Chapter 1: The financial system and roots of crisis
Financial crises have occurred for centuries, and after the Great Recession of 2008 which began in the US and spread globally, both economists and policy makers have realized that economically developed countries are not immune from such phenomena. After the Asian financial crisis that began in 1997, much literature was generated which sought to decrease the volatility of capital flows, but in most studies, these short-term flows were seen as problematic only in combination with underdeveloped financial systems. Yet at this point, we have witnessed the final death knell of the efficient markets hypothesis (according to reasonable economists) which holds that prices immediately reflect all available information. We have also watched a key economic figurehead, former US Federal Reserve Chairman Alan Greenspan, admit that he was wrong in approaching monetary policy from a free market ideology. Free market ideology, in which markets are viewed as self-correcting and symmetric, remains prevalent in the United States, but cracks in the system can no longer be ignored. As history has shown, rather than reaching equilibrium, markets can descend into stagnation without active policy maneuvers. The correct policies are still subjects of sharp debate.
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