reversal later). A similar picture emerges from Figure 4.2, Figure 4.3 and Figure 4.4, which deal with three of the main elements of economic globalization: trade, investment (in this case, FDI) and a measure of financial transactions. Trade openness is represented by the ratio of international trade to global GDP, while FDI is shown in both flow and stock terms, also relative to global GDP

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  Social Changes in a Global World

  • Ulrike Schuerkens, Author(Authors)
  • 2017(Publication Date)
  • SAGE Publications Ltd

    (Publisher)

  There is a further divergence of the two notions: the outcomes of crises and conflicts are different. On the one side, crises are resolved by asking for the coherence of social, cultural, and economic systems (Galtung, 1984); they are similar to the decisions of politicians at the apogee of the recent global financial crisis. These men and women tried to cope with the crisis by lending public money to banks (Krier, 2009) so that a few months later, the banks could begin to repay these credits: the continued functioning of the neoliberal economic system was ensured. On the other side, conflicts reveal structural contradictions of the whole system (e.g. the 1989 system break in Eastern Europe), which can only be resolved by a structural change of the system or, as Touraine emphasized, by a ‘revolution.’ A crisis lets ideas and social beliefs on given topics with their weak and strong sides appear. Today, global crises are thus periodic phenomena based no longer on only endogenous factors but on global forces and structures (see Gross, 2007; Schuerkens, 2009).

  The Global Communication Network and the Financial Crisis

  The problem with the recent financial crisis was that the global communication network was no longer controlled by responsible people, but by an irrational belief in numbers. Journalists gave the mass media ceaseless comments, so that the activities and reactions of bankers on the stock markets were published as news around the clock. The future after the crisis was and is still uncertain, and the reactions of the employees of the financial sector are still difficult to predict, such as in the recent (spring 2016) financial situation in China that has shown high debt levels of local authorities and a devaluation of the Chinese currency, or the financial crisis in emerging markets in early 2014. In order to find a solution, politics and media have realized that they cannot remain passive when bankers act irrationally. The basic rules of the complex neoliberal socio-economic system must therefore be understood, so that a global crash with an uncertain economic future can be prevented.

  Some Empirical Evidence of the Recent Financial Crisis in Various Regions of the World

  First of all, the recent global crisis was not only a financial, but also a structural crisis. This process meant the end of a model: that of the powerful and insatiable consumer, that of the saver who is confident in the financial system, and that of the producer who believes resources are inexhaustible. Therefore, one should not confuse a moment of the cycle with a possible end of the crisis. In fact, globalization means that every economy in the world is concerned with international trade. Globalization (transnational flows of goods, people, and cultural elements) has contributed to the global spread of the crisis.

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  Governing Global Finance

  The Evolution and Reform of the International Financial Architecture

  • Anthony Elson(Author)
  • 2011(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  CHAPTER 7 Financial Globalization and the Onset of the Global Financial Crisis of 2008–9 T his chapter focuses on the antecedents and causes of the current financial crisis that erupted in the United States in mid-2007 and was then transformed into a global financial and economic crisis in September 2008. After the cascade of emerging market finan- cial crises during 1994–2002 and the events surrounding the terrorist attacks of September 11, 2001, there was a period of relative calm in international financial markets. In this environment, a new wave of financial globalization unfolded that would intensify financial linkages among the advanced countries, as well as those between the advanced and emerging market economies. These linkages spanned the entire spectrum of financial instru- ments, but were particularly strong in the case of banking system flows and trade in derivatives and structured financial products or securi- tized debt instruments. This period was also characterized by a sharp increase in the size of gross capital flows among the advanced countries, which represented a process of international portfolio diversification on the part of corporations, financial institutions and households, which was particularly dramatic in the case of the United States (figure 7.1). The development of the single financial market in the European Union beginning in 1999 unleashed a strong growth in cross-border financial flows in that region. On a global basis, cross-border capital flows rose from US$3 trillion in 2002 (around 8 percent of global GDP) to US$11 trillion in 2007 (21 percent of global GDP), of which more than half in the latter year were in the form of cross-border lending and deposits by banks, largely for maturities of less than one year. 1

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  Financial Globalization

  Growth, Integration, Innovation and Crisis

  • D. Das(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  11. Summary and conclusions Three decades of commendable progress in financial globalization was brusquely stifled by the current financial crisis and recession. Its back- ground was partly caused by the macroeconomic, financial and pay- ments imbalances that steadily grew in the global economy over some ten years before the outbreak of the crisis. Other contributing causal fac- tors included the lowering of lending standards in the mortgage and corporate buy-out markets, over two decades of deregulation in a large number of financial markets, failure of regulatory bodies and supervis- ing agencies to understand the potential risks, excessive use of novel and untested financial instruments, the short-term mentality of banks and other financial institutions – and the incompetence and venality of bankers and financers running them –, the failure of credit-rating agencies to play their intended role and thus in effect fueling the hous- ing bubble, and the systemic mis-pricing of assets and subsidization of risk-taking by governments. Some even believed that shortcom- ings and mistakes in the financial system were not to be blamed for the global financial crisis but it was more of a problem of capitalism per se. Freezing of credit flows during the crisis affected the real economy. It spread globally, causing a spike in unemployment rates and the failure of business firms. In addition, spreads on inter-bank loans and what banks expected pay to central banks jumped to unprecedented levels. 162 Financial Globalization There was a general loss of confidence in the financial system. The crisis caused a sizable loss in global economic welfare. It occurred through asset market collapse and global output and employment losses. Both direct and indirect losses in the global economy were huge. Also, the budget deficits and real value of government debt tended to explode.

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  The Evidence and Impact of Financial Globalization

  • (Author)
  • 2012(Publication Date)
  • Academic Press

    (Publisher)

  Chapter 1

  Financial Globalization and CrisesOverview

  T. Beck* , S. Claessens† and S.L. Schmukler‡

  * CentER and European Banking Center, Tilburg University, The Netherlands and CEPR, London, UK

  † International Monetary Fund, Washington DC, USA, University of Amsterdam, Amsterdam, The Netherlands, and CEPR, London, UK

  ‡ The World Bank, Washington DC, USA

  Outline

  Introduction Evidence on Financial Globalization Forces Behind Globalization Effects of Financial Globalization Monetary and Exchange Rate Policy under Financial Globalization Crises Final Words Acknowledgment References

  Introduction

  Financial globalization, the integration of countries with the global financial system, has increased substantially since the 1970s and particularly with more force since the 1990s. But it is hardly a new phenomenon. In fact, the gold standard period of 1880–1914 saw a major wave of financial globalization, as cross-border capital flows surged, incorporating countries in the center and the periphery at that time into a worldwide network of finance and investment. With the advent of World War I, global growth halted and international financial integration was disrupted as barriers were erected, with minimal capital movements between 1914 and 1945. Although domestic financial markets remained heavily regulated and controls were typically imposed on capital flows, a slow reconstruction of the world financial system took place during the Bretton Woods era of 1945–71. It was not until the late 1970s, however, that the world witnessed the beginning of a new wave of international financial integration, reflecting the dismantling of capital controls, the deregulation of domestic financial systems, and a technological revolution, not just in information and telecommunications, but also in financial product engineering. Newly emerging markets joined this wave of financial globalization with vigor starting in the latter part of the 1980s and mostly in the 1990s.

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  Road to Recovery

  Singapore's Journey through the Global Crisis

  • Sanchita Basu Das(Author)
  • 2010(Publication Date)
  • ISEAS Publishing

    (Publisher)

  2 Global Financial and Economic Crisis: Causes, Impact, and Policy Response The global financial turmoil surfaced in the middle of 2007 as a result of defaults of sub-prime mortgage loans in the United States. It was blown into an unprecedented financial crisis in 2008 when a series of major financial institutions in the United States and Europe started to fail. Around the world stock markets fell, financial institutions were bought out, and massive coordinated actions by the authorities were taken to inject liquidity into money markets and restore confidence in the financial systems. Strong calls were made at the Group of Twenty (G-20) 1 level for a new financial system to prevent future financial crises and to maintain global financial stability. As the U.S. sub-prime mortgage crisis spread to the rest of the U.S. financial system and other industrialized-country financial markets, a significant slowdown was observed in economic growth of the U.S., Europe, and Japan. The financial sector crisis subsequently moved to the real economy. Although Asian financial institutionsʼ exposure to sub-prime-related products was limited, the impact was felt through capital flow and trade channels. Global Financial and Economic Crisis 17 Accordingly, the IMF in its World Economic Outlook (WEO) Update publication (January 2010) placed global growth at 3.0 per cent in 2008 and a contraction of –0.8 per cent in 2009. This represented a significant slide from an economic growth of 5.0 per cent observed in 2006–7. The advanced economies were in or close to recession in the second half of 2008 and early 2009, and showed some signs of recovery later in 2009. Growth in most emerging and developing economies was below trend, although key emerging economies in Asia, like China and India, showed higher resiliency. Genesis of the Global Financial Crisis The global financial crisis was triggered in August 2007 when the U.S. sub-prime loan defaults began to rise and foreclosures increased.

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  Macroeconomics and Development

  • Mario Damill, Martín Rapetti, Guillermo Rozenwurcel(Authors)
  • 2016(Publication Date)
  • Columbia University Press

    (Publisher)

  P A R T 4 Finance and Crises Capitalism has a considerable capacity for creating material wealth and spurring technical innovations, but this process is often far from smooth. In fact, it has been shown historically (and continues to be shown) that wealth creation often comes along with inequality, booms, recessions, and recurrent financial crises. Financial crises, a theme of great interest to Roberto Frenkel throughout his professional life, are costly in several respects. 1 They stop the normal flow of credit (the lifeblood of any economic system) and deepen recessions, creating unemployment, reducing real wages, and leading to wealth destruction. Economic and financial crises were behind the rise of nationalism and xenophobia in Europe in the 1920s and 1930s and accompanied the turn to authoritarianism in Latin America in the 1970s and 1980s. Today, in crisis-ridden Europe, we see again the emergence of xenophobic parties trying to mobilize in their favor the social discontent and frustration associated with high unem-ployment and diminished expectations. The financial crisis of 2008 and 2009 in the United States and Europe has challenged the view that the world is divided between a financially stable core (the mature capitalist economies of North America and Europe) and a chronically unstable periphery (developing countries in Latin America, Africa, and Asia). This time the crisis also hit the core and its closer periphery formed by countries such as Iceland, Ireland, Portugal, Greece, Spain, and Italy, while developing countries have con-tinued to grow at respectable rates after 2008. The recent spate of financial crises in advanced capitalist countries is, in a sense, also a crisis of economic theory built around the assumption of C H A P T E R 1 3 Capitalism and Financial Crises A LONG-TERM PERSPECTIVE Andrés Solimano

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  Understanding Financial Stability

  • Indranarain Ramlall(Author)
  • 2018(Publication Date)
  • Emerald Publishing Limited

    (Publisher)

  Chapter 6

  Financial Crises

  6.1. Key Features of A Crisis

  • Economic and financial crises tend to be recurrent in nature. This implies that the same phenomena are at work to constitute the genesis of a crisis.
  • Nearly, all crises exhibit three common elements. First, there is distrust in the financial system or lack of confidence in the financial system. Second, there are spillover or contagion effects such as in the case of Allen and Gale (2009) who base themselves on the contagious transmission of bank difficulties. Third, there are network effects based on endogenous interactions among different financial institutions.
  • A crisis is usually financial in first stage to then entangle the real economy in the second stage. This can be corroborated by the evolution of the global financial crisis in 2007 into an economic crisis and thereafter into a debt crisis.
  • Crisis often occurs because market players assume that EMH (all relevant information is automatically reflected in the price) holds while in practice it is hard to see that assets are properly priced – a clear instance of this appears during the US subprime crisis.
  • Humans have a strong tendency to herd so that deleveraging of assets often witnesses a highly painful adjustment in the financial system, all geared towards an unending downward spiral in asset prices.
  • Crises are often caused by two events, a euphoria phase and a de-illusion stage. Under the euphoria stage, there are strong incentives to push forward asset prices while in the de-illusion stage, investors began to realise of over-valued assets which then lead to massive sell-offs and drastic asset price declines. The leverage cycle (Geneakopolous, 2009) contributes to higher asset prices. When the de-illusion stage manifested in the case of the US subprime crisis, it led to negative equity holdings by borrowers who had no choice but to deliberately default on their home loans.
  • Political forces can also contribute to crises. For instance, in the case of the US subprime crisis, there were strong political incentives to make each household own his home.

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  International Development

  Issues and Challenges

  • Damien Kingsbury, John McKay, Janet Hunt(Authors)
  • 2016(Publication Date)
  • Red Globe Press

    (Publisher)

  Yet it is these imbalances in the global economy – caused by high levels of debt and huge trade and budget deficits in the West and equally large foreign exchange reserves, savings and trade surpluses in some key developing economies – that are seen by many as the fundamental cause of the GFC (see, for exam-ple, Eichengreen 2007 ; Roubini and Mihm 2010 ; Pettis 2013 ). This theme is explored in more detail in the next section, which examines the role of Asia in the GFC and the implications of the crisis for the future of this dynamic region. Asia and the global financial crisis We have already seen in Chapter 2 that the dramatic rates of growth achieved in a number of East Asian countries from the 1960s onwards posed a major challenge to analysts of the processes of development, and opinions varied widely as to the basic causes of this economic suc-cess. Similarly, the catastrophic crisis that hit the region in 1997 also gave rise to widely varying theories about the causes and implications of these events. Some commentators have argued that the causes of the Asian crisis were basically internal and resulted from the growing con-tradictions and inefficiencies that had emerged within the economic and political systems of these countries. Their policy response called for fun-damental reforms of corporate governance, economic policy-making, the political systems and the relationships between the government and the private sector. By contrast, other researchers have suggested that, while there were certainly some internal shortcomings, the basic causes of the crisis were external, relating particularly to the problems in the structure of the international financial system. Their policy responses centred on the need for a new architecture of regulations governing these global flows of funds.

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  Global Governance and Financial Crises

  • Meghnad Desai, Yahia Said, Meghnad Desai, Yahia Said(Authors)
  • 2003(Publication Date)
  • Routledge

    (Publisher)

  2 Financial crises and global governance Meghnad Desai Introduction There have been financial crises for 175 years, at least. At first they had national origin and reach but even in the nineteenth century their shocks were transmitted across countries. By the end of that century, the TransAtlantic cable had been laid and as a result, Britain, France, Holland, Germany and the USA had interlinked financial markets, which moved in parallel, especially at times of crises. At the end of the twentieth century, the Asian crisis of the summer of 1997 brought us back to that world. That crisis originated in Thailand and after spreading across Indonesia, Malaysia, South Korea, leapt across to Russia, threatened to hit Brazil and caused the spectacular troubles 1 at Long-Term Capital Management (LTCM) in the summer of 1998. That was the first crisis of the recent phase of globalisation. It led in its turn to demands for ‘new financial architecture’ and much activity by the IMF/World Bank and G7 leaders in the summer of 1998 was directed towards coping with the global crisis. 2 As it happened (and this is my reading of the events of October 1998), a small number of interest rate cuts by the Federal Reserve (Fed) calmed the markets and resolved the crisis. While some new institutions such as the Forum on Financial Stability were introduced, the global financial system has escaped any drastic structural adjustment or reform. In the new century, stock markets in G7 countries again witnessed a prolonged decline with widespread failures in the dot.com sector. Events of September 11, 2001 had less impact than the news of accounting malpractice at Enron and World.com. While during the 1990s there was talk of a new paradigm and abolition of the business cycle (as indeed happens in every long boom), by 2002 there was a widespread fear of a double-dip recession in the USA or even a depression

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  Financial Globalization and the Emerging Market Economy

  • Dilip K. Das(Author)
  • 2004(Publication Date)
  • Routledge

    (Publisher)

  6 Financial globalization and the contagion effect  

  1 Introduction

  To be sure, a serious downside of financial globalization is the so-called “contagion effect.” The communicable nature of recent financial and currency crises has been the center of economic discussions among academics as well as in policy circles. The contagion effect implies that a crisis generated in one emerging market economy is transmitted to another seemingly unrelated emerging market, if the economy is open and integrated with the global economy. In fact, the crisis may be transmitted to the whole region, even spread globally. For instance, the crisis and sovereign default in the Russian Federation in August 1998 triggered a pervasive widening of credit spreads and generalized risk aversion in the financial markets.1 It also triggered fragilities in German banks and helped to provoke Long-Term Capital Market's (LTCM's) near-bankruptcy in September 1998, before spreading its impact around the globe.2 By the end of 1998, as noted above, the impact of the Russian and LTCM crises combined to increase substantially the volatility in the global securities markets. A reassessment of credit and sovereign risks during this period led to large jumps in credit and liquidity spreads as well as in risk premia in both emerging market and industrial economies. This episode of financial distress has special significance because of its global ramifications (BIS, 1999).3 Following the Russian crisis and default, many currency markets became inordinately volatile and global security markets seized-up (Loisel and Martin, 2001).

  Furthermore, a crisis situation may also be initially generated in one region and affect economies of different sizes and structures in other regions, even around the globe. As seen in Chapter 2 , with the progress in financial globalization there was a rapid expansion of international liquidity and an enormous increase in liquid assets available to participants in the global financial markets. There was an explosion of global capital flows in the early 1990s in the emerging market economies. However, this turned into a stampede of investors out of these very high-performing emerging market economies in 1997 (see Table 2.1

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