Regulatory Failure and the Global Financial Crisis

Regulatory Failure and the Global Financial Crisis

An Australian Perspective

Edited by Mohamed Ariff, John H. Farrar and Ahmed M. Khalid

This fascinating book presents a lively discussion of key issues resulting from the recent financial crisis. The expert contributors explore why the global financial crisis occurred, how it destroyed wealth, triggered mass unemployment and created an unprecedented loss of control on employment, monetary policy and government budgets.

Chapter 2: The Origin of the Global Financial Crisis: An Alternative View

Mohamed Ariff

Subjects: economics and finance, financial economics and regulation


Mohamed Ariff I will do my utmost to spur the risk takers to do more . . . Gordon Brown, Chancellor of the Exchequer, 2001, Chatham House Lecture 2.1 INTRODUCTION Massive risk-taking behaviour on the part of financial market participants was squarely behind this century’s opening financial crisis and the ensuing economic turmoil that reduced the 2007–08 world GDP with predictable consequences. With massive interventions of central banks’ lending money, the liquidity trap that occurred in August–September 2008, when no money was available for borrowing, was eased so that the world could stabilize credit availability soon afterwards to meet consumption and production demands for funds. With government treasuries no-holds-barred free (stimulus) spending amounting to some 6 per cent of domestic income in 60 countries or US$3600 billion, the world economy has crawled along since 2009 to grow at an anaemic rate of about 2.2 per cent after having fallen from the growth trend of 4.6 per cent before the crisis started in 2007. The asset bubble that built in many countries over 1994 and 2006 has been burst, with real estate and security prices having corrected to levels far below what these were at the height of the bubbles grown on the back of the freewheeling liquidity splurge over several years. At the time of writing, the verdict is still not out as to whether the worst of the fears for sufficiently rapid economic recovery to reverse record unemployment and sovereign debt could be reversed in 2011. The future holds...

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