The Unexpected Global Financial Crisis : Researching Its Root Cause

The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform.

Bibliographic Details

Main Authors:	Treichel, Volker, Lin, Justin Yifu
Language:	English
Published:	2012-01-01
Subjects:	ASSET MANAGER, ASSET PRICE, ASSET PRICES, ASSET-LIABILITY MISMATCH, BAILOUT, BALANCE OF PAYMENTS, BALANCE OF PAYMENTS CRISES, BALANCE OF PAYMENTS CRISIS, BALANCE SHEET, BANK LENDING, BANKING INSTITUTIONS, BANKING SYSTEM, BANKRUPTCY, BORROWER, BORROWING COSTS, BUDGET DEFICIT, BUDGET SURPLUSES, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL MARKETS, CAPITAL OUTFLOWS, CENTRAL BANK, CENTRAL BANKS, COLLATERAL, COMMERCIAL BANK, COMMERCIAL BANKS, COMMERCIAL PAPER, COMMERCIAL PAPER MARKET, COMMODITY PRICE, COMMODITY PRICES, CONSUMER CREDIT, CONSUMER GOODS, CONSUMPTION EXPENDITURES, CORPORATE SAVING, CREDIT DEFAULT, CREDIT DEFAULT SWAPS, CREDIT MARKET, CREDIT MARKETS, CREDITOR, CREDITORS, CURRENCY, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CURRENT ACCOUNT SURPLUS, CURRENT ACCOUNT SURPLUSES, DEBT BURDENS, DEBT CRISIS, DEBT OBLIGATIONS, DEFAULT RISK, DEFAULTS, DEFICITS, DEPOSIT ACCOUNTS, DEPOSIT INSURANCE, DEPOSITS, DERIVATIVE, DERIVATIVE PRODUCTS, DERIVATIVES, DEVELOPING COUNTRIES, DISCLOSURE OF INFORMATION, DURABLE, DURABLE GOODS, ECONOMIC POLICIES, EMERGING ECONOMIES, EMERGING MARKET, EMERGING MARKET ECONOMIES, EMERGING MARKETS, EQUITIES, EQUITY FUND, EQUITY INVESTMENT, EQUITY MARKET, EQUITY MARKETS, EXCESS LIQUIDITY, EXCHANGE COMMISSION, EXCHANGE RATE, EXPORT COMPETITIVENESS, EXPORT SHARE, EXPORTERS, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL ASSETS, FINANCIAL CRISIS, FINANCIAL DISTRESS, FINANCIAL FLOWS, FINANCIAL INSTITUTIONS, FINANCIAL INSTRUMENT, FINANCIAL INSTRUMENTS, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL SYSTEM, FISCAL DEFICITS, FISCAL POLICIES, FISCAL POLICY, FIXED INCOME, FOREIGN CURRENCY, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVES, GLOBAL CAPITAL, GLOBAL CAPITAL MARKETS, GLOBAL ECONOMY, GLOBAL TRADE, GLOBALIZATION, GOVERNMENT BUDGET, GOVERNMENT POLICY, HEDGE FUND, HEDGE FUNDS, HOME EQUITY, HOME EQUITY LOAN, HOME EQUITY LOANS, HOME LOAN, HOME MORTGAGE, HOUSEHOLD INCOME, HOUSEHOLD WEALTH, INCOME INSTRUMENTS, INFLATION, INFLATIONARY EXPECTATIONS, INFLATIONARY PRESSURES, INSURANCE, INSURANCE COMPANIES, INSURANCE COMPANY, INSURANCE CORPORATION, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATE POLICY, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BORROWING, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL STATISTICS, INTERNATIONAL MARKETS, INTERNATIONAL SETTLEMENTS, INTERNATIONAL TRADE, INVESTMENT BANKS, INVESTMENT PORTFOLIO, INVESTMENT RATE, LACK OF TRANSPARENCY, LENDERS, LETTERS OF CREDIT, LEVEL OF DEBT, LEVEL OF RISK, LIABILITY, LIEN, LIENS, LIQUIDATION, LIQUIDITY, LIQUIDITY CRISIS, LOAN, LOAN OBLIGATIONS, LONG-TERM INTEREST, LONG-TERM INTEREST RATES, LONG-TERM MATURITY, MACROECONOMIC MANAGEMENT, MACROECONOMIC POLICIES, MARKET CONFIDENCE, MARKET DISTORTIONS, MARKET INDICES, MARKET PARTICIPANTS, MARKET STABILITY, MATURITY, MICRO-DATA, MONETARY AUTHORITIES, MONETARY FUND, MONETARY POLICY, MONEY MARKET, MONEY MARKETS, MORTGAGE, MORTGAGE LOANS, MORTGAGE MARKET, MORTGAGE OBLIGATIONS, MORTGAGE-BACKED SECURITIES, MORTGAGES, MUTUAL FUNDS, NATIONAL SAVINGS, OIL PRICES, PENSION, PENSION FUNDS, PERSONAL INCOME, POLICY RESPONSE, PRICE MOVEMENTS, PRIVATE EQUITY, PUBLIC DEBT, PUBLIC DEBTS, PUBLIC FINANCES, PURCHASING POWER, REAL EXCHANGE RATE, REAL INTEREST, REAL INTEREST RATES, REMITTANCES, REPAYMENTS, RESERVES, RESIDENTIAL MORTGAGE, RETURN, RISK AVERSION, RISK OF DEFAULT, RISK PROFILE, RISKY ASSETS, SAVINGS RATE, SAVINGS RATES, SECURITIES, SHAREHOLDERS, SHORT-TERM DEBT, SHORT-TERM DEPOSIT, SOVEREIGN DEBT, STOCK MARKET, STOCK MARKET PRICES, STOCK MARKETS, STOCKS, SWAP, TAX, TRADE BALANCE, TRADING, TRANCHES, TRANSACTION, TREASURIES, TREASURY, TREASURY BILL, TREASURY BILLS, TREASURY BONDS, VALUATION, WEALTH EFFECT, WEALTH EFFECTS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120109085942 https://hdl.handle.net/10986/3222
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