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Global Finance After the Crisis

The United States, China and the New World Order

Richard A. Iley and Mervyn K. Lewis

This thought-provoking book addresses challenging questions raised in light of the aftermath of the global financial crisis that saw an accelerated rise in the economic growth of China and other emerging market economies, while the US, Japan and Europe have laboured under the great recession.
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Chapter 3: Global finance and payments imbalances

Richard A. Iley and Mervyn K. Lewis

Extract

When the global financial crisis unfolded, the immediate focus of those searching for explanations of the causes was almost exclusively on ‘micro’ factors, involving the behaviour of the banks and failures in the regulatory system, that is, on the factors considered in the previous chapter. Only later were attempts made to place these factors in a wider macroeconomic context involving global imbalances. Pisani-Ferry and Santos (2009), for example, point out that ‘there was a collective failure to grasp fully the link between global payments imbalances and the demand for safe (or seemingly safe) financial assets and the manufacturing of those assets’. They continue: ‘it was the combination of strong international demand for such assets, largely in connection with the accumulation of current account surpluses in emerging and oil rich economies, and an environment of perverse economic incentives and poor regulation that proved to be explosive’ (p. 9).

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