Impacts, Transmission and Recovery
KDI/EWC series on Economic Policy
Edited by Maurice Obstfeld, Dongchul Cho and Andrew Mason
Chapter 8: Macroeconomic and Financial Policies Before and After the Crisis
Barry Eichengreen My charge in this chapter is to analyse the roles of monetary, fiscal and regulatory policies in the run-up to, midst of and aftermath of the crisis. This focus directs attention to the following questions: ● ● ● How important in the genesis of the crisis were lax supervision and regulation of financial institutions, perverse incentives in financial markets, the stance of monetary and fiscal policies and global imbalances? What explains variations in the policy response across countries? Should we rethink the efficacy of the policy response in the light of the problems that developed subsequently in Europe and elsewhere? My focus is on the Group of 20 (G20) countries. The crisis also had a powerful impact on other, generally poorer economies whose experience is certainly deserving of attention.1 But, then, a single chapter cannot cover everything. FINANCIAL POLICIES IN THE RUN-UP TO THE CRISIS It has become fashionable, even commonplace, to blame outside factors for the crisis in the United States. Alan Greenspan has argued that the crisis had its roots in the end of the Cold War.2 Others have attributed the crisis to the rise of China, which unbalanced global markets by significantly augmenting the global labor supply with workers with an inordinate inclination to save (Bernanke 2010). While factors such as these may have played an enabling or compounding role, the root causes of the crisis, in my view, lay at home, in the United States. Those root causes were an ideology of market fundamentalism and the policies...
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