One Step Forward and Two Steps Back: The 2007 Global Crisis and Our Future

Have the worst wounds of the crisis been avoided? We might have cauterized the injury with an infection still inside. To name a few: advanced economies, the European Union (EU) and emerging nations face dire economic imbalances; archaic geopolitical style maneuvering is occurring at rising rates in Eastern Europe while Africa and the Arab region are bleeding migrants in alarming numbers. Even if you do not add in a changing climate, these relations will not equal a description of ‘smooth sailing’ for global economics in the foreseeable future. At the very least, they show an expressed need to move away from crisis economics as a ‘new normal’ and return to the ability to use conventional Keynesian models of economics. If taken as critical, as they should be, there is a need for broad structural changes that would see new models of economics that temper global arrangements in exchange for a more powerful state.

One Step Forward and Two Steps Back:

The 2007 Global Crisis and Our Future.

There is no economy either global or domestic without the nation-state and as such a significant change away from unsustainable economic liberalization and integration should occur. The argument put forth is a return to protectionism; not the sort of protectionism found yesterday but rather methods created for tomorrow. The global crisis that started in 2007 exposed a systemic need for reform not only in financial oversight but economic regulation and business conduct in general. The solutions devised to correct the crisis by central banks and governments might be creating future crises and at a minimum, they show a need for monetary and fiscal policy reform within nation-states. Economists Nouriel Roubini and Stephen Mihm’s seminal work Crisis Economics will be used as a theoretical foundation. As well, economist Dani Rodrik’s theory in The Globalization Paradox of tempering global integration will be advocated as a way forward. However, numerous other theories and authors will facilitate building the arguments contained in this essay.

Have the worst wounds of the crisis been avoided? We might have cauterized the injury with an infection still inside. To name a few: advanced economies, the European Union (EU) and emerging nations face dire economic imbalances; archaic geopolitical style maneuvering is occurring at rising rates in Eastern Europe while Africa and the Arab region are bleeding migrants in alarming numbers. Even if you do not add in a changing climate, these relations will not equal a description of ‘smooth sailing’ for global economics in the foreseeable future. At the very least, they show an expressed need to move away from crisis economics as a ‘new normal’ and return to the ability to use conventional Keynesian models of economics. If taken as critical, as they should be, there is a need for broad structural changes that would see new models of economics that temper global arrangements in exchange for a more powerful state.

The Progresses Made

While the gears and pulleys of the global economy were churning well before the 1970’s, they have since been programmed with metaphorical circuit boards and operate in a most electrifying fashion. Peering into the complex pathways and nodes of this ‘global economic circuit board’ will illuminate the run-up that led to the overheating crisis that erupted up in 2007. This section will define the pervasiveness of liberalization, the advances in trade along with the maturation of the financial industry, which all combined into what Dani Rodrik (2011) described in The Globalization Paradox as hyper-globalization. These can be thought of as the forces that electrify the ‘circuit board’ that is the global economy.

Ideas. It was during the New Deal era and Bretton Wood Conference that multilateralism took the main stage. Rodrik (2011) defines multilateralism as the “rule of enforcement and belief systems would work henceforth through international institutions – the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade (GATT) – rather than through naked power politics or imperial rule” (p. 70). Arguably, this was of high success. So much so, it is also argued its success caused its undoing (Rodrik, 2011, p. 76). Long after the conference came to an end in the 1970’s with the adoption of floating currencies, the ‘Bretton Woods’ ideologies of collective deliberation have remained sticky, and the global community wanted even more (Rodrik, 2011, p. 69). It is not a far stretch to see how in the 1980’s we also saw the creation of the Reagan-Thatcher revolution or Washington Consensus. In simplifying the Washington Consensus ideologies, Rodrik (2011) argues the consensus “regarded any obstacle to free trade as an abomination to be removed; caveats be damned” (p. 77).

With the high-octane fueled ideology of the Washington Consensus and the stickiness of ‘Bretton Woods’, the final session of GATT called the ‘Uruguay Round’ created the World Trade Organization in 1995. The ‘Uruguay Round’ saw multinational companies clamoring for even greater international reach: domestic subsidies, import quotas, agricultural protections, and local content preferences were now fair game to attack. The WTO also saw emerging markets adopting wholesale liberalization and integration to secure FDI for exports (Rodrik, 2011, p. 77). The WTO was the policy catalyst that allowed liberalization and integration to bury the gas pedal of our global economy and set us off into hyper speeds of globalization.

Running parallel to the creation of the WTO, the 1990’s saw the United States spirit away the Glass-Steagall Act of 1933. This reversal according to Roubini and Mihm (2010) allowed the combination of commercial banking, insurance underwriting, and securities underwriting to come under the same roof (p. 74). In summarizing a quote by Roubini and Mihm (2010), “this combination forced the issue: the new financial behemoth (referring to the Travelers-Citicorp merger in 1999) was illegal under existing laws,” (p. 74).

As described above, ideas of liberalization, integration, and free markets have up to this point grown so pervasive we now define policy constraints in words like ‘abomination’, which usually elicits religious fervor. To conclude this subsection, running in sync with economic development post-World War, technology advances are exponentially reducing communication and transportation costs, increasing production efficiencies and changing the ways in which we conduct affairs. It is in this technology progress and reductions in regulation the financial industry innovated its expressed maturation and brought the world to critical crises, once again.

Innovations. With tools of economic liberalization, global integration, and technology advances at a banker’s beck and call, the financial industry grows into what we now call ‘too big to fail’ (TBTF) right before our eyes. Credit has been around as long as people have been trading and is arguably a necessary evil. However, whether it is benevolent or evil is irrelevant; there is a pervasiveness in the use and manipulation of credit today that makes the financial industry a vital point of focus.

If you take Karl Marx at a basic glance, without the social and political rhetoric, he describes capitalism as inherently chaotic (Roubini & Mihm, 2010, p. 46). To see a more granular look at this, the relationship between owner and worker is significant. Roubini and Mihm (2010) describe this relationship in saying, “capitalists replaced workers with machines in an attempt to cut costs, profits would perversely decline. This decline would spur capitalist to cut costs even more, eventually driving the economy into a crisis born of overproduction and underemployment” (p. 45). Marx was somewhat correct in this relationship, but more importantly, it illuminates how finance can be of great utility.

Credit works well because it can temper the flare-ups between overproduction and underemployment. Owners can finance overproduction and cost reductions while workers can use credit to consume the excess production and soothe the pain of underemployment. Nation-states can borrow to make investments towards their perceived comparative advantages in the global economy along with borrowing and trading in foreign currencies. Martin Wolf’s (2009) interview with Nayan Chanda describes this modern rise in credit. In quoting Wolf (2009) “in the 1980’s there was very little debt in the economy, we liberalized finance, there was a new environment of low inflation and stability, people borrowed more, and merely by the act of borrowing more, they created credit” (pp. 1-2). This is artificial and prone to crises, but overall it allows for financial investment to make relative gains for everyone (Roubini & Mihm, 2010, p. 65). Risk, however, is no stranger to almost any endeavor we undertake, and the financial industry is not immune.

As the use of credit became more nuanced and sophisticated so too did the inherent risks and tools used for risk aversion. In summary, financial innovation spurred from the 1970’s onward with a marked increase in the 1990’s because of combining, repackaging (securitization), and redistributing of home mortgages into sellable assets (Roubini & Mihm, 2010, pp. 64-65). These sellable assets regardless of their underlying safety were deemed secure and then sold in the global economy to banks, nation-states or anyone with a hand outstretched. The practice of securitization became enormously popular and was soon adopted into almost every single type of financial transaction well beyond home mortgages (Roubini & Mihm, 2010, p. 65). In the reversal of many forms of financial regulation, mainly Glass-Steagall, we gave financial and insurance entities the ability to grow into rather large monolithic corporations. These firms now with an inexhaustible amount of securitization products at their disposal burrowed deeper and deeper into domestic and foreign markets extending credit and securities to stratospheric new heights.

‘Hyperzation.’ Now we can combine the progress made from the 1970’s onward into what Rodrik calls hyper-globalization and Roubini and Mihm advocate as another manifestation of crisis economics. With the world awash in liberalization, the global integration of business at full steam and a highly sophisticated financial industry doling out endless credit, global development was in a state of overdrive. With the ability to trade internationally much easier, emerging markets adopted investment seeking industrial policies heavily tilted toward exports, some to great success (Roubini & Mihm, 2010, pp 243-246). In this era, we see a rise in groups of nations like the BRIC’s (Brazil, Russia, India, and China) or the East Asian Tigers (South Korea, Singapore, and Taiwan) that all emerge unilaterally or through cooperation into the global economy. This is turn correlates to a rise in consumption mainly by advanced economies. Emerging markets need a place to sell their products, and advanced economies have a voracious appetite for consumption.

It appears quite logical to use common sense and take advantage of import-exports comparisons. After all, there are many factors the go into the current account of a nation. Roubini and Mihm (2010) profess current account deficits or surpluses are neither good nor bad for a country until those imbalances become extreme and are tilted towards externals (p. 243). It is precisely the case that happened in the run-up to 2007, and at a minimum, represents a structural attribute of the global crisis. Roubini and Mihm (2010) describe these imbalances before the global crisis in saying, most emerging economies in Asia and Latin America went from deficit to surplus surprising most economists. So did the fact that a number of advanced economies – Ireland, Spain, Iceland, Australia, the United Kingdon, New Zealand, and, most important, the United States – went from running surpluses to running deficits. (p. 247)

Considering pre-crisis, we were in a state of hyper-globalization; extreme imbalances are not surprising. Roubini and Mihm sum up this scare in current accounts by saying, “if the United States were an emerging market, it would have long ago suffered a collapse of confidence in its debt and its currency” (Roubini & Mihm, 2010, p. 252). Account imbalances did not cause the crisis, but they are yet to be resolved by numerous nations to this day. What brings this section to a close and up to the crisis, is that overconsumption and overproduction led to current account deficits and surpluses that were extreme and exacerbated by free flowing credit. Consumption accounts for 70% of the GDP in the Unites States (Roubini & Mihm, 2010, p. 253). It was an overconsumption in housing markets in the United States fueled by subprime lending that proved to be the catalyst of crisis.

The Crisis Cometh

What was mapped out in the previous section can be taken as year upon year of only dealing in extremes: expansive liberalization of the global economy, sophisticated leaps in technology, widely arching tilts in imports and exports, and runaway extensions of finance. It is no wonder that a critical crisis hit, hyper-globalization amounted to a circuit board running entirely too hot. This section will plot out how a housing bubble bursting in the United States caused a significant breakdown in the global economy.

The Bust. Excess consumption and financing, especially in housing, created the environment that led to the subprime crisis in not just the United States but many advanced economies around the world. Simply stated, the housing bubble burst. Robert Bloom (2011) describes the subprime crisis in saying “unsound loans were made and then securitized into investments that were improperly rated by credit rating agencies. Thereafter, those investments ‘backed’ by troubled mortgages were sold to the public” (p. 6). He continues to profess that the crisis should have stopped in its tracks at that point, but government agencies botched the response by being indecisive and causing doubt in the markets (Bloom, 2011, p. 6).

Moral hazard and corporate governance cannot be left out of the discussion. Roubini and Mihm (2010) define moral hazard as “someone’s willingness to take risks – particularly excessive risks – that he would normally avoid, simply because he knows someone else will shoulder the burden” (p. 68).  Erik Berglof (2011) describes corporate governance as “about how we allocate resources across different activities and how we monitor how these resources are used” (p. 498). In paraphrasing Bloom (2011) he raises this dilemma in corporate governance by saying, “there was questionable ethical behavior.. during the financial crisis in allowing subprime mortgages.. in the first place, in granting bonuses to the broker for such mortgages.. and in securitizing these mortgages” (p. 8).

Governance of this style rewards dealers who disregard moral hazard because if it pays off in the end, they’ll be rewarded even more. Berglof (2011) in commenting on a recent paper by Cheng, Hone, & Scheinkman (2010), says the work, “shows a strong correlation between the compensation systems and risk-taking of large financial institutions” (p. 500). In concluding his discussion on corporate governance, he says, “it is also a distinct possibility that large banks are simply ungovernable, in the sense that even the best of boards cannot exercise meaningful governance over them” (Berglof, 2011, p. 500). This alludes to corporate governance of larger entities being systemically flawed just by the sheer size of the organization. The moral hazard created by the bailouts of central banks and government agencies will be covered in the following section.

The Fallout. When the housing bubble bursts and we realize subprime loans are not getting paid back, all those securitized financial products leveraged off the backs of subprime mortgages became toxic. Many of these commodities were misunderstood and unregulated allowing institutions to shelter their risk and create a ‘shadow banking’ regime. Bloom (2011) talks about this cavalier attitude towards risk in saying, “for example, collateralized debt obligations (CDO), back by unsound mortgages, in issuing credit default swaps (CDS), betting that CDO’s would go under” (p. 8). Variable Interest Entities (VIE) have been largely unregulated, off-the-books financial tools that are at the root of shadow banking (Bloom, 2011, p. 9). Capital maintenance requirements pre-crisis were not hefty enough to enforce banks hold enough cash to offset these unknown, pervasive and toxic securities commodities, which only compounded the problem (Bloom, 2011, p. 9).

As the previous sections have shown, all the while this housing and financial crisis is heating up, the financial industry is entrenching further and further into the global economy. The world economy is already strained with widely arching imbalances. Banks and institutions on every continent had traded in toxic subprime securities sold by large financial entities. Moral hazard is disregarded for excessive profit seeking, designed into the system by weak corporate governance. Before anyone had a moment to catch his breath, the financial contagion had spread rapidly.         

The Crisis Converted

With the global community reeling in pain at just how far-reaching and critical the crisis became, someone had to step in and save the day. While the response from governing institutions both global and domestic should be admired for their coordination, the solutions adopted have been incredibly divisive. The simplest way to describe the solutions enacted is to say that the private debt created by the crisis was billed to the public. This section will explain the fiscal and monetary responses from governing institutions and map out the conversion of private debt into sovereign debt.

The Response. The leading fiscal theory used as a policy response to the crisis was born out of the Keynesian school of thought. Off the cuff, Keynesian economics advocate for ‘mixed economies’ where there is a public/private stake in markets.  In a time of crisis, which leads to unemployment and a dip in production a self-fulfilling cycle is born and that only governments can step in directly or indirectly to stave off depression (Roubini & Mihm, 2010, pp. 160-161). However, they do point that numerous method of fiscal stimulus heavily used in the crisis (Roubini & Mihm, 2010, p. 162). They focus on two main fiscal stimulus methods in conjunction with a direct fiscal stimulus: tax rebates and tax cuts geared to stroke consumers into spending along with transfer payments that come in numerous assortments like unemployment benefits, food stamps and education funding (Roubini & Mihm, 2010, p. 162).

Monetary policy is much more complicated to grasp than fiscal policy. In times of crisis or overheating markets, the central banks of the world wave magical wands to stave off deflation, depressions, and crises.  In summarizing Roubini and Mihm, the United States Federal Reserve utilizes open market operations as its ‘go to’ tool. For instances, when the Fed wants to fight inflation it might sell short-term government debt which the purchaser will pay for resulting in the Fed holding that money and effectively taking it out of the market (Roubini & Mihm, 2010, p 143).

As Roubini and Mihm (2010) tells us, “in this way, the Fed has tightened the money supply and made credit harder to obtain: it has effectively raised the cost of borrowing” (p. 143). If the reverse needs to happen, the Fed buys short-term government debt by using its magical wand to create the money to pay the sellers of debt, which in turn it should create cheaper credit because of the increase in the supply of money (Roubini & Mihm, 2010, p. 144). A liquidity trap, however, is a scenario that no banker wants to face. This happens when rates have been driven down to zero, and the Fed has no more conventional tools at hand, yet all the while banks are not lending cash, and the actual rates at which a bank is willing to give money are much higher (Roubini & Mihm, 2010, p. 144).

The Trade-off. When the Feds in a liquidity trap and fiscal stimulus is not working, which is what happened during the crisis, the options become much less desirable. While many central banks can print money in times of crisis, not all are afforded this options. Greece as a member of the EU and subservient to the European Central Bank (ECB) was not able to print money during the sovereign debt crisis. Greece, as a result, faced crippling austerity measures that are still the news of the day. As well the EU, when problems are in foreign currencies, there are explicit caveats (Roubini & Mihm, 2010, p. 148). This caveat is the cause of many of the emerging market crises: Mexico in 1994, East Asia in 1997 and 1998, Russia and Brazil in 1998, and Turkey and Argentina in 2001. The International Monetary Fund (IMF) acts as the lender of last resort in all these crises, and in the global crisis of 2007, it acted no different (Roubini & Mihm, 2010, p. 149).

At the end of it all when there is still not relief, unconventional monetary policies like ‘quantitative easing’ (QE), the purchasing of toxic debt like CDOs, and bailing out (TBTF) firms are called to order (Roubini & Mihm, 2010, p. 154). Admittedly, the inner-workings of (QE) and other unconventional monetary policies are vastly abstract. For the sake of simplicity, (QE) can be looked at as the Fed purchasing long-term debt, to which is highly unconventional. What is most important to understand is that we have been warned that the Fed, with buying long-term debt has broached into areas of fiscal policy, which are to be in the hands of a legislative body. Roubini and Mihm (2010) explain this in saying, “engagement in monetary policies that bleed imperceptibly into the traditional domain of fiscal policy – namely, government’s power to tax and spend” (p. 156). In reality, what is being said is that unconventional monetary policies have consequences that fall on the shoulders of those who pay the taxes in a country. Furthermore, by subsidizing the financial industry with bailouts of (TBTF) firms and easy money, there is a greater moral hazard in the system. What is going to stop the potential for future excesses if the government continually comes to the rescue of firms that cause the crisis in the first place?

The Caveats of Debt

The issues of sovereign debt are on the minds of many leading economists. Massive conversion of debt was taken off the backs of the financial industry and potentials on the shoulders of taxpayers for years to come (Roubini & Mihm, 2010, p. 156). The ways in which we handle sovereign debt through fiscal and monetary policy might create new crises and systemic risk. Not all countries can adopt the same measures to hamper debt. The tools the EU members are different than the United States. Alternatively, some nations have such high export surpluses that the tools they can use are different than the United States, a good example would be China. This section will spell out debt and imbalance differentials in the Unites States, European Union, and emerging markets.

The United States. Paul Krugman (2014) says, “it looks, in other words, as if currency regime makes a huge difference to the stories we tell about debt” (p. 473). The basic argument against Krugman is that a crisis is a crisis and will be contractionary no matter the monetary controls a central bank can utilize (Krugman, 2014, p. 485). However, in breaking apart various models of crises, he shows how this argument does not hold up to empirical evidence. Krugman’s (2014) conclusions are that “countries that borrow in their own currencies are simply not vulnerable to the kind of self-fulfilling liquidity crises that have afflicted euro debtors” (Krugman, 2014, p. 491).

In having that control, nations like the US, Japan, and the UK face different outcomes. Instead, advanced economies that control and float their currency must place more stock in reaching an equilibrium with current accounts. This arguably would call for a shift away from consumption to production with structural reform. Wolf (2009) prescribes this as well in saying, “the US external balance has to improve. It’s a matter of definition. The US, the UK, and all these other countries are going to have to have better external balances” (p. 5). Finally, the US being a reserve currency in global markets further stress on external balances. This is due to many countries having a stake in the dollar remaining strong relative to their weaker currencies. A stagnating economy and unemployment make it challenging for the US to maintain that strength. The same holds true for the UK as a global reserve currency.

The European Union. With a single currency, a quasi-political union with politically independent members, the EU has special caveats to consider when contemplating debt. The EU is also facing the same reserve currency concerns as the UK and the US. Members of the union being subservient to the ECB. The ECB did act in the same manner as the US Fed in providing lender of last resort relief in the global crisis (Roubini & Mihm, 2010, p. 153). However, the inherent structure of the EU does not allow for member states to benefit as a state would within the US federal system. The Maastricht Treaty disallows printing money along with adopted rules enshrining a ‘no bailout policy’ (Ferguson & Kotlikoff, 2000, p. 118). Krugman (2014) describes the EU debt crisis as not one of sovereign debt, but rather a balance of payments crisis (p. 476). Whereas Wolf (2010) illustrates the EU crisis as a story between thrifty ants and spend-happy grasshoppers that ultimately teach the ants not to share (p. 1).

What both Krugman and Wolf are hinting at in their stories of the EU debt crisis is the relationship between Western European lending and Southern European buying. This created external imbalances, but Germany kept lending, and Greece kept taking loans. Quoting Krugman (2014) “every country that ran cumulative external deficits of more than 50 percent of GDP – Estonia, Slovakia, Malta, Cyprus, and Greece – did experience a crisis of confidence” (p. 476). The Greek sovereign crisis saw a country smacked with severe austerity measures in negotiating for assistance from Western European banks. What all this amounts to are serious questions about the union’s future. Ferguson and Kotlikoff forewarn that if all members of the union were facing that same predicament, they might resolve this conflict politically (Ferguson & Kotlikoff, 2000, p. 118). In time, it is argued the EU has two hard choices to overcome: dissolution that could become political or violent or opting for further unification that could temper member inbalances.

Emerging Markets. China as the leading emerging market will be used as the primary focus. However, numerous emerging markets face the same quandaries as China. The dynamics are different than sovereign debt in the EU as many have already gone through that sovereign debt and are also not a part of a union. At the core of the problem is the propensity of emerging economies to rely on exports and a devalued currency for growth (Wolf, 2009 p. 6). While this is not terrible at face-value, when the numbers go to the extreme, the foreign reserve stockpiles from all that exporting stick out like a sore thumb. As is the case with China, this is because there isn’t enough domestic market demand to offset potentially falling exports levels. Furthermore, if the dollar tanked, all the dollars held by China in stockpiles would tank as well.

To stave off a crisis like Japan faced in the 1990’s: constant excess capacity and persistent deflationary pressures; demand all around must be expanded. Wolf (2009) says of this, “China should forget having a GDP target, instead of having an 8% gowth GDP target, it should have a real domestic demand target. It should think of its policy in terms of generating real domestic demand, GDP will follow” (p. 6). If emerging markets focus more on domestic demand, they can have a stable buffer and not need to rely solely on exports for growth. This, in turn, would also increase domestic consumption which could be feed by advanced economies or other emerging nations.

Overall increased demand and a leveling off of imbalances could create a bit of wiggle room but not solve structural concerns.  Demand is not China’s only concern, and the questions of democracy will need to be answered. In this sense, India might fair better considering its emergence was done as a democratic nation (Rodrik, 2011, pp. 244-246).

The Progresses of Tomorrow

Marx was not correct in prophesizing an inevitable end to capitalism by throwing it into the abyss (Roubini & Mihm, 2010, p. 46). Tempering and reconstructing capitalism as prescribed by Mihm, Rodrik and Roubini can work. However, there are severe strains that fall outside of economics that could break capitalism and bring the world to its knees. If structural reforms and return to protectionism is adopted, whether that be capitalism 3.0 (Rodrik, 2011, p. 235) or controlled creative destruction (Roubini & Mihm, 2010, p. 58) a way out of constant crisis economics is possible.

Controlled creative destruction is a hybrid of the Austrian school and Keynesian school of economics. Roubini and Mihm (2010) describes this in saying, “crisis is like nuclear energy: enormously destructive if all the energy is released at once, but much less so if channeled and controlled” (p. 58). The global crisis was brought under control, but as Roubini and Mihm (2010) foretell, “much remain to be done: radioactive assets the world over much be acknowledged, contained, and disposed of. Regulation must be rewritten, and international financial institutions reborn” (p. 58). Radical remedies are presented by Roubini and Mihm (2010) that force structural changes in curtailing arbitrage ahead of policy reform (p. 213). Instead of setting principals that bankers should follow, regulators need to adopt robust rules that govern the financial system. Roubini and Mihm (2010) expand on this in saying“for example, they should set clear caps on leverage – not on ‘risk-adjusted leverage’ but on absolute leverage” (p. 214).

Rodrik takes Keynesian models of economics and builds an entirely new form of capitalism. He does stray too far from advocating for a true ‘mixed-economy’ as Keynes would see it with markets heavily embedded in systems of government (Rodrik, 2011, p. 237). Rodrik suggests an entire restructuring of economic order for a return to protectionism and national interest (Rodrik, 2011, pp. 233-250). Economics are won and lost more often at home than abroad and as such the state should remain supreme (Rodrik, 2011, p. 248). He is not describing the protections of yesterday through import-substitution and tariff walls. On the contrary, there is explicit dialogue on non-binding international cooperation. Advocated in this new capitalism are agreements that allow opt-outs, suspensions, and the abilities of states to protect social wellbeing and domestic growth in negotiations moving forward (Rodrik, 2011, p. 253). This would allow countries to use all economics tools at their disposal. Most important to Rodrik, however, is placing national interest as the deciding stakeholder in both domestic and international markets.


Is crisis a white swan event of randomness or is it a black swan of predictability and pervasiveness? The debate is still rather divisive on this question. What is known is that since the 1970’s economic liberalization, political deregulation and a sophisticated and complex financial industry coalesced together to form what Rodrik call hyper-globalization. Globalization ran face first into the American housing bust of 2007 and precipitated around the world in the form of toxic securities sold by the financial industry. Once the crisis became critical, central banks and governments answered with exotic fiscal and monetary policy that staved off a depression but left gaping wounds in the form of excess debt on the back of taxpayers. Because of the disparity between how nations are constructed, their central banks and governments might be constrained in the tools they can utilize. This set out a future of uncertainty with looming crises potentially around the corner. Through the works of Dani Rodrik, Nouriel Roubini, and Stephen Mihm, along with numerous other authors, Keynesian school of economics within this essay have won out over the Austrian school. However, both The Globalization Paradox and Crisis Economics, both schools of thought are combined, and their prescriptions are intensified through new forms of capitalism that could mend the structural flaws in global markets.


Berglof, E. (2011). A European Perspective on the Global Financial Crisis. Corporate Governance: An International Review, 19(5), 497-501

Bloom, R. (2011). The Financial Crisis Inquiry Report. The CPA Journal, 6-10.

Ferguson, N., & Kotlikoff, L. (2000). The Degeneration of EMU. Foreign Affairs, 2, 110-121.

Krugman, P. (2014). Currency Regimes, Capital Flows, and Crises. IMF Economic Review IMF Econ Rev, 62(4), 470-493.

Rodrik, D. (2011). The globalization paradox: Democracy and the future of the world economy. New York: W.W. Norton &.

Roubini, N., & Mihm, S. (2010). Crisis economics: A crash course in the future of finance. New York, NY: Penguin Press.

Wolf, M., & Chanda, N. (2009). Fixing Global Finance: An Interview with Martin Wolf. Yale Center for the Study of Globalization.

Wolf, M. (2010). The Grasshoppers and the ants – a contemporary fable. Financial Times, 1-2.

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