The Global Financial Crisis in Retrospect

Transcription

1 The Global Financial Crisis in Retrospect

2 Anthony Elson The Global Financial Crisis in Retrospect Evolution, Resolution, and Lessons for Prevention

3 Anthony Elson Chevy Chase, Maryland, USA ISBN ISBN (ebook) DOI / Library of Congress Control Number: The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Cover design by Tom Howey Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Nature America Inc. The registered company address is: 1 New York Plaza, New York, NY 10004, U.S.A.

4 In Memoriam Georgina Emily Mackinnon Robert Truscott Elson

5 Preface and Acknowledgments In certain respects, this book is a sequel to my earlier book Governing Global Finance: The Evolution and Reform of the International Financial Architecture, which was published by Palgrave Macmillan in That book examined the global financial crisis of in the context of the history of financial crises in the post-wwii era and the efforts by governments since 1944 to establish and maintain a stable global monetary and financial order free of major financial disruptions. This book focuses more directly on the causes and consequences of the global financial crisis with the benefit of additional hindsight and the efforts of scholars to explain and understand the key factors behind the crisis and the special challenges it has posed for policy-makers in dealing with its after-effects. In this connection, it is remarkable to realize how little weight was given to the possibility of a global financial crisis arising from the credit bubbles in housing finance in a number of advanced countries and the extent of improvisation and experimentation that has been required in policy-making to deal with its shockwaves. The slow pace of global economic recovery, the persistent threat of secular stagnation and the significant distance of the major central banks from a normalized monetary policy stance provide dramatic testimony to the enduring negative effects of the crisis and the still uncertain timing of a full recovery. In this context, I provide an assessment, which was absent in the previous book, of the influence of mainstream macroeconomic thinking in (unintentionally) setting the groundwork for the possibility of the financial crisis and its lack of relevance for policy formulation and implementation in the period since. Given the international dimensions of the vii

6 viii PREFACE AND ACKNOWLEDGMENTS financial crisis, I also examine the defects in the international financial architecture in terms of its role in crisis prevention in the period leading up to the crisis, as well as the more positive role it has played in crisis management since late One entirely new perspective raised in this book is the role of the financial sector in exacerbating the problems of income and wealth inequality in the United States and other advanced countries prior to and since the crisis. Before the crisis, the growing problem of inequality was not a major concern of macroeconomic policy-makers and academics, but since the crisis it has become an important topic of public debate. Given the enormous impact of the global financial crisis and the continuing problems of dealing with its after-effects, issues of reform from an intellectual, institutional and policy perspective have been a major topic of concern in academic and policy debates. Accordingly, this book attempts to address some of the issues relevant to this debate in an effort to contribute useful ideas. Of particular concern to me as an economist have been the reform of financial regulation, the reform of the international financial architecture and reforms in the theory and practice of macroeconomic policy. These are big topics and have been and will continue to be in the years ahead the focus of important academic and policy debate. Clearly, the emphasis they have been given in the period since the crisis represents one of its major legacies. In this book, my intent has been to highlight some of the key aspects of these topics and to suggest possible new approaches that could be considered in the various reform efforts that are needed. In view of the extent to which financial globalization has become a dominant feature of the present-day international economic order, I believe that the greatest challenges for policy and institutional reform relate to the international financial architecture. At the end of the book, by way of a summary, I identify a number of lessons and conclusions from the experience of the global financial crisis that need to be addressed and considered if future crises of this magnitude are to be avoided. Many people have contributed to my thinking on the issues raised in this book since the outbreak of the crisis. In this connection, I would like to express my appreciation for the valuable fellowship of colleagues and students at the Duke Center for International Development and the Johns Hopkins School for Advanced International Studies, where I have been teaching for the last decade or so. These academic centers are dedicated to the highest standards of professional training for graduate students and

7 PREFACE AND ACKNOWLEDGMENTS ix young government officials from around the world in an inter-disciplinary approach to public policy and international affairs, with a strong emphasis on international economics and economic development. My interactions in and outside the classroom have provided numerous opportunities to reflect on the ideas expressed in this book. I also wish to acknowledge the invaluable work experience I enjoyed at the International Monetary Fund, where I was a senior staff member for many years. This institution plays a central role in the international financial architecture and epitomizes the meritocratic and technocratic ideals of an elite international organization on a par with the best national traditions of public financial administration. This book could not have been written without the work experiences I had in its regional and functional activities. Again, my interactions with colleagues of the Fund during and since my tenure there have influenced my thinking on many of the issues raised in this book. Needless to say, none of the three institutions mentioned above should be implicated as endorsing any of the views expressed in this book. Finally, I wish to acknowledge the very able assistance I received from Xiaoxiao Zhang, a recent graduate of the School for Advanced International Studies, in putting together the charts presented in this book and on its cover. Anthony Elson Chevy Chase, MD, USA

8 Previous Books by this Author Governing Global Finance: The Evolution and Reform of the International Financial Architecture Globalization and Development: Why East Asia Surged Ahead and Latin America Fell Behind xi

9 Contents 1 Introduction 1 2 The Financial Crisis of : Fragile Banking, Economic Bust and Deflationary Consequences 19 3 Why Did Economists Get It So Wrong? 45 4 The Challenge for Macroeconomic Policy in the Wake of the Crisis 71 5 The Role of the International Financial Architecture Prior to and Since the Global Financial Crisis The Global Financial Crisis and Inequality The Quest for Financial Stability at the National and Global Levels Toward a Rethinking of Macroeconomics 197 xiii

10 xiv Contents 9 Conclusions and Lessons for the Future 221 Index 245

11 List of Charts Chart 1.1 Total external assets and liabilities and trade flows as a percent of World GDP 4 Chart 1.2 External assets and liabilities as a ratio to GDP 5 Chart 1.3 (a) External assets and liabilities by instrument (in trillions of US dollars). (b) External assets and liabilities by instrument as a ratio to GDP 6 Chart 1.4 Total assets and liabilities for banks cross-border positions (in trillions of US dollars) 9 Chart 2.1 Total US household debt (in trillions of US dollars) 25 Chart 2.2 US real housing prices and house price to rent ratio for USA, Chart Notional value of credit default swaps (in trillions of US dollars) 33 Chart 4.1 IMF WEO projections for World GDP in constant prices 86 Chart 4.2 Central bank total assets and base money as a ratio to GDP 89 Chart 4.3 Actual and shadow federal reserve policy rates (in percent) 95 Chart 6.1 Share of income by population group in the United States 149 Chart 6.2 Share of wealth by population group in the United States 150 Chart 8.1 Chart 8.2 Potential GDP estimates and actual GDP for the United States (in constant dollar index format with 2007 = 100) 199 Real GDP for the United States with trend lines before and after 2008 (in trillions of 2009 dollars) 200 xv