From Financial Crisis to Global Recovery

From Financial Crisis to Global Recovery

Padma Desai
Copyright Date: 2011
Pages: 272
https://www.jstor.org/stable/10.7312/desa15786
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  • Book Info
    From Financial Crisis to Global Recovery
    Book Description:

    In this book, Padma Desai makes the complexities of economic policy and financial reform accessible to a wide audience. Merging a compelling narrative with scholarly research, she begins with a systematic breakdown of the factors leading to America's recent recession, describing the monetary policy, tax practices, subprime mortgage scandals, and lax regulation that contributed to the crisis. She also discusses the Treasury-Fed rescue deals that saved several financial institutions and the involvement of Congress in passing restorative policies.

    Desai follows with an analysis of stress tests and other economic measures, and she frankly assesses whether the U.S. economy is truly on the mend. Expanding her view, she considers the prospects for recovery in North America as a whole, as well as in Europe, Asia, and South America, and the extent and value of U.S. and E.U. regulatory proposals. Refocusing on American financial practices, Desai evaluates hedge funds and derivatives, credit default swaps, and rating agencies, pondering whether the dollar can remain a reserve currency. She concludes with a historical comparison of the Great Depression and the Great Recession, weighing the effect of the economic collapse on the future of American capitalism.

    eISBN: 978-0-231-52774-3
    Subjects: Business, Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. PREFACE
    (pp. ix-xviii)
    Padma Desai
  4. 1 Financial Crisis Origin
    (pp. 1-20)

    A variety of factors contributed to the U.S. economy’s recession, which exhibited catastrophic symptoms of a housing bubble toward the end of 2007. Prompted by low interest rates beginning on January 3, 2001, and overlooked by the regulatory agencies, Americans borrowed excessively for home mortgages. This first phase of extensive mortgage financing for eventual home ownership extended from 2001 to 2004. Then from June 30, 2004, interest rates began moving up and these mortgages became unmanageable and ultimately subprime. Marked by escalating foreclosures, this second phase of their conversion into the subprime category intensified from 2005 to 2007. The crashing...

  5. 2 Banking Sector Stress Tests: United States Versus the European Union
    (pp. 21-44)

    Toward the end of 2008, the U.S. economic recession continued to worsen. The banking sector was in unprecedented uncertainty. Credit to businesses had dried up, forcing them to lay off workers and postpone investment. Banks had been posting lackluster revenues throughout the year. Investors and depositors fled large banks because they were not sure if these banks would remain solvent.

    In response, the Federal Reserve announced a stress test in February 2009 for 19 major banks in order to assess the potential impact of a severe recession on their earnings. The Treasury advanced the banks a cash buffer from the...

  6. 3 Is the U.S. Economy on the Mend?
    (pp. 45-79)

    By early 2009, U.S. policy makers put in place a threefold agenda, which included a stress test of the Wall Street banks, a substantial fiscal stimulus, and continuing monetary easing by the Federal Reserve.

    The banking sector investigation via a stress test of the 19 too-big-to-fail banks in May 2009 (discussed in chapter 2) provided a reassuring signal with respect to their balance sheets. In the months ahead, the issues relating to the regulation of the financial sector were finally sorted out. The process involved vigorous bargaining among lawmakers in Congress and active lobbying by Wall Street bankers. Congress passed...

  7. 4 Global Recovery Prospects: North America and Europe, Asia, and South America
    (pp. 80-109)

    Everyone agreed that the financial crisis originated in the United States. France’s President Nicolas Sarkozy provided a sophisticated version of its onset by attributing it to the out-of-bounds Anglo-Saxon liberalism, whereas Germany’s Chancellor Angela Merkel commented on the spendthrift Americans damaging the welfare of the thrifty Germans.

    In reality, low interest rates beginning in 2001, combined with slack regulatory supervision, prompted Americans into excessive borrowing for home ownership. As interest rates gradually moved up, subprime mortgages began accumulating beginning in 2005. The crashing valuations of mortgage-based assets held by U.S. financial institutions crippled their lending potential. By the second half...

  8. 5 Hedge Funds and Derivatives, Credit Default Swaps, and Rating Agencies
    (pp. 110-126)

    As the financial crisis intensified toward the end of 2008, most U.S. banks discovered that their balance sheets were loaded with near worthless assets. The hedge fund managers operating in their proprietary divisions had acquired them by employing over-the-counter derivatives and credit default swaps. They often used high-frequency trading, flash orders, and dark pools. These instruments and activities, routinely featuring in the voluminous commentaries of Wall Street aficionados and financial journalists, frequently leave outsiders, among them some economists, in the dark about the exact meaning of these newfangled financial vehicles. Shouldn’t these activities be explained from the get-go so that...

  9. 6 U.S. and EU Regulatory Proposals: How Strict? How Cooperative?
    (pp. 127-172)

    Early in June 2009, Mervyn King, governor of the Bank of England, had emphasized the need for a sound regulatory system for dealing with the global financial crisis in these words: “The costs of this crisis are not to be measured simply in terms of its impact on public finances, the destruction of wealth, and the number of jobs lost. They are also to be seen in the lost trust in the financial sector among other parts of our economy.”¹

    Equally concerned, the chairman of the Senate Banking Committee, Christopher Dodd (D-CT), presented to the committee on March 15, 2010,...

  10. 7 The Dollar’s Future as a Reserve Currency
    (pp. 173-191)

    The easy monetary policy that the Federal Reserve undertook by steadily lowering the federal funds rate starting in January 2001 and continuing until mid-2004 contributed to the unsustainable U.S. housing bubble and the financial crisis toward the end of 2007. The Fed’s easy monetary policy was also supported by saving inflows from China: The People’s Bank of China, the central bank, increasingly invested the country’s dollar earnings (from export surpluses) in U.S. Treasury bonds, which amounted to $938 billion in October 2009. China’s burgeoning export surpluses, in turn, resulted from a significantly undervalued Chinese currency. If the Chinese authorities allowed...

  11. 8 The Great Depression and the Current Financial Crisis
    (pp. 192-213)

    From the hindsight of almost seven decades, the Great Depression of the 1930s comes across as an incomprehensible combination of a lightning financial meltdown, a massive impact on the real economy, a staggering unemployment rate, and a damaging policy flip-flop in 1937 that set back the course of the fragile recovery.

    The devastating episode raises three issues of relevance for the current financial crisis. First, which factors operating in the real economy and the financial sector during the 1920s contributed to the emergence of the Great Depression of the 1930s? Second, what institutional and policy measures were undertaken in the...

  12. 9 The Future of American Capitalism
    (pp. 214-234)

    The financial turmoil that threatened a meltdown of U.S. financial institutions toward the end of 2008 raised questions about the enduring power of American capitalism. Nobel laureate Joseph Stiglitz suggested that its destructive impact could resemble the fall of the Berlin Wall in 1989, which ended the Soviet Union in 1991. That was a misplaced analogy. Moscow’s domination of East-Central Europe had to end. The authoritarian political system that prevailed in the Soviet Union for seven decades needed to disappear as well. By contrast, post-crisis American capitalism called for its renewal.

    By all accounts, American capitalism comes across as a...

  13. NOTES
    (pp. 235-242)
  14. INDEX
    (pp. 243-254)