Introduction

Abstract

Global financial crisis of 2008 is examined in two parts in this book. The first part comprises Chaps. 2, 3 and 4. The origin of the crisis is traced in Chap. 2 to the subprime housing loans in the USA. Laxity in regulation of financial sector, regulatory capture, questionable role of the rating agencies and very low rates of interest in the USA turn out to be some of the other factors—all of which snowballed into a financial crisis. In Chap. 3, the analytical issues of financial regulation are discussed. It is argued that contrary to the philosophy of free markets, negative externalities of financial sector justify its regulation. In Chap. 4, it is explained how dominance of the US dollar in international finance created conditions for macroeconomic imbalances and thereby the crisis. In this chapter, it is suggested that for international financial stability, a multipolar international financial system would be useful. Deploying econometric models, transmission of monetary policy is characterized in a period of crisis in Chap. 5. Effectiveness of monetary policy during the crisis is examined in Chap. 6. Impact of the financial crisis on the Indian stock market is taken up in Chap. 7. Here, it is argued that during a crisis, minimization of risk is the overriding objective, with the result that the logic of stock pricing needs to be modified. In Chap. 8, to start with, interdependence of US and Indian stock markets is highlighted. Impact of the crisis on the real sector of the Indian economy is discussed, followed by detailed description of countercyclical monetary and fiscal policies. Post-crisis problems of inflation and unemployment are taken up in detail.