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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 18: The failure to halt the emergence and growth of the debt bubble

Jane D’Arista

Extract

The Federal Reserve’s adherence to free market ideology contributed to its failure to recognize that changes in the structure of financial markets and the role of banks had weakened its ability to implement countercyclical monetary policy. Allowing reserve requirements to wither as a policy tool, it lost influence over the supply of credit and its reliance on interest rates to influence demand became increasingly counterproductive as rising rates increased capital inflows and falling rates triggered outflows. The loss of influence over the supply of credit resulted in a rise in the total debt of all US borrowers from $5 trillion in 1982 to $25 trillion at the end of the 1990s. But the debt bubble continued to grow and reached 352.6 percent of GDP at the end of 2007 — a clear signal that the economy could no longer generate sufficient income to service debt.

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