Global Crisis 2008 (Feb 28th 09)

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org
Review of Global Financial Crisis 2008: Issues, Analytical

Approaches and Interventions
Dr. S. M. Ali Akkas
Email: akkas54@gmail.com, info@cdss.ingeniousbd.org

Web: www.cdss.ingeniousbd.org
January 17, 2009
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www.cdss.ingeniousbd.org
Table of Contents
1. Introduction .................................................................................. 4
2. The Collapse of US Financial System and its Impact on World
Economy........................................................................................... 5
2.1 Global Economic Trend ...................................................................... 6
2.1.1 High commodity prices............................................................................ 7
2.1.2 Trade ........................................................................................................ 7
2.1.3 Inflation.................................................................................................... 7
2.1.4 Global stock markets ............................................................................... 8
2.2 Crisis in the US Economy ................................................................... 8
2.2.1 Possible recession .................................................................................... 8
2.2.2 Liquidity crisis in U.S. ............................................................................. 9
2.2.3 Developing global financial crisis ........................................................... 9
2.2.4 Impact of the Financial Crisis ................................................................ 10
2.2.4.2 Indirect economic effects.................................................................... 11
2.3 Crisis in Europe ................................................................................ 12
2.4 Crisis in other parts of the world ....................................................... 13
2.5 The financial crisis and the developing world ................................... 14
2.6 World Financial Crisis and Bangladesh ............................................ 14
2.6.1 Impact on Stock Market......................................................................... 15
2.6.3 Impact on the Export-oriented Sector .................................................... 15
2.6.4 Impact on Real Estate Sector ................................................................. 16
2.6.5 Impact in Rural Bangladesh................................................................... 17
3. Will the crisis lead to another Great Depression? .....................18
4. Global outlook and suggested policy measures........................19
4.1 Global Outlook ................................................................................. 19
4.2 Foreign Policy Implications of the Global Economic Crisis ............ 24
5. Approaches to Crisis Analysis: The Causes of the Crisis .........26
5.1 Group of 20 Interpretation ................................................................ 26
5.2 Personifying the Responsibility......................................................... 27
5.3 Unregulated Practice of Neo-liberal Ideology ................................... 27
5.4 Flawed institutions and practices of often referred New Financial
Architecture ............................................................................................ 27
5.5 Deregulation and Risk Shifting by Banks to Investment Banks......... 28
5.6 Problematic Financial System failing to manage Risk and allocate
Capital .................................................................................................... 29
5.7 Business Cycle Approach to Financial Crisis Analysis ..................... 30
5.7.1 Pro-cyclicality of financial institutions.................................................. 30
5.7.2 Need for a Counter-cyclical Banking System ....................................... 33
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6. Reviewing Policy Interventions.................................................34

6.1 Bailout and Economic Stimulus Package .......................................... 34
6.2 European Commissioner on Economic and Monetary Policy............ 35
6.4 Asia-Pacific Policy Responses .......................................................... 37
6.5 Bretton Woods Project ...................................................................... 38
6.6 Policy Response: Should it be Domestic or International? ................ 39
6.7 A new framework for international cooperation to change the course of
events...................................................................................................... 40
6.8 Policy Review: Roubini Standpoint .................................................. 42
7. Conclusion..................................................................................44
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Review of Global Financial Crisis 2008: Issues, Analytical

Approaches and Interventions
Dr. S. M. Ali Akkas1
(Abstract: The whole world is plunging into deep economic recession. Available and
dependable forecasts predict the US recession that began in December 2007 is going to
be the longest in post World War II history. One novel-laureate economist already passes
the opinion that the recession looks like an awful beginning of a second Great
Depression. This calls for an immediate mitigation strategy of quick recovery of the US
as well as the world economy. Unfortunately, other than the bail-out plan no sign of long
lasting solutions fundamental in nature is visible to face the recurring business cycle this
time likely to lead to another Great Depression.
Upheaval of the seeming second Great Depression raises doubts on the effectiveness of
the Keynesian and the subsequent post-Keynesian prescriptions to cyclical fluctuations.
Seeking solutions within the capitalist frame of reference appears to be not forthcoming –
a sign of seeming frustration. In a situation of current reluctance in seeking solution, it is
worth mentioning the reference of Minisky made recently by some ones regarding
interpretation of the causation of cyclical fluctuation, wherein, following each economic
boom the spread between the fixed payment commitments against uncertain cash flow
(the creditor biased debtor-creditor relationship of the institution of interest) has been
identified as the main internal cause of deepening the cyclical fluctuations. Does it not
call for rethinking or revising the traditional debtor-creditor relationship of the institution
of interest? The present paper reviews the causes of the worldwide October 2008
Financial Crisis following burst of US financial bubbles. It also discusses the need for
and mechanism in dealing with a transitional debtor-creditor relationship in investment
financing.)
1. Introduction
The global financial crisis started with bursting of October 2008 US financial bubble is not an isolated
phenomenon, rather it is deeply linked to
the recession of US economy following
the boom in November 2007. The U.S.
recession that began in December 2007 is
expected to be the longest in post World
War II history, according to the latest
survey of business economists by Blue
Chip Economic Indicators.1 The January
5th-6th poll of 52 economists from top
financial firms, manufacturers and
academia found that most expected a
tepid recovery to begin later this year,
with growth returning to more normal
1
Director, Planning & Development, Bangladesh Open University.
4
levels in 2010. This recession is predicted to be the longest because it will exceed the 16-month long
recessions of 1981-1982 and 1973-1975.
The consensus predicts real GDP will contract by -1.6% in 2009, the worst annual performance since 1982,
but grow 2.4% in 2010. Although a majority of those polled predict the recession will officially end in the
third quarter of 2009 more than half of respondents said unemployment would peak no earlier than 2010.
Inflation-adjusted consumer spending is expected to be especially weak this year, registering a decline of -
1.1%, the worst performance since 1942. Accompanying the weakness in economic growth will be much
lower inflation. The Consumer Price Index is forecast to fall -0.4% in 2009, the first year-over-year
decrease since 1955.
In December 2008, the

National Bureau of Economic
Research (NBER) declared
that the United States had
been in recession since
December 2007, and will
continue to plummet further
with no end in sight2. In
January 2009, Nobel prize
winning economist Paul
Krugman wrote that "This
looks an awful lot like the
beginning of a second Great
Depression."3
The world notices several comments on why this happened. In this paper I would present
the impacts so far on the world economy in Section-2. The Section-3 will deal with
different views on this cause of this great incident. I shall present my own analysis of the
event in Section-4.
2. The Collapse of US Financial System and its Impact on

World Economy
A collapse of the US sub-prime
mortgage market and the reversal
of the housing boom4 in other
industrialized economies have
had a ripple effect around the
world. Furthermore, other
weaknesses in the global
financial system have surfaced.
Some financial products and
instruments have become so
complex and twisted, that as
things start to unravel, trust in the whole system started failing.
5
The extent of this problem has been so severe that some of the world’s largest financial
institutions have collapsed. Others have been bought out by their competition at low
prices and in other cases, the governments of the wealthiest nations in the world have
resorted to extensive bail-out and rescue packages for the remaining large banks and
financial institutions.
The effect of this, the United Nation’s Conference on Trade and Development says in its
Trade and Development Report 2008 is, as summarized by the Third World Network, that
...the global economy is teetering on the brink of recession. The downturn after four years of relatively fast
growth is due to a number of factors: the global fallout from the financial crisis in the United States, the
bursting of the housing bubbles in the US and in other large economies, soaring commodity prices,
increasingly restrictive monetary policies in a number of countries, and stock market volatility.
… the fallout from the collapse of the US mortgage market and the reversal of the housing boom in various
important countries has turned out to be more profound and persistent than expected in 2007 and beginning
of 2008. As more and more evidence is gathered and as the lag effects are showing up, we are seeing more
and more countries around the world being affected by these rather profound and persistent negative effects
from the reversal of housing booms in various countries.5
The crisis became so severe that after the failure and buyouts of major institutions, the
Bush Administration offered a $700 billion bailout plan for the US financial system.
In Europe, a number of major financial institutions have failed, or needed rescuing.
For example, some nations have stepped in to nationalize or in some way attempt to
provide assurance for people. This may include guaranteeing 100% of people’s savings
or helping broker deals between large banks to ensure there isn’t a failure.
2.1 Global Economic Trend

The decade of the 2000s saw a
commodities boom, in which the prices
of primary commodities rose again after
the Great Commodities Depression of
1980-2000. But in 2008, the prices of
many commodities, notably oil and
food, rose so high as to cause genuine
economic damage, threatening
stagflation and a reversal of
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globalization.
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2.1.1 High commodity prices
In January 2008, oil prices surpassed

$100 a barrel for the first time, the first
of many price milestones to be passed in
the course of the year.7 By July the price
of oil reached as high as $147 a barrel
although prices fell soon after.
The food and fuel crises were both discussed at

the 34th G8 summit in July 2008. The World
Bank has said that rising food and fuel prices
will increase the number of malnourished people
around the world in 2008 by 44 million and the
effect of the crisis would be life-long on some
families.8
Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper
production and bioethanol production) increased in price 6-fold in less than 1 year whilst producers of
sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price
increases.
2.1.2 Trade
In mid-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in
one week, as the credit crunch made it difficult for exporters to obtain letters of credit.9
2.1.3 Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that
domestic inflation was at 10-20 year highs for many nations.10 "Excess money supply
around the globe, monetary easing by the Fed to tame financial crisis, growth surge
supported by easy monetary policy in Asia, speculation in commodities, agricultural
failure, rising cost of imports from China and rising demand of food and commodities in
the fast growing emerging markets," have been named as possible reasons for the
inflation.11
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries,
largely due to the unsterilized growth of foreign exchange reserves. However, inflation
was also growing in countries classified by the IMF as "non-oil-exporting LDCs" and
"Developing Asia", on account of the rise in oil and food prices.12
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Inflation was also increasing in the developed countries,13 but remained low compared to
the developing world.
2.1.4 Global stock markets
As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all
fallen by about 30% since the beginning of the year.14 There were several large Monday
declines in stock markets world wide during 2008, including one in January, one in
August, one in September, and another in early October.
2.2 Crisis in the US Economy
2.2.1 Possible recession
The United States entered 2008 during a housing market correction, a subprime mortgage
crisis and a declining dollar value.15 In February, 63,000 jobs were lost, a 5-year record.16
In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month
from January to September of 2008.17
In the early months of 2008, many observers believed that a U.S. recession had begun.18
As a direct result of the collapse of Bear Stearns, Global Insight increased the probability
of a worse-than-expected recession to 40% (from 25% before the collapse). In addition,
financial market turbulence signaled that the crisis will not be mild and brief.
Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008
financial crisis in the United States is likely to be judged as the harshest since the end of
World War II.19
In a May 9, 2008, report, the chief North American economist for investment bank
Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008,
"it is still reasonable to believe that the recession started some time between September
and January", on the grounds that the National Bureau of Economic Research's four
recession indicators all peaked during that period.20
A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the
United States were in a recession. The study also said 28 states were in recession with 16
at risk. The findings were based on unemployment figures and industrial production
data.21
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2.2.2 Liquidity crisis in U.S.
The Financial crisis of 2007–2008 initially referred to in the media as a "credit crunch"
or "credit crisis", began in
August 2007, when a loss
of confidence by investors
in the value of securitized
mortgages in the United
States resulted in a liquidity
crisis which prompted a
substantial injection of
capital into financial
markets by the United
States Federal Reserve and
the European Central
Bank.22 The TED spread,
an indicator of perceived
credit risk in the general
economy, spiked up in
August 2007, remained volatile for a year, then spiked even higher in September 2008.23
Although America's housing collapse is often cited as having caused the crisis, the
financial system was vulnerable because of intricate and overleveraged financial
contracts. One example was credit derivatives - Credit Default Swaps (CDS), which
insure debt holders against default. They are fashioned privately, traded over the counter
outside the purview of regulators.
Excessive lending under loosened underwriting standards, which was a hallmark of the
United States housing bubble, resulted in a very large number of subprime mortgages.
These high-risk loans had been perceived to be mitigated by securitization. Rather than
mitigating the risk, however, this strategy appears to have had the effect of broadcasting
and amplifying it in a domino effect. The damage from these failing securitization
schemes eventually cut across a large swath of the housing market and the housing
business and led to the subprime mortgage crisis. The accelerating rate of foreclosures
caused an ever greater number of homes to be dumped onto the market. This glut of
homes decreased the value of other surrounding homes which themselves became subject
to foreclosure or abandonment. The resulting spiral underlay a developing financial
crisis.
2.2.3 Developing global financial crisis
Beginning with bankruptcy of Lehman Brothers on Sunday, September 14, 2008, the
financial crisis entered an acute phase marked by failures of prominent American and
European banks and efforts by the American and European governments to rescue
distressed financial institutions, in the United States by passage of the Emergency
Economic Stabilization Act of 2008 and in European countries by infusion of capital into
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major banks. Afterwards, Iceland almost claimed to go bankcrupt. Many financial

institutions in Europe also faced the liquidity problem that they needed to raise their
capital adequacy ratio. As the crisis developed, stock markets fell worldwide, and global
financial regulators attempted to coordinate efforts to contain the crisis. The US
government threw the $700 billions plan which was attempted to purchase the
unperforming collaterals and assets. However, the plan was vetoed by the US congress
because a group of republicans rejected the idea that the taxpayers money are used to bail
out the Wall Street's investment bankers. The stock market plunged as a result, the US
congress amended the $700 billion bail out plan and finally passed the legislation.
Unfortunately, the market sentiment continuously deteriorated and the global financial
system almost collapsed. While the market turned extremely pessimistic, the British
government launched a 500 billion pounds bail out plan aimed to injecting capital into the
financial system. The British government nationalized most of the financial institions in
trouble. Many European governments followed as well as the US government. The
market has recently stablized. In addition, the falling prices due to reduced demand for
oil, coupled with projections of a global recession, brought the 2000s energy crisis to
temporary resolution.24
As the financial panic developed during September and October, 2008 there was a "flight
to quality"25 as investors sought safety in U.S. treasury bonds, gold, and strong currencies
such as the dollar and the yen. This currency crisis threatened to disrupt international
trade and produced strong pressure on all world currencies. The International Monetary
Fund had limited resources relative to the needs of the many nations with currency under
pressure or near collapse.26
2.2.4 Impact of the Financial Crisis
2.2.4.1 Direct Impacts
Financial crisis of 2007-08 produced a number of direct impacts. On July 19, 2007, the
Dow Jones Industrial Average hit a
record high, closing above 14,000 for
the first time.27
On August 15, 2007, the Dow dropped

below 13,000 and the S&P 500 crossed
into negative territory for that year.
Similar drops occurred in virtually every
market in the world, with Brazil and
Korea being hard-hit.
Mortgage lenders and home builders fared terribly, but losses cut across sectors, with
some of the worst-hit industries, such as metals & mining companies, having only the
vaguest connection with lending or mortgages.28
10
Stock indices worldwide trended
The crisis caused panic in financial markets and encouraged investors to take their money
out of risky mortgage bonds and downward for several months since the first panic in
July–August 2007.shaky equities and put it into commodities as "stores of value".29
Financial speculation in commodity futures following the collapse of the financial
derivatives markets has contributed to the world food price crisis and oil price increases
due to a "commodities super-cycle." Financial speculators seeking quick returns have
removed trillions of dollars from equities and mortgage bonds, some of which has been
invested into food and raw materials.30
Beginning in mid-2008, all three major stock indices in the United States (the Dow Jones
Industrial Average, NASDAQ, and the S&P 500) entered a bear market. On 15
September 2008, a slew of financial concerns caused the indices to drop by their sharpest
amounts since the 2001 terrorist attacks. That day, the most noteworthy trigger was the
declared bankruptcy of investment bank Lehman Brothers. Additionally, Merrill Lynch
was joined with Bank of America in a forced merger worth $50 billion. Finally, concerns
over insurer American International Group's ability to stay capitalized caused that stock
to drop over 60% that day. Poor economic data on manufacturing contributed to the day's
panic, but were eclipsed by the severe developments of the financial crisis. All of these
events culminated into a stock selloff that was experienced worldwide. Overall, the Dow
Jones Industrial plunged 504 points (4.4%) while the S&P 500 fell 59 points (4.7%).
Asian and European markets rendered similarly sharp drops.
The much anticipated passage of the $700 billion bailout plan was struck down by the
House of Representatives in a 228–205 vote on September 29. In the context of recent
history, the result was catastrophic for stocks. The Dow Jones Industrial Average suffered
a severe 777 point loss (7.0%), its worst point loss on record up to that date. The
NASDAQ tumbled 9.1% and the S&P 500 fell 8.8%, both of which were the worst losses
those indices experienced since the 1987 stock market crash.
It is also estimated that even with the passing of the so-called bailout package, many
banks within the United States will tumble and therefore cease operating. It is estimated
that over 100 banks in the United States will close their doors because of the financial
crisis. This will have a severe impact on the economy and consumers. It is expected that
it will take years for the United States to recover from the crisis .31
2.2.4.2 Indirect economic effects
The subprime crisis had a series of other economic effects. Housing price declines left
consumers with less wealth, which placed downward pressure on consumption. Certain
minority groups received a higher proportion of subprime loans and experienced a
disproportional level of foreclosures. Home related crimes including arson increased. Job
losses in the financial sector were significant, with over 65,400 jobs lost in the United
States as of September 2008.32
11
Many renters became innocent victims, often evicted from their homes without notice
due to foreclosure of their landlord's property. The sudden lack of credit also caused a
slump in car sales. Ford sales in October 2008 were down 33.8% from a year ago,
General Motors sales were down 15.6%, and Toyota sales had declined 32.3%. One in
five car dealerships are expected to close in Fall of 2008.33
2.3 Crisis in Europe

Denmark was confirmed to be in a recession after quarterly results for 2008 showed a
contraction of 0.6 percent in the first quarter following a contraction of 0.2 percent in the
fourth quarter of 2007.34 Estonia similarly saw an economic contraction of 0.9 percent in
the second quarter, following a 0.5 percent contraction in the first quarter, putting it in a
recession.35 Latvia officially entered a recession after gross domestic product fell 0.2
percent in the second quarter following a fall of 0.3 percent in first quarter GDP.36
Sweden's economy showed zero growth in the second quarter of 2008.37 The entire
economy of the European Union declined by 0.1 percent in the second quarter.38
The Icelandic króna has declined 40% against the euro during 2008 and has experienced
inflation of 14%. Iceland's interest rates have been raised to 15.5% to deal with the high
inflation.39 This depreciation in currency value has put pressure on banks in Iceland,
which are largely dependent on foreign debt. On September 29, 2008 Iceland's Glitnir
was effectively nationalized after the Icelandic government acquired 75% of the bank's
stock.
The economy of the United Kingdom has also been hit by rising oil prices and the credit
crisis. Sir Win Bischoff, chairman of Citigroup, said he believes that house prices in
Britain will keep falling for another two years. The Ernst & Young Item club predicted
growth of only 1.5 percent in 2008, slowing to 1 percent in 2009. They also predicted
consumer spending would slow to only 0.2 percent, and forecast a two-year drop in
investment. Deputy Governor of the Bank of England, John Gieve said inflation would
accelerate "well over" 4 percent while economic growth is "slowing fast." Bank of
England Governor Mervyn King said there may be "an odd quarter or two of negative
growth," following the first quarter of 2009. Gieve said he couldn't rule out the U.K.
economy heading into a recession.40 According to the Office for National Statistics
unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider
Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between
May and July, the largest increase since 1999.41
In September, British bank Bradford & Bingley's £20billion savings business was
acquired by Spanish bank Grupo Santander. While its retail deposit business along with
its branch network will be sold to Santander, the mortgage book, personal loan book,
headquarters, treasury assets and its wholesale liabilities will be taken into public
ownership.
12
Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent and 0.4
percent in 2009 due to a decline in multinationals hit by the global economic slowdown
making Ireland the first member of the eurozone to enter a recession.42
Spain's Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to

refinance a debt of 5.1 billion euros. In the second quarter in Spain house prices
reportedly fell 20 percent.43 Deutsche Bank said it expects a 35 percent fall in real house
prices by 2011. The Bank of Spain is concerned about the health of smaller regional
lenders with heavy exposure to the mortgage market. Spain’s unemployment has risen by
425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in
May. Spain's factory output slumped 5.5 percent in May. The country's business lobby
Circulo de Empresarios warned of a "high probability" that Spain's economy would fall
into recession in the second half of 2008 due to the housing collapse.44
In Germany officials are warning the economy could contract by as much as 1.5 percent
in the second quarter because of declining export orders. Industrial output in both Italy
and Greece has slumped 6.6 percent over the past year. Portugal is off 6.2 percent.45
Germany's industrial output was down 2.4 percent in May, the fastest rate for a decade.
Orders have now fallen for six months in a row, the worst run since the early 1990s. The
German Chamber of Industry and Commerce warned of up to 200,000 job losses in
coming months.46
In Italy, Fiat announced plant closures and temporary layoffs at factories in Turin, Melfi,
Imola and Sicily. Car sales in Italy have fallen by almost 20 percent over each of the past
two months. Analysts have predicted Italy had entered a recession in the second quarter
or would enter one by the end of the year with business confidence at its lowest levels
since the 9-11 terrorist attacks. Italy's economy contracted by 0.3 percent in the second
quarter of 2008.47 In May industrial output fell in the Netherlands by 6 percent.48
The French economy declined by 0.3 percent, Finland's economy declined by 0.2%, and
the Netherlands showed zero growth in the second quarter. According to INSEE, France's
statistical agency, the French GDP was projected to decline by 0.1 percent in the third
quarter of 2008 with another 0.1 percent decline in the fourth quarter falling into a
technical recession.49
2.4 Crisis in other parts of the world

New Zealand's economy contracted 0.3 percent in the first quarter and Treasury figures
suggested the economy also contracted in the June quarter putting New Zealand in a
technical recession. About 23 financial companies in New Zealand have filed for
bankruptcy in a year. Housing starts in New Zealand fell 20 percent in June, the lowest
levels since 1986. The figures suggest a decrease in construction and economic growth.
House sales fell 42 percent in June from a year earlier. The Treasury of New Zealand
concluded the country's economy had contracted for a second quarter based on economic
indicators, putting New Zealand in a recession.50
13
In Australia, approvals for loans to build or buy homes and apartments decreased 3.7
percent in June of 2008. Housing prices in Australia fell in the second quarter of 2008 for
the first time in about three years. Consumer confidence in Australia fell to a 16-year low
in July and retail sales fell 1 percent in June. High profile casualties of the credit crunch
include Allco Finance, MFS, ABC Learning, Babcock & Brown and Centro.51
In Japan exports in June declined for the first time in about five years falling by 1.7
percent. The decline in exports and increase in imports cut Japan's trade surplus $1.28
billion a decline of 90 percent from the previous year. Taro Aso, secretary-general of
Japan's ruling Liberal Democratic Party, said he believes Japan had entered a recession.52
Japan's economy declined by 0.6 percent in the second quarter of 2008.
In South Korea Samsung Electronics has been reported to be posting a decrease in sales
for the first time since the Asian financial crisis since home appliances saw a decrease in
the domestic market of up to 20 percent since mid-June compared to the previous year.
Domestic auto sales also saw a decrease in the second quarter.53
Singapore's economy saw it's biggest drop in five years in the second quarter, falling by
6.6 percent. Taiwan announced billions of dollars in spending and tax cuts due to
declining growth and a 26 percent slump in the stock market in 2008. Finance Minister
Tharman Shanmugaratnam said he could not rule out Singapore entering a recession.54
2.5 The financial crisis and the developing world

For the developing world, the rise in food prices as well as the knock-on effects from the
financial instability and uncertainty in industrialized nations are having a compounding
effect. Summarizing a United Nations Conference on Trade and Development report, the
Third World Network notes the impacts the crisis could have around the world, especially
on developing countries that are dependent on commodities for import or export.55
Commodity-dependent economies are exposed to considerable external shocks stemming

from price booms and busts in international commodity markets.
Market liberalization and privatization in the commodity sector have not resulted in
greater stability of international commodity prices. There is widespread dissatisfaction
with the outcomes of unregulated financial and commodity markets, which fail to
transmit reliable price signals for commodity producers.
2.6 World Financial Crisis and Bangladesh
Immediately after the United States' October 2008 credit crunch and the subsequent
turmoil in the developed world Bangladesh economy was apprehended to be hit mildly
but confidence in the prevailing economic system would hit hard. Experts were optimistic
to rule out serious impact of global financial crisis in Bangladesh immediately but
suggested more regulation on economy rather than pursuing free-marketism recklessly.
Eminent economist Prof Muzaffer Ahmad said the impact of US crisis would not hit
14
Bangladesh hard because this economy is mostly based on domestic sectors. Impact on
apparel sector, the main exportable item, would also not be severe as the country exports
less-value items. The seasoned economist did not see any severe consequence of US fall
on manpower export of Bangladesh.
After 90 days of the financial bubbles burst in US, impact analysis on Bangladesh in its
stock market, banking sector, garments export and real estate sector are available.
2.6.1 Impact on Stock Market
While other emerging economy stock markets have crashed, cut in half in a couple of
months, the Bangladesh bourses have only experienced a mild correction - down 11 per
cent from their peaks.56 There are two key reasons as follows:
First, foreign capital inflow into the Bangladesh stock market has been limited. While in
countries like India, foreign capital inflow accounts for over 40 per cent of trading
volume, and in Vietnam more than 50 per cent, for Bangladesh this number is closer to 5
per cent. Even if these foreign funds were all to pull out of Bangladesh, which seems
unlikely given the performance of the DSE compared to other emerging market indexes,
the impact would be small.
Second, banks in Bangladesh have been immune in spite of a large segment of the stock
markets was shaken. Like many of their developed market counterparts, the Bangladesh
stock indexes have a heavy concentration of financial institutions; banks and other
financial institutions account for over 44.23 per cent of market capitalization of the
Dhaka Stock Exchange. Moreover, unlike their foreign counterparts, Bangladeshi banks
have not been big casualties of the global financial meltdown for the same reason.
2.6.3 Impact on the Export-oriented Sector
Export-oriented sectors being a small part of the index and representing less than 10 per
cent of the market capitalization and taking the first brunt of the negative consequences
of the financial crisis, the impact on the stock market is relatively small.
Bangladesh's apparel sector sees a bright prospect amid the ongoing global economic
crisis as manufacturers have bagged adequate orders for ready-made garment (RMG) up
to November 2008.57 During the first three months of the current fiscal year the RMG
exports grew by 44.66 per cent on an average and only in September this sector saw a
vigorous growth of 45.26 per cent.
Local RMG manufacturers and the BGMEA said massive shutdown of factories in China
and higher wages in India, Indonesia, Vietnam, Sri Lanka, Pakistan and Cambodia are the
main reasons behind the increased orders in the local RMG sector.
15
Industry people said the growth rate of the industry over the last three years was on an
average at 64 per cent.
It is interesting to note that the retail sales at US clothing stores dropped significantly in
2008 over 2007 and the buyers from the US market also had reduced imports from
clothing manufacturing nations but the US import of clothing from Bangladesh continued
to rise in 2008. The reason might be relative external competitiveness of Bangladesh in
this sector. As per Global Apparel Manufacturing Labour Cost Update-2008, Bangladesh
pays the lowest wages to its over 2.4 million workers, of them over 85 per cent are
women.
According to the study, India pays 51 cents an hour, China 86 cents, Indonesia 44 cents,
Sri Lanka 43 cents, Vietnam 38 cents, Pakistan 37 cents, Cambodia 33 cents and
Bangladesh 22 cents.
2.6.4 Impact on Real Estate Sector
The country's housing sector is likely to face yet another slump due to the ongoing
financial crisis in developed countries, including the USA.58
As a result of lasting economic crisis Bangladeshi expatriates living in the USA, Britain
and other countries might face job cuts. This will hit real estate sector hard as they are
major buyers of Bangladesh real estate sector. Bangladeshi expatriates are engaged in
construction work and self-employed as taxi drivers abroad. So they will be the victims
of the recession. It will have a definite impact on Bangladesh real estate sector. China’s
slow downing of production in the wake of ongoing economic crisis will have a negative
impact on Asia including Bangladesh, as Bangladesh also uses China’s building raw
materials.
Bangladesh had a sound growth in real estate sector reaching peak in 2006. But
developers did not take new projects in 2007, so its impact will be felt in 2009 and 2010.
In the last two years under the interim government, the growth of the sector remained
totally negative. The second six-month period grew a little bit, the third segment was
better than the previous period. In the fourth segment the sector recovered at least 75 per
cent. Developers have signed agreements with the land owners and taken up many
projects in the second half of 2008.
The country's real estate sector which had been growing at a pace of double digit until
2006 would have a negative growth in 2009 and in 2010 as a result of global recession.
The next round after effect of world credit crunch has manifested in Bangladesh by the
collapse in the Steel Re-rolling sub-sector. In fact, investment in Bangladesh was also
following the world trend of investing in housing leading to major pouring of bank credit
to this sector which has already stagnated resulting massive bad debt concerns for
investing banks. The effect is that no further investment demand in the real estate sector
resulting fall in iron rod price and subsequent halt of rod production in Bangladesh.
16
2.6.5 Impact in Rural Bangladesh
The country's shipments of primary and agriculture products such as shrimps,jute and jute
goods, vegetables, betel leaf, cut flowers are sliding fast amid a global recession,
dragging down export growth and directly hitting millions of rural people.59
Between July and December the country's exports of goods such as shrimps, jute,
vegetables and cut flower have declined by more than five per cent to US$488.23 million,
or a 20 per cent drop from the target.
During the same period, shipment of manufactured items including apparel rose 21.49 per
cent to $7.27 billion, raising the share of manufactured products to 94 per cent of the
country's total exports.
In global foreign trade, only Cambodia with manufactured goods occupying a
disproportionate 97 per cent of its export basket is ahead of Bangladesh.
Officials and industry said there is a steep slide of primary goods' exports --- rather than
ready-made garments --- have been the main culprits behind the shipment downturn in
December.
Export was growing around 27 per cent in the first five months to November, thanks to
swelling of orders for ready-made garments, textile fabrics and footwear.
But it plunged 10 per cent in December to $1.195 billion, pulling down six months export
growth to 19.38 per cent.
Frozen food, jute, vegetables, cut flower and betel nuts have been main poor performers,
as the worst global economic downturn since 1930s triggered a slump for their demand in
the western markets.
While a hefty growth in manufactured items bode well for millions of factory workers in
the cities, falling demand for agriculture and primary goods has already affected millions
of rural poor.
From a fry catcher in Cox's Bazar to a jute grower in Mymensingh and to a tribal betel
leaf plucker in Moulvibazar Khasia-punji , the global recession has affected millions of
farm workers in rural Bangladesh.
Shipment of frozen food, the second biggest export item after apparel, dropped by four
per cent, but exporters said the decline would be steeper in the coming months due to fall
in shrimp consumption in Europe and America.
Restaurant and hotel business are the worst victims of the global recession. Shrimp is a
rich people's luxury in the western hotels and in this time of crisis there have been fewer
orders for such luxuries. The precipitious decline has resulted in a huge stockpile of
shrimps at dozens of processing plants. The ultimate victims would be the coastal
17
districts' millions of fry catchers, farmers, ice workers, traders and processing workers
who make their living on the Tk. 40 billion industry.
Both raw jute and jute goods such as yarn, hessian and sackings have been faring worse
since the economic crisis gripped the developed nations in the latter half of 2008. Jute
spinners have shut down three factories, shed some 25,000 jobs and cut raw jute
purchases to cope with ebbing demand caused by the global economic crisis. Export of
jute goods --- the fourth biggest export item of the country --- slumped a 17.86 per cent in
the first six months while raw jute fell by nine per cent. Declining orders from key
markets such as Belgium and Turkey meant that the chances are bleak for a jute rebound
in the next six months. The country's 20 million farmers who grow jute as a cash crop
during the rainy season will bear the brunt of the crisis as the prices of raw jute have
already nosedived in local markets.
Export of vegetables, cut flowers and betel leafs grew more than 60 per cent in in the last
fiscal year and have been important drivers of growth in the north and western Bengal.
Cut flower and betel leafs exports dived by 44 per cent and vegetables by 35 per cent in
the first six months.
3. Will the crisis lead to another Great Depression?

Global EconoMonitor lead analysts presented an analysis on Jan 13 2009 that 2008 was
a dismal year for the economy and financial markets and it is now official that the current
U.S. recession started already in December 2007. So, how far the economy is into this
recession that has already lasted longer than the previous two (the 1990-91 and 2001
recessions lasted 8 months each)? Global EconoMonitor forecasts that the U.S.
economy is only half way through a recession that will be the longest and most severe in
the post war period. U.S. GDP will continue to contract throughout all of 2009 for a
cumulative output loss of 5% and a recession that will thus last about two years. The
forecast is much worse than the current consensus forecast expecting a growth recovery
in the second half of 2009; predicts significantly weak growth recovery – well below
potential - in 2010.60
Nouriel Roubini, Chief of Global EconoMonitor warned on March 2008 that because
the United States is such a huge part of the global economy, there’s real reason to worry
that an American financial virus could mark the beginning of a global economic
contagion. Last year’s worst-case scenarios came true. But the economy is still only in
the early stages of this crisis. Predictions for the coming year, unfortunately, are even
more dire: The bubbles, and there were many, have only begun to burst.61
The global financial system in 2008 experienced its worst crisis since the Great
Depression of the 1930s. Major financial institutions went bust. Others were bought up
on the cheap or survived only after major bailouts. Global stock markets fell by more
than 50 percent from their 2007 peaks. Interest-rate spreads spiked. A severe liquidity
and credit crunch appeared. Many emerging-market economies on the verge of a crisis
had to ask for help from the International Monetary Fund.62
18
The U.S. recession that began in December 2007 is expected to be the longest in post
World War II history, according to the latest survey of business economists by Blue Chip
Economic Indicators.63 The January 5th-6th poll of 52 economists from top financial
firms, manufacturers and academia found that most expected a tepid recovery to begin
later this year, with growth returning to more normal levels in 2010. This recession is
predicted to be the longest because it will exceed the 16-month long recessions of 1981-
1982 and 1973-1975.
The consensus predicts real GDP will contract by -1.6% in 2009, the worst annual
performance since 1982, but grow 2.4% in 2010. Although a majority of those polled
predict the recession will officially end in the third quarter of 2009 more than half of
respondents said unemployment would peak no earlier than 2010. Inflation-adjusted
consumer spending is expected to be especially weak this year, registering a decline of -
1.1%, the worst performance since 1942. Accompanying the weakness in economic
growth will be much lower inflation. The Consumer Price Index is forecast to fall -0.4%
in 2009, the first year-over-year decrease since 1955.64
4. Global outlook and suggested policy measures
4.1 Global Outlook
On September 24, 2008 John Lipsky, First Deputy Managing Director of IMF
summarized in a deliberation the global outlook, and suggested policy measures
necessary to keep the global
economy advancing with a
view to avoiding the risks of
either a sharp downturn or
meaningful deterioration in
inflation prospects. The
forecast was as follows:
Advanced and emerging
economies are moving in the
same direction—that is,
growth is slowing
everywhere—effectively
ending earlier hopes of a
growth decoupling. The
marked slowdown in global
activity is being led by major
advanced economies, which are either close to recession or experiencing growth far
below potential.
Analyzing background context of the global outlook, Lipsky identifies housing and credit
markets in the United States at the core of the slowdown. The growth slowdown has
19
spread to Europe and Japan, amid weak business and consumer sentiment, terms of trade
losses, weaker partner country growth, the impact of strong currencies on trade, and
tightening credit conditions. Activity also is decelerating in emerging and developing
economies, although growth in these regions remains high and close to trend, in large part
reflecting the strength of domestic demand. Despite weakening global growth prospects,
inflation has risen around the world to the fastest pace since the 1990s.
In the advanced economies, headline inflation accelerated to around 4½ percent in

July’08 driven mainly by oil price rises. However, underlying or core inflation has
remained contained and, with commodity prices now in retreat, inflation is expected to
moderate quickly, notwithstanding the recent—probably temporary—oil price increase.
The inflation resurgence has gone much further in emerging and developing economies,
although risks have receded recently. Headline inflation climbed to about 9 percent in the
aggregate by mid-year, and a wide range of countries are experiencing double-digit
inflation.
This overall state of affairs in the global economy reflects the confluence of three major
shocks: high commodity prices, the housing downturn affecting the United States and
several other advanced economies, and the financial crisis. The interplay of these shocks
has made policymaking much more difficult.65
Commodity
prices have
retreated
recently, but are
expected to
remain high and
volatile. The
prices of major
agricultural
commodities
have moderated,
although the
pass-through to
food prices may
be more drawn
out than for oil
and energy
prices.
Nevertheless, if
the trends in commodities prices are sustained, this would help create new space for
countercyclical monetary, and in some cases, budgetary policies, Lipsky adds.
20
Oil prices have moved off their highs, but uncertainty remains high. Strong demand
growth—fueled by the acceleration of activity in resource-intensive emerging
economies—
sluggish supply
responses, and
declining
inventories and
spare capacity, are
likely to keep
prices high and
volatile.
The housing
downturn—the
epicenter of the
slowdown in the
United States—is
still unfolding. With a large glut of unsold homes, house prices—on a national basis—
continue to fall and the negative equity (or level) problem is still growing, although
futures data suggest some deceleration in the rate of price decline. As prices fall,
however, the collateral value of housing is declining, adding to the financial market
pressures. Despite this collateral effect, consumption has held up better than might have
been expected, in part because the moderate drop in total US employment has not
prevented a modest gain in disposable income, including the impact of the income tax
rebates that were distributed at the end of the second quarter.
As is recognized widely, it is the intensified financial crisis that is dominating the near-
term global outlook.
Notwithstanding extraordinary actions by major central banks, interbank spreads have

widened sharply, underlining
heightened risk aversion and
uncertainty. Strains in term-
funding markets increasingly
reflect not only liquidity but
serious credit risks and
counterparty concerns.
Elevated credit risks reflect
the ongoing pressures on bank
balance sheets, as well as
signs of wider credit
deterioration in the context of
slower economic growth,
particularly in areas exposed
to the U.S. mortgage,
21
construction, and commercial real estate markets. As a result, monetary and financial
conditions have tightened further. Weaker share prices and wide spreads on mortgage and
corporate debt have raised financing costs.
Progress has been made towards balance sheet adjustment, but the task of strengthening
financial positions has become much more challenging. In both the United States and in
Europe, banks have raised substantial amounts of capital while writing down about
$520 billion
(largely on U.S.
based assets),
compared to loss
estimates of
between $640-
735 billion for
banks and about
$1.3 trillion for
the entire global
financial system.
But the downturn
in economic
activity, falling
share prices,
rising funding
costs and declining revenues from activities like securitization and leveraged buyouts are
making adjustment more difficult. Ongoing deleveraging in the financial sector is likely
to weigh on the pace of credit and economic growth for a considerable period of time,
Lipsky further adds.
Emerging economies
are also now being
increasingly affected
by the financial crisis.
Equity prices have
declined sharply and
bond spreads have
widened. Countries
with larger external
current account
deficits have faced
greater market
pressures in both
credit and equity
markets, underscoring
their greater
vulnerability to
spillovers from
22
financial and economic stress in advanced economies.
Looking forward, four principal factors underpin our view that a serious downturn can
be avoided.
First, as noted earlier, oil prices have come down sharply from their highs.
In the United States, if oil prices remain around current levels, a modest rebound in
consumption may be expected in the United States (and in the euro area) over the course
of 2009.
Second, it is not unreasonable to anticipate that the U.S. housing market will find a
bottom through the course 2009.
Third, while credit

conditions have
tightened in both the
United States and
Europe, growth can
continue. Recent IMF
analysis suggests that
a slowdown in credit
provision does not
necessarily forestall
an economic
recovery. In the
United States, for
example, non-
financial corporate
balance sheets are
relatively healthy.
Productivity gains
have helped to sustain
profits. As in past
U.S. downturns,
internal funds help buffer against less provision of bank credit and market financing.
Time-bound investment tax credits will also encourage corporate capital expenditures in
the coming months.
Finally, we expect that relatively resilient domestic demand and growth in emerging
economies would support global (and U.S.) growth.
In this context, however, I would note that the lack of adjustment in the currencies of
several economies with inflexible exchange rate regimes and large external surpluses has
not been supportive of global adjustment. These relatively faster growing economies—
notably China—would benefit from some currency appreciation to help foster more
balanced internal growth, relieve domestic price pressures, and, at the same time, support
global growth and reduce imbalances.
23
On balance, we anticipate a further slowdown in global growth before a gradual

recovery begins during the coming year . Nonetheless, the challenges facing the global
economy and the financial system are formidable, and downside risks to the outlook have
risen.
4.2 Foreign Policy Implications of the Global Economic Crisis

On February 11, 2009 Desmond Lachman made testimony in the Senate Foreign
Relations Committee on the Foreign Policy Implication of global economic crisis. In the
testimony concerned was expressed about the likely major political fall out from what
will almost certainly be the worst global economic slump in the post-war period. Refering
IMF it was conceded that output in the world's advanced economies will contract by as
much as 2 percent in 2009, while global output will increase by a scant ½ percent in 2009
or by the lowest rate in the past 60 years. This would be the first time in the post-war
period that output will have contracted in a synchronized manner in all of the world's
major economies. A pernicious feature of the synchronized nature of this crisis is that it
precludes the possibility of any of the major industrialized countries from exporting its
way out of its recession. The IMF is also now expecting only a very gradual global
economic recovery in 2010, which will keep global unemployment at a high level. To
him, the IMF is probably underestimating the severity of the global downturn in 2009 as
it has done through the course of this crisis. In recent months, output and employment
appear to have been in free fall in the United States, Europe, and Japan.
In the last quarter of 2008, Japanese exports declined at a 12 month rate in excess of 30
percent, while industrial production fell by around 10 percent. These developments,
coupled with the strong appreciation of the Japanese yen, raise again the specter of
deflation in that country. It is particularly disturbing that Japan's compromised public
finances and its lack of room for monetary policy easing will highly constrain Japan's
ability to successfully combat a renewed bout of deflation.
In Europe, one has to be concerned about the lack of an adequate monetary and fiscal
policy response to falling output across the European region. Of particular concern has to
be the difficulties that the straitjacket of a single European currency is causing for
Greece, Ireland, Italy, Portugal, and Spain.
4.3 Risks and Policy Challenges
The serious risk and the policy challenges lie with it revolves around the potential
negative feedback loop between continuing financial market strains and slowing
economic activity. Despite aggressive policy actions aimed at alleviating liquidity strains
and preventing systemic events, markets remain under severe stress. Beyond systemic
events, a major concern is that rising losses, increasing difficulty in raising capital, and
more aggressive attempts to deleverage balance sheets could imply severe credit
24
contraction, In addition, emerging market economies, that have so far been relatively
insulated from the financial turmoil, potentially could be subject to capital flow reversals,
with serious implications for economic activity. Under such a situation, the key
challenges to restoring the financial system to full functionality are to insure adequate
liquidity provision, to restore damaged balance sheets, and to rebuild capital where
needed.66
Lipsky thinks that the first line of defense in sustaining liquidity lies with monetary
authorities. Monetary policy can play a critical role in helping individual economies find
their footing, but the scope for policy easing ultimately will depend on each country's
cyclical position.
In advanced economies, the slowdown in activity may help contain inflation. Given the
downside risks to growth and the ongoing strains of the financial crisis in advanced
economies outside the United States, there could be scope to lower interest rates
(including in the euro area and the United Kingdom) if activity slows and inflation
moderates as projected. In addition, central banks have expanded the scope and duration
of their liquidity support through rediscounting operations. In several cases, such as the
UK's Special Liquidity Scheme, monetary authorities have developed innovative
techniques to improve market liquidity.67
In many emerging economies, the shifting balance of risks between inflation and growth
suggests greater policy scope for countries with moderating inflation and policy
credibility to take a "wait and see" approach. That said, inflation risks still remain
serious in several countries where growth remains strong and where, given lags in pass-
through, food and energy price increases are still in the pipeline and could feed into
"second-round" effects. For these countries, monetary policy should still have a
tightening bias.
Fiscal policy provides a second line of defense. It has played a role in the United States
already and automatic stabilizers are appropriately providing support elsewhere in other
advanced economies. In many emerging economies, fiscal policy will have to play a
supportive role to monetary policy in helping to bring down inflation.
Fiscal policy is broadly appropriate across the advanced economies, but room for
maneuver is limited given the need for medium-term fiscal consolidation in many of these
countries. However, support for the financial sector inevitably will involve budgetary
costs that must be taken into account in considering policy alternatives.
In emerging economies where inflation remains a problem, fiscal policy should play a
more supportive role in restraining demand growth and easing inflation pressures. In
particular, greater restraint on spending growth would be helpful as a complement to
tighter monetary policy.
An element that makes these policy challenges particularly difficult is that in many
markets, the financial sector likely became outsized. Thus, restoring the sector to health
25
will include further consolidation. To put it bluntly, not all institutions can or should be
saved. Naturally, monetary and budget policies will be critical in meeting the policy
challenges, but it is clear already that these alone will not be adequate to reach the goal
of restoring balanced growth. The use of the public sector balance sheet to contain
systemic financial risks—a third line of defense or direct intervention—no doubt will
continue to be instrumental in addressing the problems, a suggestion of Lipsky has
already been put in effect by USA and its European mates.
In these circumstances, the key is to strike the right balance between safeguarding present financial stability and
limiting future moral hazard. This task is by no means an easy one, but the consequences—either in the short- or
longer-term—would be severe if the pendulum swings too far in either direction.
The reality of financial globalization means that policy interventions—including the longer-term issues of
regulatory and supervisory reforms—need to be globally coherent and consistent in order to be effective. No
doubt, new actions will be needed to cope successfully with the near-term challenges. In addition, the issue will
have to be addressed eventually of how to prevent excessive risk-taking in the future, without stifling the
powerfully positive potential of effective financial markets.
5. Approaches to Crisis Analysis: The Causes of the Crisis

The reasons shown for this crisis are varied68 and complex.69 The crisis can be attributed
to a number of factors pervasive in both housing and credit markets, factors which
emerged over a number of years. Causes proposed include the inability of homeowners to
make their mortgage payments, poor judgment by borrowers and/or lenders, speculation
and overbuilding during the boom period, risky mortgage products, high personal and
corporate debt levels, financial products that distributed and perhaps concealed the risk of
mortgage default, monetary policy, and government regulation (or the lack thereof).70
Utimately, though, moral hazard lay at the core of many of the causes.71
5.1 Group of 20 Interpretation
In its "Declaration of the Summit on Financial Markets and the World Economy," dated
15 November 2008, leaders of the Group of 20 cited the following causes:
"During a period of strong global growth, growing capital flows, and prolonged stability
earlier this decade, market participants sought higher yields without an adequate
appreciation of the risks and failed to exercise proper due diligence. At the same time,
weak underwriting standards, unsound risk management practices, increasingly complex
and opaque financial products, and consequent excessive leverage combined to create
vulnerabilities in the system. Policy-makers, regulators and supervisors, in some
advanced countries, did not adequately appreciate and address the risks building up in
financial markets, keep pace with financial innovation, or take into account the systemic
ramifications of domestic regulatory actions."72
26
5.2 Personifying the Responsibility
Some analysts hold former Federal Reserve Board Chairman Alan Greenspan, Treasury
Secretary Robert Rubin, and SEC Chairman Arthur Levitt for not regulating financial
instruments known as derivatives.73 According to these analysts, it was the collapse of a
specific kind of derivative, the Mortgage Backed Security, that triggered the economic
crises of 2008. It was Alan Greenspan's actions and inactions that triggered the economic
crises of 2008, wrote attorney Timothy D. Naegele producing economic tsunami that has
been rolling worldwide with devastating effects. He asserts that Greenspan is the
architect of the enormous economic "bubble" that burst globally.74
5.3 Unregulated Practice of Neo-liberal Ideology
What followed that crisis was not an egalitarian restructuring of world-trade relations but
the rise of a neo-liberal ideology in the late 1970s that was embodied in Reaganomics and
Thatcherism in the global north and the Washington consensus and structural adjustment
in the global south.75
Many libertarians76 predicted the crisis

prior to its occurrence. They are critical of
theories that the free market caused the
crisis and instead argue that the Federal
Reserve's printing of money out of thin air
and the Community Reinvestment Act are
the primary causes of the crisis.77
Furthermore, the reason the crisis could

not be contained had nothing to do with
the borrowers and everything to do with the fancy financial packaging and creative
marketing techniques that the debt originators resorted to. The urge to come up with the
new and, in retrospect, unsound methods of debt financing was driven by greed; the urge
to participate in amassing what appeared to be easy - though albeit- unethical profits ,
arose from the excess liquidity injected into the global financial markets by the major
central banks. 78
The FED is blamed to have provided the economy with a big amount of liquidities,
boosting speculation and the housing bubble. In fact, in March 2000, the dot com bubble
burst and the crash had negative repercussions on the US economy. This process was
worsened by the 9/11 attacks, which led to the temporary closure of the financial markets.
As a result, the FED cut interest rates to stimulate economic growth. Then it started to
raise the interest rate from 1% in 2004 to 5.25% in 2006.
5.4 Flawed institutions and practices of often referred New Financial

Architecture
27
James Crotty argues (citation

needed) that the ultimate
cause of the current global
financial crisis is to be found
in the deeply flawed
institutions and practices of
what is often referred to as
the New Financial
Architecture (NFA) – a
globally integrated system of
giant bank conglomerates
and the so-called 'shadow
banking system' of investment banks, hedge funds and bank-created Special Investment
Vehicles. The NFA has generated a series of ever-bigger financial crises that have been
met by larger and larger government bailouts.
5.5 Deregulation and Risk Shifting by Banks to Investment Banks

C.P. Chandrasekhar (citation needed) finds
the crisis traced to forces unleashed by the
transformation of US and global finance
starting in the 1970s. Prior to that, the US
financial sector was an example of a highly regulated
and stable financial system in which banks
dominated, deposit rates were controlled, small and
medium deposits were guaranteed, bank profits were
determined by the difference between deposit and
lending rates, and banks were restrained from
straying into other areas like securities trading and
the provision of insurance. The era of deregulation followed, he explains, had many features.
To start with, banks extended their activity beyond conventional commercial banking into merchant
banking and insurance, either through the route where a holding company invested in different kinds of
financial firms or by transforming themselves into universal banks offering multiple services.
........................
Second, within banking, there was a gradual shift in focus from generating incomes from net interest
margins to obtaining them in the form of fees and commissions charged for various financial services.
Third, related to this was a change in the focus

of banking activity as well. While banks did
provide credit and create assets that promised
a stream of incomes into the future, they did
not hold those assets any more. Rather they
structured them into pools, “securitized” those
pools, and sold these securities for a fee to
institutional investors and portfolio managers.
Banks transferred the risk for a fee, and those
who bought into the risk looked to the returns
they would earn in the long term. Many of
these structure products were complex
28
derivatives, the risk associated with which was difficult to assess. The role of assessing risk was given to
private rating agencies, which were paid to grade these instruments according to their level of risk and
monitor them regularly for changes in risk profile.
Fourth, financial liberalisation increased the number of layers in an increasingly universalised financial
system, with the extent of regulation varying across the layers. Where regulation was light, as in the case of
investment banks, hedge funds and private equity firms, financial companies could make borrow huge
amounts based on a small amount of own capital and undertake leveraged investments to create complex
products that were often traded over the counter rather than through exchanges.
Finally, while the many layers of the financial structure were seen as independent and were differentially
regulated depending on how and from whom they obtained their capital (such as small depositors, pension
funds or high net worth individuals), they were in the final analysis integrated in ways that were not always
transparent. Banks that sold credit assets to investment banks and claimed to have transferred the risk lent
to or invested in these investment banks in order to earn higher returns from their less regulated activities.
Investment banks that sold derivatives to hedge funds, served as prime brokers for these funds and
therefore provided them credit. Credit risk transfer neither meant that the risk disappeared nor that some
segments were absolved from exposure to such risk.
The view that had come to dominate the debate was that the financial sector had become too complex to
be regulated from outside; what was needed was self-regulation.
In the event, a less regulated and more complex financial structure than existed at the time of the S&L
crisis, was in place by the late 1990s. In an integrated system of this kind, which is capable of building its
own speculative pyramid of assets, any increase in the liquidity it commands or any expansion in its
universe of borrowers (or both) provide the fuel for a speculative boom. Easy access to credit at low
interest rates triggered a housing boom, which in turn triggered inflation in housing prices that encouraged
more housing investment. From 2001 to end 2007, real estate value of households and corporate sector is
estimated to have increased by $14.5 trillion. Many believed that this process would go on.
5.6 Problematic Financial System failing to manage Risk and allocate

Capital
Jan Kregel considers the sub prime crisis in the US has little to do with the mortgage market, or
subprime mortgages per se, but rather with the basic structure of the financial system that produces
overestimates of creditworthiness and under pricing of risk. The bottom line is that the system has been
structured to make credit too cheap, leading to excessive risk in order to provide higher returns. The
financial fragility that was identified in Minsky's work cannot be eliminated, only damped by systemic
policies.
Joseph Stiglitz’s comments published in The Guardian on September 16, 2008 is worth
mentioning. He says America’s financial system failed in its two crucial responsibilities:
managing risk and allocating capital. The industry as a whole has not been doing what it
should be doing … and it must now face change in its regulatory structures. Regrettably,
many of the worst elements of the US financial system … were exported to the rest of the
world. It was all done in the name of innovation, and any regulatory initiative was fought
away with claims that it would suppress that innovation. They were innovating, all right,
but not in ways that made the economy stronger. Some of America's best and brightest
were devoting their talents to getting around standards and regulations designed to ensure
29
the efficiency of the economy and the safety of the banking system. Unfortunately, they
were far too successful, and we are all — homeowners, workers, investors, taxpayers —
paying the price.79
5.7 Business Cycle Approach to Financial Crisis Analysis
5.7.1 Pro-cyclicality of financial institutions
The foregone analyses of the credit crunch have all blamed the wrong Fed policy,
deregulation or the bad innovation of so-called credit derivatives and last not the least the
failure of the financial system in managing risk and allocating capital, the systemic
inefficiency, as mentioned by Joseph Stiglitz. The analysis by Stiglitz is a serious blow to
the institutional viability of the financial system under capitalism, this time known as
‘casino capitalism’. Minsky identified fragility of conventional banking system based on
interest in the context of business cycle. He finds lending mechanism of conventional
banking system as an internal cause of accelerating business cycle80. It is the ‘spread’
between the fixed payment commitments to bank against uncertain cash flow of the
borrowers that widens while the economy switches over from boom to recession. The
implication is that interest-based conventional banks become more and more alert and
desperate in recovering dues from the borrowers leading to foreclosure of already sick
enterprises, bring other solvent ventures in line of foreclosure diverting funds from this
units in to the already sick ones.81
Nouriel Roubini82 cites the great but relatively unknown Post-Keynesian economist
Hyman Minsky in his latest dispatch about the state of US financial markets and
economy.83 Minsky’s main contribution to economics was a model of asset bubbles
driven by credit cycles. In his view periods of economic and financial stability lead to a
lowering of investors’ risk aversion and a process of releveraging. Investors start to
borrow excessively and push up asset prices excessively high. In this process of
releveraging there are three types of investors/borrowers. First, sound or “hedge
borrowers” who can meet both interest and principal payments out of their own cash
flows. Second, “speculative borrowers” who can only service interest payments out of
their cash flows. These speculative borrowers need liquid capital markets that allow them
to refinance and roll over their debts as they would not otherwise be able to service the
principal of their debts. Finally, there are “Ponzi borrowers” who cannot service neither
interest nor principal payments. They are called “Ponzi borrowers” as they need
persistently increasing prices of the assets they invested in to keep on refinancing their
debt obligations.
The other important aspect of the Minsky Credit Cycle model is the loosening of credit
standards both among supervisors and regulators and among the financial
institutions/lenders who, during the credit boom/bubble, find ways to avoid prudential
regulations and supervisions.
30
Minsky’s ideas and model fit nicely to the last two US credit booms and asset bubbles
that ended up in a recession: the S&L-based real estate boom and bust in the late 1980s;
and the tech bubble and bust in the late 1990s. But the experiences of the last few years
suggest another Minsky Credit Cycle that has probably now reached its peak. First, it was
the US households (and households in some other countries) that releveraged
excessively: rising consumption, falling and negative savings, increased in debt burdens
and overborrowing, especially in housing but also in other categories of consumer credit,
an increase in leverage that was supported by rising asset prices (housing and, more
recently, equity). We know now that many sub-prime borrowers, near-prime borrowers
and many condo-flippers were exactly the Minsky “Ponzi borrowers”: think of all the
“negative amortization mortgages” and no down-payment and no verification of income
and assets and interest rate only loans and teaser rates. About 50% of all mortgage
originations in 2005-2006 had such characteristics. Also, many other households (near
prime and subprime borrowers) were Minsky “speculative borrowers” who expected to
be able to refinance their mortgages and debts rather than paying a significant part of
their principal.
The Minsky idea of loosening of credit/lending standards among mortgage lenders – and
the phenomenon of supervisors/regulators falling asleep at the wheel while the reckless
credit bubble occurs – is also now evident in the recent mortgage credit cycle. A
supervisory ideology that tried to minimize any prudential supervision and regulation and
totally reckless lending practices by mortgage lenders led to a massive housing and
mortgage bubble that has now gone bust. The toxic waste aftermath of this bust includes
more than fifty subprime lenders gone out of business this years, soaring rates of
delinquency, default and foreclosure on subprime, near prime and non-conventional
mortgages, and the biggest housing recession in the last few decades with now home
prices falling for the first time – year over year – since the Great Depression of the 1930s.
While the process of releveraging started in the household sector – that is the most
financially stretched sector of the US economy – the releveraging more recently spread to
the corporate and financial system: in the financial system the rise of hedge funds, private
equity and speculative prop desks led to a sharp rise in the financial system leverage. In
the corporate sector given the cheapness - until recently - of credit we observed a massive
process of switch from equity to debt that took the form of leveraged buyouts, share
buybacks and privatization of formerly public companies. This releveraging fed that
equity/asset bubble: as expectations of more LBOs occurred equity valuation of many
firms went higher and higher. The excesses took recently the form of premia of 40-50%
or higher on the stock price of firms that were a leveraged takeover target. Specifically,
CLO demand for corporate debt helped fuel the private equity sponsored LBO wave over
the past few years, and thus contributed to the recent bull market in equities. Notice also
that the amount of issuance of low grade corporate bonds (below investment grade “junk
bonds”) had been rapidly rising in the last few years.
While pure “Ponzi” borrowers were not as common in the corporate system, there is wide
evidence of “speculative borrowers” who relied and still rely on continued refinancing of
their debts.
31
Thus, until recently the Minsky “speculative borrowers” in the corporate sectors included
corporations that could service their debt only by refinancing such debt payments at very
low interest rates and financially favorable conditions. While “Ponzi borrowers” were
those firms that, under normal liquidity conditions, would have been forced into distress
and debt default but were instead able to obtain out-of-court rescue and refinancing
packages because of the most easy credit and liquidity conditions in bubbly markets.
The Minsky phenomenon of loosening credit and lending standards during a credit
bubble included both the corporate borrowers and financial institutions. First, there are
clear parallels between the mortgage market and the leveraged loan markets. These
include corporate borrowers’ high leverage ratios, declining credit standards (“cov-lite”
loans instead of subprime), PIK (or payment-in-kind) deals (variants of negative
amortization), insufficient monitoring by lenders due to the “originate and distribute”
model (loans repackaged into CLOs instead of CDOs), banks’ retained exposure (bridge
loans as opposed to CDO equity tranche). In the financial system, margin requirement for
hedge funds and other leveraged speculators became lower and lower as the competition
for prime brokerage services for hedge funds among lenders became fierce.
Housing bubble, mortgage bubble, credit bubble, debt bubble and asset prices (equities,
housing, prices of corporate debt and other risky loans) rising well below what could be
justified by the economic and credit fundamentals. It certainly looked like a typical
Minsky Credit Cycle. The first crack in this cycle was the bust of housing and of
subprime mortgages in the US. The second crack was the spread of the subprime carnage
to near prime and prime mortgages and to subprime credit cards and auto loans. The third
crack is the most recent repricing of risk in a variety of credit markets and the beginning
of a credit crunch in the LBO and corporate credit markets.
Roubini observed in August 2007 a significant worsening in US financial conditions and

a peaking of the Minsky Credit Cycle in a variety of markets:84
(1) a housing recession that is getting worse by the day and home prices now falling (for
the first time since the Great Depression) as the housing asset bubble has now burst.
(2) a credit crunch in subprime that is now spreading to near prime (Alt-A) and prime
mortgages (see the Countrywide financial results) and to subprime credit cards and
subprime auto loans;
(3) massive losses - at least $100b in subprime alone and most likely to end up higher –
in the mortgage markets;
(4) a significant recent increase in corporate yield spreads (by 100 to 150 bps);
(5) the beginning of a liquidity crunch in capital markets that starts to look like the one
experienced during the LTCM crisis (10 year swap spreads are - at 70bps - at their
highest levels since 2002 and close to the levels that triggered the 1998 LTCM
crisis);
(6) the effective shut down of the CDO and CLO markets as investors risk aversion
towards complex derivative instruments - whose official ratings are clearly bogus
given the subprime ratings debacle - is sharply up;
32
(7) up to 40 LBO deals now in serious trouble (restructured, postponed or cancelled) as

the credit crunch is spreading to the leveraged loans and LBO market;
(8) the overall increasing stresses in a variety of credit markets (”a constipated owl”
where “absolutely nothing is moving” is how Bill Gross of Pimco described the
effective recent shutdown of the CDO market);
(9) credit default swap spreads being sharply up;
(10) the ABX, TABX, LDCX, CMBX, CDX, iTraxx indices all showing rising risk
aversion of investors, sharply rising credit default spreads and significant concerns
about credit risk in a variety of credit markets (US, Europe and Japan corporate,
high yield corporate, commercial real estate, leveraged loans), not just in subprime
or in mortgage markets.
5.7.2 Need for a Counter-cyclical Banking System
The foregone Roubini interpretation of Minisky Credit Cycle applied to the last three
credit boom and asset bubbles (including the recent one in October 2008) may be
summarized as follows: (a) all of the three credit cycles started with the economic boom
and ended with recession. That means, each credit cycle is linked to business cycle with
the implication that crisis in financial sector generates instability in real sector following
each boom and accelerates recession or depression in the economy. In other words,
financial sector has a pro-cyclicality effect on the real sector and that works through the
fixed payment commitment of the borrowers against their uncertain cash flows – an
uneven contractual practice between the traditional financial institutions and the
borrowers – expediting credit defaults, foreclosures and deepening recession, thereby
aggravating business cycle each time.
In a recent conference “Building an International Monetary and Financial System in

21st Century: Agenda for Reform held in New York during November 24-25, 2008
Erich Harbrecht, Head of International Financial System Division, Deutsche Bundesbank
said “IMF’s main task would be to analyze the interaction between the real economy and
the financial system, and monitoring, particularly while implementing supervisory
standards and stability risk in the context of Article IV consultations and the ESAP”.85
Some participants in the conference argued that “Basel II had enhanced pro-cyclicality
and the three-pillar system (minimum capital requirements, supervisory review, and
market discipline) was inadequate. In this regard prudential regulation should become
anti-cyclical rather than pro-cyclical. The real challenge lied in the pro-cyclicality of
banking, not in the pro-cyclicality of the capital regime”86
This calls for bringing reforms in contractual obligations of and relationship between the
financier and borrower so that corrective measures can be taken towards removing pro-
cyclical character of the financial institutions.
33
6. Reviewing Policy Interventions
6.1 Bailout and Economic Stimulus Package

In response to global financial crisis originated from the subprime mortgage crisis in
USA during September 2008, the U.S. government announced a series of comprehensive
steps to address the problems, following a series of "one-off" or "case-by-case" decisions
to intervene or not, such as the $85 billion liquidity facility for American International
Group on September 16, the federal takeover of Fannie Mae and Freddie Mac, and the
bankruptcy of Lehman Brothers.
The Emergency Economic Stabilization Act of 2008, commonly referred to as a

bailout of the U.S. financial system, is a law enacted in response to the global financial
crisis of 2008 authorizing the United States Secretary of the Treasury to spend up to
US$700 billion to purchase distressed assets, especially mortgage-backed securities, and
make capital injections into banks.[1][2] Both foreign and domestic banks are included in
the bailout. The Federal Reserve also extended help to American Express, whose bank-
holding application it recently approved.[3] The Act was proposed by Treasury Secretary
Henry Paulson during the global financial crisis of 2008.
The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the
worth of the remaining assets, and restore confidence in the credit markets.
In Feb. 2009, the stimulus package the U.S. Congress is completing would raise the
government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay
off more than 90 percent of the nation’s home mortgages.
The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation
have lent or spent almost $3 trillion over the past two years and pledged up to $5.7
trillion more. The Senate is to vote this week on an economic-stimulus measure of at least
$780 billion. It would need to be reconciled with an $819 billion plan the House
approved last month.
Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief
Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008
have been voted on by lawmakers. The remaining $8 trillion is in lending programs and
guarantees, almost all under the Fed and FDIC. Recipients’ names have not been
disclosed.
The pledges, amounting to almost two-thirds of the value of everything produced in the
U.S. last year, are intended to rescue the financial system after the credit markets seized
up about 18 months ago. The promises are composed of about $1 trillion in stimulus
packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to
provide aid.
34
The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of
the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and
Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank
of America Corp.
The Group of Seven (G7) Finance Ministers and Central Bank Governors, meeting in Rome on 13-14
February, agreed to accord their highest priority to stabilising the global economy and financial markets, as
well as to avoid protectionist measures, refrain from raising new barriers. The G7 meeting also took place
just as the US Congress gave the nod to US President Barack Obama's massive $787 billion stimulus
package aimed at kick-starting the troubled US economy. The package comes on the heels of an
announcement earlier in the week by US Treasury Secretary Timothy Geithner of a whopping $2.5 trillion
bailout plan for US banks.
Other G7 countries such as France, Canada, Italy, Japan, the United Kingdom and Germany had also earlier
instituted bailout measures and guarantee schemes for their troubled financial institutions. Some of them,
such as the United States, Germany and France, also came to the aid of their auto industries, which have
been hard hit by the global downturn, by providing billions of dollars worth of loans.
In a communique issued on Saturday, the G7 finance ministers and central bank governors said: "The
stabilisation of the global economy and financial markets remains our highest priority.
These actions aimed at restoring normal credit flows to the economy follow three approaches as needed:
(1) enhanced liquidity and funding through traditional and newly created instruments and facilities;
(2) strengthen the capital base according to the competent authority's assessment of individual financial
institutions; and
(3) facilitate the orderly resolution of impaired assets. The G7 commits to take any further action that may
prove necessary to re-establish full confidence in the global financial system.
6.2 European Commissioner on Economic and Monetary Policy
Joaquín Almunia, European Commissioner for Economic and Monetary Policy made a
deliberation on “A recipe for recovery: the European response to the financial crisis” in
the 2nd Brussels' International Economic Forum, Brussels on 11 November 2008 as
follows:
.
The crisis has caused confidence to fall significantly. It is aggravating the housing market
corrections in some advanced economies. With the US and some European countries in recession,
and the outlook darkening for emerging economies too, the global economy is slowing and
external demand is falling rapidly.
In our central scenario, growth in 2008 would be 1.4% in the EU and 1.2% in the euro area – half
what it was in 2007. In 2009 the EU economy is expected to grind to a stand-still at 0.2% [0.1%
in the euro area] before recovering to 1.1% [0.9% in the euro area] in 2010.
While all Member States will experience a downturn, it will be more pronounced and protracted
in those countries with greater exposure to shocks.
35
Employment is set to increase only marginally in 2009 and 2010 compared to the 6 million new
jobs created over the last two years. After being at its lowest for more than a decade, we expect
unemployment to rise by about 1 percentage point.
There is one piece of good news– the downturn is helping to ease inflation as oil prices fall. We
now forecast inflation at 2.4% in the EU for 2009.
The outlook is not only bleak, it is also highly uncertain. There is a real risk that if the financial
stress intensifies or lasts longer, it may have a greater effect on the economy and could fuel the
negative feedback loop between the economy and the financial sector.
Faced with the most difficult economic situation in decades, we need to mobilise a concerted and
coordinated policy response as done in the financial sector. This means using all the policy
instruments we have available to limit the slowdown, protect jobs and lay the ground for a sound
recovery.
The first tool is monetary policy. The recent fall in inflation has opened the way to interest rate
reductions to help sustain consumption and investment. The European Central Bank has already
demonstrated its readiness to act with two cuts in the last weeks.
Second, within the rules of the Stability and Growth Pact there is scope for budgetary policy to
cushion the slowdown.
We don't underestimate the challenges ahead for fiscal policy. The slowdown will inevitably take
its toll on budgetary positions. And emergency measures to support the banking sector are already
having an effect on government debts.
Fiscal policy should remain on a sustainable course. It should take into account the different
situations in different Member States. The recent sharp increase in spreads on sovereign debt in a
number of Member States is a reminder that the scope to use fiscal policy to support the economy
varies across countries.
The Pact provides for specific treatment when "exceptional circumstances" exist. A deviation
above the 3% ceiling, if it is temporary and the deficit remains close to the reference value, does
not trigger the opening of an Excessive Deficit Procedure.
If the EDP is open, but the economic situation is what the Pact defines as "special circumstances",
the deadlines for the correction of an excessive deficit can deviate from the general rule and be
extended to more than one year. And if this situation continues at the end of that period, new
recommendations can be issued without advancing to the next steps in the procedure.
These recommendations will take into account the existence of national fiscal rules and medium
term budgetary frameworks that will help fulfil the engagements assumed by the member state
concerned by the EDP.
Third policy intervention would be to track fast certain structural reforms to mitigate the impact
on the real economy, especially those which boost demand and help reduce inflationary pressures,
supporting household purchasing power.
Immediate priority should be given to measures which enhance productivity. Pressing ahead with
measures in low carbon technologies and energy efficiency would both support European
competitiveness while tackling climate change.
Measures that ease the hardship of job losses and lay the ground for renewed employment growth
would have to be pursued. This means strengthening 'flexicurity' in our labour markets policies,
making sure that income support is available to vulnerable households and investing in education
and skills.
36
Finally, immediate steps to improve access to financing for businesses, especially SMEs are to be
taken. Part of this can be done through the European Investment Bank, which has already
increased its loan package for SMEs to 30 billion euro. We will propose reinforcing the capital
base of the EIB so that the bank can continue to support businesses as well as accelerate financing
of climate change, energy security and infrastructure projects.
The downturn has a global nature, and international partners need to take coordinated measures to
boost world demand, particularly those countries or regions with large current account surpluses.
This would both help support global growth and facilitate the unwinding of large global
imbalances.
It is vital that Europe reaffirms its commitment to the principle of openness and lead by
example. It must uphold the competition rules that underpin the Single Market and come
out strongly against trade barriers.
6.4 Asia-Pacific Policy Responses
Asia-Pacific countries met in the 3rd week of February 2009 to discuss responses to
global economic crisis. Ministries of labour and finance, senior UN, World Bank and
government officials, workers and employers representatives from more than 10 Asia and
the Pacific countries are meeting in Manila this week to discuss effective responses to the
current economic crisis.87
The report, The fallout in Asia: Assessing labour market impacts and national policy
responses to the global financial crisis, prepared by the Bangkok based ILO’s Regional
Office for Asia and the Pacific was discussed.
In reviewing existing crisis response measures the report says that just as important as the
size of national rescue packages there was the need to focus fiscal measures on areas that
have the largest potential multiplier effect. Another important consideration is whether
they enhance economies’ medium-term growth potential – so that increased fiscal
spending now will be covered by higher future revenues, without the need for prohibitive
tax increases.
Maximizing the employment impact of stimulus packages and maintaining household

incomes and purchasing power should be a central goal, the report says. Packages should
be capable of being rolled out rapidly and have a significant impact on employment
almost immediately. Measures that are likely to meet these criteria and have a strong
multiplier effect include:
• Expanding already-approved public spending projects (e.g. infrastructure,

housing, health, education).
• Scaling up existing social transfers (e.g. unemployment benefit systems, welfare
payments to low income families, other poverty reduction programmes) will help
protect the poor and most vulnerable.
• Programmes to help poor families keep their children in school.
• Fiscal measures that target credit-constrained businesses; particularly SMEs,
labour-intensive industries or those that don’t rely on imports.
37
While job insecurity is clearly on the rise the report also says there are some grounds for
optimism in the region. Many countries enjoy considerable fiscal room for
countercyclical policy measures to address the crisis. Asia’s developing economies,
which are faring far better than the region’s industrialized economies, are expected to
grow by 5.5 per cent in 2009. When the recovery begins many Asian economies may
bounce back quickly, due to their policies and solid underlying fundamentals. To make
the most of this the report says that:
• The social partners – employers and workers organizations – must be involved in

policy design and constructive dialogue must be supported.
• Labour standards, in particular the core ones, must continue to be monitored and
respected as they form the basis of decent work and are essential to preserving
social progress and maintaining social stability.
• Crisis response should be seen as an opportunity to rebalance towards more
domestically-led growth, including investments that will boost long-term
productivity – e.g. workforce skills, research and development, and other
measures that will improve the quality of labour, enterprise productivity and
environmental protection. In particular, the opportunities for a “green recovery”
and “green jobs’ are vast.
• Co-operation between countries could help confront the crisis and minimize the
negative effects on people, enterprises, rights, and decent work. Asia can play a
leading role in creating much better policy coherence at national, regional and
international levels.
In the forum, the participants proposed practical measures to address the global economic
crisis. These measures include protecting and supporting decent jobs, collective
bargaining, and severance packages. The ILO also stressed the need to support specific
sectors, such as the rural and agricultural economy as well as the vulnerable groups of
workers. These vulnerable groups of workers include international and internal migrants,
temporary workers, women, and the youth, it added.
Enterprise support measures, including access to credit, should also be given to small and
medium enterprises, the ILO said. In addition, developing countries should also get
international and regional aid to include funding and easing of conditionality from
financial institutions.
Meanwhile, the ILO said it would help mobilize development partners to strengthen
regional cooperation, reduce barriers to trade and commerce, and build capacities for
policy coherence for growth, employment, and decent work.
6.5 Bretton Woods Project
The global economic and financial crisis has ushered in a number of calls by the World
Bank, the International Monetary Fund, the Commonwealth, the European Union and the
Group of Seven to rethink the international financial system, its institutions and its
governance – in essence a Bretton Woods II. But for the most part, the proposals want to
38
put the world’s leading industrialized economies and a select few emerging economies in
the driver’s seat. With the Bank and Fund turning 65 next year, isn’t it time for these
institutions to retire, and for all governments – under the auspices of the United Nations
(UN) – to engage in a radical rethink of the international monetary and financial
system.88
Others have proposed a new international institution to deal with banking regulation and
oversight. This new institution would then set global rules which could be enforced at the
national or international level. This idea is supported by UK-based NGO Oxfam: "This
new institution should act counter-cyclically, ensuring money is put aside during good
times, and is released during slowdowns in order to minimize boom and bust. It should
also be comprehensive; new rules should cover not just banks but also the parallel
financial system, including hedge funds and private equity funds. Some first steps should
include applying stricter international capital reserve requirements and stronger
transparency rules."
University of California professor Barry Eichengreen has supported this idea in a

modified format - a voluntary arrangement only for those countries whose financial
institutions are seeking access to foreign markets. He proposes obligations for
supervision and regulation, but not hard rules, so that it would "permit regulation to be
tailored to the structure of individual financial markets."
Paul de Grauwe of the University of Lueven in Belgium advocates instead "returning to

narrow banking", meaning much stricter limits on commercial banks, preventing them
from investing in equities, derivatives and structured finance products. Financial
institutions not declaring themselves commercial banks would be required to ensure that
the duration of their liabilities would be at least as long as the duration of their assets.
This banking model would have to be "embedded in an international agreement" in order
to "avoid a classic regulatory race-to-the-bottom".
US officials have thrown cold water on such proposals, and the biggest blockers are
likely to be the United States and the United Kingdom, the countries with the biggest
financial sectors. One US official said "we believe there is little support ... for
empowering a single global authority to regulate all of the world's financial markets."
6.6 Policy Response: Should it be Domestic or International?
The G20 Leaders have met and urged action. Learned commentators have opined that
there can be no solution without international concerted action. There are calls for a
Global Prudential Regulator, and for a massive increase in the IMF’s international lender-
of-last resort capabilities.89 However, actions so far have been on the domestic policy
front. Does it mean that are most of the required responses to the Global Financial Crisis,
in fact, would have to be domestic? Or much more international cooperation are to follow
later?
39
The immediate need is to shrink leverage, maintain a flow of new lending and keep the
core financial sector afloat, while addressing sagging confidence with fiscal stimulus.
This requires big cash infusions, lower interest rates and budget deficits – all purely
domestic issues.90
Steven Grenville opines91 Basel III may be another decade away, but there is no need to
wait. Most of the problems can be corrected by determined domestic action. The biggest
task by far is in the USA, where the dispersed, uncoordinated and under-resourced
regulatory bureaucracy was over-ridden, by-passed or ignored by the entrenched forces of
Wall Street and the powerful anti-regulation free-market ethos. The UK has already
begun substantive reform, demonstrating that the opportunity and responsibilities lie
squarely with the national authorities, who need no international oversight.
As regards international policy coordination, until 1971 the Breton Woods system
provided some discipline and international coordination, fixing exchange rates and
tolerating restrictions in capital flows. When this system broke down, it was widely
believed that the magic of the market or the flexible exchange rates would allow stable
capital flows to fund whatever external imbalances arise. Despite ample evidence since
then that the market doesn’t work at all smoothly in price discovery or equilibration, the
US has shown no enthusiasm at all for attempting international policy coordination.92
Where external imbalances have been identified as excessive, the response has usually
been bilateral. Multilateral agencies such as the IMF have been side-lined.
The December 2008 communiqué set out a realistic agenda, waiting to be built on in
April 2009. International peer pressure can urge countries to act more strongly where
there is beneficial international spill-over, such as expansionary fiscal policy. G20 can
discourage countries from actions which threaten an international spiral of tit-for-tat
policy – principally trade protection. Grenville’s opinion is pertinent in this case. G20 can
spotlight US regulatory inadequacies by urging members to undertake the IMF/World
Bank assessments of their regulatory frameworks. The US is the only G20 country not to
have begun this process. It could oversight the strengthening of of the process. If the pace
of adjustment in the different countries is out of sync, GDP and exchange rates may be
sharply disrupted.93
So the case for international coordination is strong. But for success, it requires both
heightened motivation and a new forum.
6.7 A new framework for international cooperation to change the course

of events
RIETI Senior Fellow KOBAYASHI Keiichiro, following the collapse of U.S. brokerage
firm Bear Stearns, wrote that the deepening U.S. financial crisis and weakening dollar
would eventually impose a huge burden of economic adjustments throughout the world,
particularly on China and other emerging economies. Theoretically, China should be able
40
to reduce its burden of economic adjustments by allowing the renminbi (RMB) to

fluctuate freely under a free-floating exchange rate system. In reality, however, an
excessively sharp drop in the value of the dollar would impose huge costs on China.
From a long-term point of view, the appreciation of the RMB with respect to the dollar is
unavoidable for China. Still, slowing the pace of the dollar's decline could be beneficial
for China, because decelerating RMB appreciation would substantially reduce China's
noneconomic adjustment costs, such as those associated with social unrest and ethnic
minority problems.
Thus, as a new framework for international cooperation to change the future course of
events, it may be possible to consider a scheme under which Chinese public funds
(foreign reserves) would be injected into capital-depleted U.S. financial firms to shore up
their capital bases, thereby propping up the dollar. Such a scheme - needless to say it
would be beneficial to the U.S. - would bring considerable benefit to China in terms of
reducing the unwanted social adjustment costs that would accompany a sharp decline in
the dollar. This would be a win-win strategy for both the U.S. and China.
Of course, given the current delicate relationship between the two countries on the
military front, it is unthinkable that the Chinese government would be permitted to
become a major shareholder of leading U.S. financial firms. Such an event would surely
invoke the argument that U.S. security could be undermined by the acceptance of such
capital infusions that would effectively place major U.S. financial firms under Chinese
control. This problem, however, could be averted by devising an appropriate multilateral
funding mechanism, a scheme under which the Japanese government sets up a fund and
the Chinese government purchases bonds issued by the fund. That is, China would lend
money, but limit its role to that of creditor, to the Japanese fund. This Japanese fund
(hereinafter the "East Asia foreign exchange stabilization fund") would then inject funds
into capital-depleted U.S. financial firms and government-affiliated housing corporations
through the purchase of non-voting preferred shares or subordinated bonds. Under this
scheme, the Chinese government's influence over the East Asia foreign exchange
stabilization fund would be kept to a minimum because it would only be purchasing
bonds issued by the fund. Furthermore, the fund's influence over the management of U.S.
financial firms would be limited because investments would be made in the form of non-
voting preferred shares or subordinated debt. By thus creating double walls to block the
Chinese government's influence over the management of U.S. financial firms, the
possibility of Beijing interfering with the U.S. financial system would be reduced to a
considerable extent.
If this multilateral cooperative framework can be designed in such a way that countries
other than China also purchase bonds issued by the East Asia foreign exchange
stabilization fund, the Chinese government's control would be further reduced. This
should be a welcome scheme for the U.S. provided that these other countries investing in
the fund are friends and allies of the U.S. - namely Asian countries such as Japan and
South Korea. China would not necessarily lose out on the deal by offering public funds
under this scheme. In the short run, China is bound to incur substantial unrealized losses
if U.S. housing prices continue to decline because the public funds are destined to be
41
invested in capital-depleted U.S. financial firms. However, things appear quite different
from a much longer-term point of view looking beyond the next ten years.
Considering the public significance of a stable dollar to the global economy, capital
injected into the U.S. financial system under such an international cooperative framework
involving China and other countries should be a practical option.
Moreover, considering the practicality, it is necessary to maintain the dollar-based

international monetary system in order to ensure the world's political and economic
stability. Eventually it may become impossible to support the dollar's value solely by
means of the tax collecting power of the U.S. government, given the expected decline of
the U.S. economy relative to the world economy. If so, the idea of the combined tax-
collecting power of the world's major economies underpinning the value of the dollar,
instead of the U.S. alone, may be worth considering for a new and more stable
international monetary system.
The U.S. financial crisis facing us today may be pressing the world to make a historic
choice.
6.8 Policy Review: Roubini Standpoint

Based on 31 December 2008 assessment that the credit crisis would grow worse and
2009 would be a painful year of global recession,further financial stresses, losses, and
bankruptcies Nouriel Roubini opted for an aggressive, coordinated, and effective policy
actions by advanced and emerging-market countries to ensure global economy recover in
2010.
On January 11th, 2009 Roubini blamed the political leaders who facilitated the global
economic crisis, surrendering to the “logic” of the unregulated market place and stated
that United States had broken from a fiscal standpoint. The trillions of dollars in excess
expenditures as planned by the policy makers would inevitably require massive
borrowing from foreign countries who themselves are in need of their own stimulus
deficit spending. The only way the U.S. will be able to attract foreign credit in this
context is through much higher interest rates. This will kill private borrowing, stifling
investment and ultimately defeating the purpose of the stimulus spending. The other
alternative is to simply print the money, and produce the hyper-inflationary hell that now
exists in Zimbabwe.
As the U.S. is reliant on foreigners to finance its fiscal and current account deficits, it will
have to compete with many other countries also seeking deficit financing to salvage their
own insolvent banks, the UK being a conspicuous example. Even with higher interest
rates, it is unlikely that there is enough credit available to cover the total cost of bailing
out the U.S. banking industry (it must also be factored in that the Obama administration
plans on borrowing one trillion dollars for an economic stimulus program, not directly
related to salvaging the banks). Printing the money and monetizing debt will lead to
crippling inflation and the inevitable destruction in the value of the U.S. dollar. Finally,
42
the level of increased taxation required to pay for full recapitalization of the American
banks without resort to credit markets would be so severe, it is probably both politically
and fiscally unsustainable.
With the numerical analysis of Nouriel Roubini adding a quantitative reality to the
impending meltdown of the global banking sector in general and U.S. banks in particular,
it appears that a bankers hell is in store for us all. In a perverse paradox, instead of banks
lending to people, it will be the people called upon to save what can be salvaged from an
insolvent banking system, even at the cost of economic ruin that may endure for
generations.
February 10th, 2009. A banking system that is insolvent is dysfunctional in the extreme.
That is the core of the credit crunch that has now precipitated a Global Economic Crisis
so egregiously destructive, it will likely exceed the Great Depression of the 1930s in its
impact. This is why all the costly deficit spending on economic stimulus packages being
enacted in the G7, BRIC and eurozone countries are doomed to failure. The key decision
makers are aware of this conundrum, which is why they are frantically searching for a
solution to the banking disaster that has frozen normal credit flows throughout the global
economy. The American banking sector is insolvent to such an immense degree, it would
in all likelihood require recapitalization at a level counted not in hundreds of billions, but
rather trillions of dollars.
Virtually every serious economist agrees that massive deficit spending in the United
States by both the public and private sector was the driver of the global economic crisis.
Strange that the identical prescription that led to this disaster is now being advertised as
the cure.
The paradox is that the U.S. economy cannot afford the cost of salvaging its banks. To
him, “In many countries the banks may be too big to fail but also too big to save, as the
fiscal/financial resources of the sovereign may not be large enough to rescue such large
insolvencies in the financial system.”
That means, the United States created a banking system with large institutions that are
too big to fail, due to the systemic risk such a collapse would impose on the national and
even global economy. It compounded this roll of the dice by removing any coherent
regulatory regimes, instead trusting in the “self-correcting” character of the unregulated
marketplace, which encouraged risky behaviors, otherwise known as “innovation,”
leading to the creation of unsustainable asset bubbles.
However, no matter how the Obama administration packages its own TARP II bank
rescue effort, it is increasingly likely that the foreign credit markets the United States
relies on for financing its grandiose deficit spending will simply lack the capacity to loan
all the money needed to recapitalize America’s banks.
In the event the credit markets are unable to finance the rescue of the U.S. banking sector,
then the lender of last resort will undoubtedly be the Federal Reserve. By resorting to
43
quantitative easing, the Fed may purchase Treasury bills with bank notes it simply
generates off of its printing press. In essence this is legal counterfeiting, conjuring up fiat
money out of thin air. It may lead to the recapitalization of the banks, on paper. But the
net cost will be the destruction of the U.S. dollar as the world’s reserve currency, along
with the displacement of the current trend of deflation with a virulent and potentially
uncontrollable outbreak of hyperinflation.
In his latest blog posting on February 20th, 2009, Roubini offered the following dire
pronouncement: “The process of socializing the private losses from this crisis has already
moved many of the liabilities of the private sector onto the books of the sovereign…at
some point a sovereign bank may crack, in which case the ability of the governments to
credibly commit to act as a backstop for the financial system-including deposit
guarantees-could come unglued.”
In effect, governments in the major economies acted as a backstop, putting their

sovereign credit potential on the line to preserve a measure of confidence necessary to
prevent a total run on the banks and unsustainable levels of de-leveraging.
All the steps outlined above have the appearance of panic-driven improvisation. As this
crisis has already proven, improvisation is never a substitute for thoughtful and strategic
policy response. It appears, based on what Roubini is now apprehending that in the year
2009 we will witness the futility of the debt-driven mania to socialize the losses incurred
by private risk-takers. If a sovereign bank does indeed crack wide open, Nouriel Roubini
considers this to be the final nail in the coffin of a mindless policy whereby governments
offer virtually unlimited financial backstops to cover the losses of banks that accumulated
massive quantities of toxic assets on their balance sheets.
7. Conclusion
Recession follows every boom that has been the usual feature of capitalism, alternatively
known as the market economy. When the boom turns to recession financial bubbles burst
– a scenario repeatedly orchestrated in the world history of economic development. The
havoc starts every time with the collapse of a certain thrust sector, this time the housing.
Artificial pouring of money in the housing sector through a securitization process by
means of derivatives, the so-called financial innovations, is now blamed to be the culprit
of the perceived worst ever disaster, an analysis within a capitalist frame of reference
where recurrence of business cycle is taken as a rule and the conventional banking system
based on interest has nothing to do with it – a perception little questioned. Therefore,
adoption of conventional fiscal and monetary measures together with bringing back the
conventional banking regulatory framework has so far been the recent policy
recommendation by most experts. The implication of this sort of prescription is that the
taxpayers of the national economies should be ready for contributions in bailout packages
for financial institutions each time of the business cycle havoc. This is tantamount to
44
making taxpayers, instead of the central bank or sovereign, the lender of the last resort.
This is a situation which indicates systemic failure of the conventional banking system as
echoed in Joseph Stiglitz’s comments that America’s financial system has failed in its
crucial responsibilities of managing risk and allocating capital requiring inevitable
change in its regulatory structures.94 The change in structure must act counter-cyclically.
Moreover, the new banking structure must have interacting capacity with the real-
economy sector. How to do that? Claimed superiority of Islamic banking95 in this regard
may be studied as an alternate possibility.
References
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final readings of various economic measures.
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The fact is that recent economic numbers have been terrifying, not just in the United States but around the world.
Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending.
Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression. Fighting Off Depression
By PAUL KRUGMAN Published: January 4, 2009 http://www.nytimes.com/2009/01/05/opinion/05krugman.html Downloaded on
15/1/09.
4
Housing prices fell continuously in Japan since last half of 1990s. In case of United States, Britain and
Australia the reversal of housing prices started from beginning of 2005 after steady rise from 1995 until it
booms in 2005.
5
Kanaga Raja, Economic Outlook Gloomy, Risks to South, say UNCTAD, Third World Network,
September 4, 2008
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"Crude oil prices set record high 102.08 dollars per barrel".
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World Bank. 2008. “Rising food and fuel prices: Addressing the risks to future generations”.
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"New Zealand slashes rates as economy lurches toward recession", The Daily Telegraph (2008-09-11).
12
Leo Lewis in Seoul. "South Korea heads for black September with won problems - Times Online".
Business.timesonline.co.uk.
13
"Autos, Electronics Face Slumps at Home and Abroad", The Chosun Ilbo (2008-07-07). Keith Bradsher
(Published: September 4, 2008). "China’s Central Bank Is Short of Capital - NYTimes.com". Nytimes.com.
14
Wilkinson, Isambard (2008-09-16). "Pakistan facing bankruptcy", The Daily Telegraph
15
^ "dollar hits record low against euro, oil prices rally".
45
16
^ Aversa, Jeannine, "Employers Slash 63,000 Jobs in February, Most in 5 years, Feeding Recession
Fears,", Associated Press, March 7, 2008. Accessed July 11, 2008
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^ CJJ Staff, "Massive Job Cuts Across the Country", accessed October 6, 2008
18
^ "Recession in the US 'has arrived'". ^ "US recession is already here, warns Merrill". ^ "Poll:
Majority of people believe recession underway".
19
^ Greenspan, Alan. "We will never have a perfect model of risk", Financial Times. Retrieved on
2008-09-22.
20
^ "Rosenberg: Debunking Five Myths", Mish's Global Economic Trend Analysis (2008-05-
18). Retrieved on 2008-05-19.
21
^ Petrello, Randi (2008-10-06). "Report finds Honolulu in recession, Hawaii at risk", Pacific Business
News. Retrieved on 2008-10-07
22 http://en.wikipedia.org/wiki/Global_financial_crisis#cite_note-0#cite_note-0. http://en.wikipedia.org/wiki/Global_financial_crisis#cite_note-August2007-
1#cite_note-August2007-1.
23 http://en.wikipedia.org/wiki/Global_financial_crisis#cite_note-August2007-1#cite_2note2.
24
Gross, Daniel (2008-01-05). "Gas Bubble: Oil is at $100 per barrel. Get used to it.". Slate. ^ a b Oil
^
Prices Fall As Gustav Hits, Sky News, 02-09-08
25
A flight-to-quality is a stock market phenomenon occurring when investors sell what they perceive to be higher-risk investments
and purchase safer investments, such as US Treasuries, gold or land. This is considered a sign of fear in the marketplace, as investors
seek less risk in exchange for lower profits.
26 http://en.wikipedia.org/wiki/Global_financial_crisis#cite_note-11#cite_note-11
27
http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-115#cite_note-115
28
Ibid.
29
30
http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-NS-125#cite_note-NS-
125
31
32
33
34
http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-35#cite_note-35
35
36
37
38
39
40
41
42
43
44
http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-Recessionwarnings-70#cite_note-
Recessionwarnings-70
45
http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-Europeanrecession-62#cite_note-
Europeanrecession-62
46
http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-Recessionwarnings-70#cite_note-
Recessionwarnings-70
46
47
48
49
50
51
52
53
54
55
— Kanaga Raja, Economic Outlook Gloomy, Risks to South, say UNCTAD, Third World Network,
September 4, 2008
56
Hasan Imam, Impact of the financial crisis on Bangladesh capital markets Financial Express: Home Page, Dhaka,
Friday January 16 2009.
57
Jasim Uddin Haroon, Financial Express: Home Page, Dhaka, Friday January 16 2009
58
Toufiq M Seraj. Real Estate Sector bracing another slump, Financial Express, Home Page, Dhaka,
Friday January 16 2009
59
Mushir Ahmed, The Financial Express 08 Feb 2009
60
RGE Monitor - 2009 U.S. Economic Outlook, Delicious Digg Facebook reddit Technorati ,
RGE Lead Analysts | Jan 13, 2009
61
Nouriel Roubini | Jan 7, 2009
From Foreign Policy:
62
Read more
Delicious Digg Facebook reddit Technorati
Permalink | Comments (440)
Nouriel Roubini Says Worst Still Is Ahead of Us: Year in Review
Delicious Digg Facebook reddit Technorati
Nouriel Roubini | Jan 5, 2009
From Bloomberg:
63
The most trusted source of economic and interest rate forecasts available. Since 1976, Aspen
Publishers has provided corporate and government decision makers with our survey results - making Blue
Chip Economic Indicators and Blue Chip Financial Forecasts synonymous with the latest in expert
opinion on the future performance of the American economy. Every month we survey America's leading
business economists and publish their individual predictions along with an average—or consensus—of
their forecasts.
64
Blue Chip Economic Indicators.
65
The Global Economy and Financial Crisis, Speech by John Lipsky, First Deputy Managing Director,
International Monetary Fund at the UCLA Economic Forecasting Conference, September 24, 2008.
66
Ibid.
67
Ibid.
68
http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-different_views-28
69
http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-FT-interactive-30
70
^ http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html Time-Stiglitz]
47
71
^ Brown, Bill (2008-11-19). "Uncle Sam as sugar daddy; MarketWatch Commentary: The moral hazard
problem must not be ignored". MarketWatch. Retrieved on 2008-11-30.
72
http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html
73
On October 15, 2008, Anthony Faiola, Ellen Nakashima and Jill Drew , wrote a lengthy article in the
Washington Post titled, "What Went Wrong"[145]
74
Timothy D. Naegele, wrote an article in the American Banker entitled, "Greenspan's Fingerprints All
Over Enduring Mess," October 17, 2008.
75
Walden Bello, "Afterthoughts: A Primer on the Wall Street Meltdown", Focus on the Global South,
October 2008).
76
http://en.wikipedia.org/wiki/Libertarians
77
Ron Paul[151] and Peter Schiff, Congressman and former 2008 Presidential candidate commented in the
book Crash Proof.
78
By Ghassan Karam, Special to Ya Libnan Root causes of the current global financial crisis
79
Joseph Stiglitz, The fruit of hypocrisy; Dishonesty in the finance sector dragged us here, and Washington
looks ill-equipped to guide us out, The Guardian, September 16, 2008
80
Business cycle refers to economy’s ups and downs with a regular feature of certain time intervals. That
means, an economy revives each time after recession and reaches the boom followed by recession again.
81
Akkas, SMA. (2008). Text Book on Islamic Banking, Islamic Economics Research Bureau, Page 73-77.
82
Professor of Economics, NYU's Stern School of Business; Chairman, RGE Monitor.
Nouriel Roubini is a Professor of Economics at New York University's Stern School of Business
and is cofounder and Chairman of RGE Monitor, an innovative economic and geo-strategic
information service with 30 economists on staff. He studies international macroeconomics,
political economy and the mechanisms of economic growth. Professor Roubini served as a senior
adviser to the White House Council of Economic Advisers and the U.S. Treasury Department,
has published numerous policy papers and books on key international macroeconomic issues,
and is regularly cited as an authority in the media.
83
,
The Progressive Economic Forum, Posted by Marc Lee, August 2nd, 2007 A Minskian analysis
of US economy and financial markets.
84
Ibid.
85
Marc Uzan, Founder and Executive Director, Reinventing Bretton Woods Committee (November 2008),
Building an International Monetary and Financial System in 21st Century: Ageda for Reform,
proceedings of the seminar held in New York during November 24-25, 2008. Page 112.
86
Ibid. Conference summary, edited by Dandrine Merckaert. Page 3.
87
The High-level regional forum, Responding to the Economic Crisis – Coherent Policies for Growth,
Employment and Decent Work in Asia and the Pacific, is being convened by the ILO in collaboration
with the Asian Development Bank and the Department of Labour and Employment of the Philippines. The
topics to be discussed will include the impact of the crisis on economies, vulnerable people, and societies.
Gender issues, social protection, the creation of a social floor to cushion the impact, strengthening policy
coherence and lessons from the previous crisis, will also be discussed.
88
http://www.ifiwatchnet.org/?q=en/node/24605
89
Stephen Grenville is an Adjunct Professor with the Crawford School, a visiting fellow at the Lowy
Institute for International Policy and a former deputy governor at the Reserve Bank of Australia.
90
Ibid.
91
Ibid.
92
Ibid.
48
93
Ibid.
94
Joseph Stiglitz, The fruit of hypocrisy; Dishonesty in the finance sector dragged us here, and Washington
looks ill-equipped to guide us out, The Guardian, September 16, 2008
95
Akkas, S. M. Ali (…..). “Deficiencies of Conventional Banking System in financing Investment and their
Remedies under Islamic Banking”, article published in Thoughts on Economics, Vol. No. ..,
49

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Review of Global Financial Crisis 2008: Issues, Analytical

Dr. S. M. Ali Akkas

Email: akkas54@gmail.com, info@cdss.ingeniousbd.org

January 17, 2009

6. Reviewing Policy Interventions.................................................34

Review of Global Financial Crisis 2008: Issues, Analytical

Dr. S. M. Ali Akkas1

In December 2008, the

2. The Collapse of US Financial System and its Impact on

In Europe, a number of major financial institutions have failed, or needed rescuing.

2.1 Global Economic Trend

2.1.1 High commodity prices

In January 2008, oil prices surpassed

The food and fuel crises were both discussed at

2.1.4 Global stock markets

2.2 Crisis in the US Economy

2.2.1 Possible recession

2.2.2 Liquidity crisis in U.S.

2.2.3 Developing global financial crisis

major banks. Afterwards, Iceland almost claimed to go bankcrupt. Many financial

2.2.4 Impact of the Financial Crisis

2.2.4.1 Direct Impacts

On August 15, 2007, the Dow dropped

Stock indices worldwide trended

2.2.4.2 Indirect economic effects

2.3 Crisis in Europe

Spain's Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to

2.4 Crisis in other parts of the world

2.5 The financial crisis and the developing world

Commodity-dependent economies are exposed to considerable external shocks stemming

2.6 World Financial Crisis and Bangladesh

2.6.1 Impact on Stock Market

2.6.3 Impact on the Export-oriented Sector

2.6.4 Impact on Real Estate Sector

2.6.5 Impact in Rural Bangladesh

3. Will the crisis lead to another Great Depression?

4. Global outlook and suggested policy measures

4.1 Global Outlook

In the advanced economies, headline inflation accelerated to around 4½ percent in

Notwithstanding extraordinary actions by major central banks, interbank spreads have

financial and economic stress in advanced economies.

Third, while credit

On balance, we anticipate a further slowdown in global growth before a gradual

4.2 Foreign Policy Implications of the Global Economic Crisis

4.3 Risks and Policy Challenges

5. Approaches to Crisis Analysis: The Causes of the Crisis

5.1 Group of 20 Interpretation

5.2 Personifying the Responsibility

5.3 Unregulated Practice of Neo-liberal Ideology

Many libertarians76 predicted the crisis

Furthermore, the reason the crisis could

5.4 Flawed institutions and practices of often referred New Financial

James Crotty argues (citation

5.5 Deregulation and Risk Shifting by Banks to Investment Banks

Third, related to this was a change in the focus

5.6 Problematic Financial System failing to manage Risk and allocate

5.7 Business Cycle Approach to Financial Crisis Analysis

5.7.1 Pro-cyclicality of financial institutions

Roubini observed in August 2007 a significant worsening in US financial conditions and

(7) up to 40 LBO deals now in serious trouble (restructured, postponed or cancelled) as

5.7.2 Need for a Counter-cyclical Banking System

In a recent conference “Building an International Monetary and Financial System in

6. Reviewing Policy Interventions