Abstract
Financial crises, in one form or the other, have been ravaging the world economy from time to time. The great depression of 1929 was perhaps the most significant financial crisis in the economic history of the world in terms of its geographical spread and deep impact. Commentators are unanimous at crediting the global financial crisis of 2008 as the second-most significant crisis (Hall 2010). In between several crises of smaller dimension-like Mexican crisis, Latin American debt crisis and Asian crisis have frequented us. All these crises had played havoc with the rhythm of economic lives of the people of the affected countries. But at the same time, they made the people understand the importance of exercising prudence and caution in economic policy-making.
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Notes
- 1.
According to national income accounting, this is an identity reflecting a statistical relationship. Therefore, it always holds good ex post. However, Keynes treated it as an equation by making the variables function of ex ante (or planned) income (Y). Thus, relationship (3.1) is an equation ex ante, which becomes an identity ex post at the equilibrium value of Y.
- 2.
Mankiw (2006) said that even if one’s knowledge of economics dates back to the undergraduate textbooks of the 1960s one would be able to sit in the FOMC meetings comfortably. Since the macroeconomics textbooks of the 1960s were loaded with Keynsian flavor the above comment of Mankiw basically points to the relevance of Keynesianism at the parlance of policy-making even today.
- 3.
Bretton Woods is a quiet town in New Hampshire, USA. Here negotiations took place to find a suitable alternative to gold standard as modes of international payments and settlement. Keynes also participated in the deliberations and took an active role. The negotiations were finalized in 1944.
- 4.
This denouement has been continuing since then.
- 5.
Strictly speaking, ‘fundamental’ refers to some equilibrium value. However, it sometimes refers to normal value in loose sense of the term.
- 6.
Friedman’s (1953) remark in this context is worth mentioning: “People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators sell when the currency is low in price and buy it when it is high”. McKinnon (1983) even showed that in some cases speculation is capable of turning an otherwise unstable flexible exchange rate regime into a stable one.
- 7.
- 8.
- 9.
The use of moral hazard in modeling finance has become very popular. Interested readers may see Tirole (2005).
- 10.
So much, so that International Monetary Fund was more focused this time with the task of containing the bandwagon effects of the financial crisis within a limited geographical spread rather than relieving the particular countries out of the balance of payments problems.
- 11.
Aggregate saving of the economy is split between private saving and public saving. Thus, the right hand side of Eq. (3.2) represents excess of aggregate investment over aggregate saving, in short, investment over saving.
- 12.
For \( \left( {M\, - \,X} \right) \) to qualify as current account deficit both M and X need to be much more loaded variables like M standing for the excess of payments to the rest of the world for goods, services, investment income, and X for unilateral transfers over receipts from the rest of the world for similar items.
- 13.
Aggregate expenditure is measured by the sum \( C\, + \,I\, + \,G \) in the middle equivalence relation of Eq. (3.2).
- 14.
Of course, the accumulated current account position needs to be adjusted for valuation changes for this purpose.
- 15.
Bernanke has coined the phrase ‘saving glut’ hypothesis to describe the situation.
- 16.
This might remind one of convergence hypothesis of Baaro and Sala-i-Matin (2003) in growth literature.
- 17.
Precautionary savings should be on the rise as well. Not only the lives of the people are longer, uncertainty prevails over how much longer, given the continuous medical advancement. Moreover, many countries, including India, are facing the uncertainty over future financial viability of their public pension scheme. This is expected to drive people toward more precautionary saving (Cooper 2008).
- 18.
This will ultimately reduce the demand for schools and housing.
- 19.
This category includes Hong Kong, Korea, Singapore, Taiwan, etc.
- 20.
This shortage of market securities outside US was a major factor behind emergence of ‘shadow banking’ in US (Gorton and Metrick 2012). It will be pointed out later at the appropriate place.
- 21.
“No home bias” is synonym for perfect financial globalization. “No home bias” level would accommodate foreigners holding 30 % of their financial assets in US, whereas the actual figure, at the end of 2006, is to the tune of 12 % (McKinsey Global Institute 2008).
- 22.
Credit spreads refer to the difference between private borrowing rates and the rates the federal government paid.
- 23.
Subprime organizations also acted as shadow banks.
- 24.
A repo transaction is a collateralized deposit in a bank. The depositor or lender deposits money in the bank for short-term, usually overnight. The bank promises to pay the overnight repo rate on the deposited money. To ensure the safety of the deposit, the bank provides collateral that the depositor takes possession of. If the bank fails, then the depositor can sell the collateral to recover the value of the deposit (Gorton and Metrick 2012).
- 25.
The structured investment vehicles in US market were basically portfolios based on these kinds of mortgage-backed securities. But asymmetric information problem was lurking there in great measure. At each step in the chain of such structured investment vehicles one side knew significantly less than the other about the underlying structure of securities. At the top layer of the chain, an investor knows absolutely nothing about the hundreds of thousands of mortgages several layers below the derivative being traded (Lo 2012).
- 26.
Securitization means the sale of loan pools to special purpose vehicles that finance the purchase of loan pools via issuance of asset-backed securities in the capital market. Securitization is off-balance sheet financing for banks and other financial intermediaries. Securitization practice began in 1990s, but its growth just before the crisis was phenomenal.
- 27.
The nature and causes of global imbalance has already been discussed.
- 28.
Both federal funds rate and prime lending rate were used.
- 29.
Federal Reserve cut interest rate by 325 basis points in a span of 8 months during the crisis (Cecchetti 2008).
- 30.
By one estimate, by the end of May, 2008 Federal Reserve had committed almost two-third of its $900 billion balance sheet (Cecchetti 2008).
- 31.
However, the vulnerability of these economies has so far been contained within their national boundaries. If the sovereign debt crises of these economies explode to become a banking crisis, it might have the potential of triggering an even greater crisis than the global financial crisis of 2008. In the European debt crisis what is at stake is the confidence of the public in the sovereign debt of the governments (Kim 2012).
- 32.
‘Decoupling hypothesis’ was put forward by the financial market experts to point out that the correlation between business cycles of the developed countries like USA and Western Europe and those of emerging market economies, especially the larger ones like China and India have become weaker over the years despite the increased globalization of the latter economies.
- 33.
There are more people in India in the age group of 15–60 than in the age groups like 0–14 and above 60 years. This has made the dependency ratio (number of people in the age groups 0–14 and above 60 years over the total population) relatively lower for India compared to many, particularly the western developed countries.
- 34.
- 35.
Lo (2012) has surveyed 21 books on the crisis published in the recent years.
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Mandal, K., Kar, S. (2013). Global Financial Crisis: What Did We Know, What Have We Learnt?. In: Banerjee, S., Chakrabarti, A. (eds) Development and Sustainability. Springer, India. https://doi.org/10.1007/978-81-322-1124-2_3
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