Into the Danger Zone

Abstract

The failure of the world economy to recover fully from the financial crisis and recession was a monetary as well as a real phenomenon. Why did the climate for international business, trade and investment remain hostile? Why, years later, were many economies struggling to emerge fully out of recession? With governments desperately seeking to reassure financial markets that they could and would service their debts, the deterioration in the soundness of banks and other financial institutions was particularly alarming. Before FinCR, there had seemed no reason to doubt the creditworthiness of most of the world’s major financial institutions, or governments’ capacity to control a financial panic if one should break out. Of course, banks had from time to time got into difficulties, currencies had swung around wildly and the so-called Asian crisis in 1997–98 had shown the damage that such financial panics could inflict on an increasingly global scale. It is also true that economic history is pockmarked with financial panics. But until FinCR it was thought that we were learning how to manage such difficulties. International institutions such as the IMF and World Bank had accumulated expertise through learning from such experiences and advising governments around the world in a wide variety of different circumstances.

Many of the underlying causes of economic weakness and high unemployment were due to faults of the global financial system (GFS), yet governments and central bankers were loath to acknowledge this.