The Demise of Finance-dominated Capitalism

The Demise of Finance-dominated Capitalism

Explaining the Financial and Economic Crises

New Directions in Modern Economics series

Edited by Eckhard Hein, Daniel Detzer and Nina Dodig

This book provides an overview of different theoretical perspectives on the long-run transition towards finance-dominated capitalism, on the implications for macroeconomic and financial stability, and ultimately on the recent global financial and economic crisis. In the first part, the macroeconomics of finance-dominated capitalism, the theories of financial crisis and important past crises are reviewed. The second part deals with the 2007-09 financial and economic crisis in particular. The special focus is on the long-run problems and inconsistencies of finance-dominated capitalism which played a key role in the crisis and its level of severity.

Chapter 7: Global and European imbalances and the crisis: a critical review

Carlos A. Carrasco and Felipe Serrano

Subjects: economics and finance, financial economics and regulation, post-keynesian economics

Extract

The wave of global imbalances generated since the turn of the twenty-first century between the US economy and those of the South-East Asian emerging economies and oil-exporting countries were identified early on as a fundamental cause of the global financial crisis. The argument linking the crisis to these imbalances, in broad strokes, was that current account surpluses generated by emerging economies were placed in US financial assets. These flows, in the form of asset demand, pushed down long-term interest rates, which encouraged a credit boom that fuelled a real estate market bubble. In other words, the US financial system came under strong pressure to receive and recycle capital flows from abroad. Until the outbreak of the crisis, global imbalances were perceived, at least by some researchers, as a signal of a new global equilibrium that might persist over time. However, another group of researchers argued that these imbalances should be corrected by appropriate fiscal and monetary policies in the USA and by exchange rate adjustments in China to avoid a radical adjustment induced by a sudden stop of foreign capital flows into the US economy, an event with a high probability of dragging the global economy into crisis.

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