What Have We Learnt?
Edited by Steven Kates
Chapter 10: The New Institutional Economics and the Global Financial Crisis
Martin Ricketts INTRODUCTION The narrative of the global financial crisis is now very familiar. An asset price bubble, particularly associated with residential property, exposed financial organizations to risks that they did not recognize sufficiently. Like generals flushed with past successes, the chief executives of many of these organizations advanced confidently into terrain that more detached, cautious and historically aware observers might reasonably have warned contained dangerous features potentially lethal, not only to their own troops, but also, as a result of consequences felt elsewhere, fatal to an entire campaign. Economic organizations are interdependent just as individual people are interdependent. No economic organization ‘is an island entire of itself’ – in spite of historical attempts to construct one. Even large nation-states or empires are rarely self-sufficient, while, at the other end of the scale, even religious communities and small social communes depend to some degree on outsiders. Interdependence is the norm, and as the bell tolled for Northern Rock in September 2007 in the UK, when depositors queued to withdraw their funds; or for Lehman Brothers in September 2008 in the USA, when clients fled and Chapter 11 bankruptcy ensued; senior people in the banking industry (at least for a brief period) did not need John Donne to tell them for whom it tolled. If all organizations are interdependent it must nevertheless be admitted that the systemic consequences of failure vary massively. The fate of small religious communes will not disturb many other people as the effects gradually ripple out from the...
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