Economic Crises Case Study

US Financial Crisis: Prospects and Perils of Globalisation of Financial Markets

OR

Abstract:
This case study analyses the pros and cons of financial globalisation and its affects on developing economies. It also helps in debating the need for more regulations in global capital flows. The case study also provides scope for discussion on the kinds of reforms needed to withstand the shocks of financial disturbances and future implications of globalisation on developing economies. Blame it on the greed of the investment bankers or the incomprehensible financial derivatives or the inexplicable housing mortgage market or the laidback regulators or the overenthusiastic administrators, but the real culprit of the US financial crisis (2008) is the obsession of the Americans to live on credit and the federal government’s audacity in breeding colossal deficits. Reasoning is that if the US citizens were prudent enough to discourage excessive lending by banks or had the government kept the deficits at manageable levels, curbing availability of liquidity to deserving levels, the housing bubble would not have built up and the subsequent crisis could have been avoided.

The aforecited phenomena – Americans living on credit and Federal government encouraging deficits – were fed, for a long time, by surpluses of the Asian economies, especially China. If history is any evidence, this crisis wasn't the first that was built by capital from across borders. During the late 1970s, petrodollars, from oil exporting countries were siphoned to emerging economies, principally in Latin America through western banks. This ended in the first big crisis of modern times, when Mexico went bankrupt in 1982, bringing the banks of New York and London to their knees. Then again, from 2000, over a trillion dollars were channelled into the subprime mortgage market of the US and rest of it is now a well-reported history. How was enormous money shipping across borders possible at the first place? Were the modern financial deregulations the real cause? Could the crisis have been averted with tighter regulations over capital flows? The case study helps to analyse some of the problem areas of financial globalisation in classroom discussion.

Pedagogical Objectives:

• To explore the roots of financial globalisation and persistent changes in currency exchange systems
• To analyse the relation between globalisation of financial markets and development of various economies
• To analyse whether capital inflows of FIIs type are useful or harmful for emerging economies
• To debate the negative face of FIIs and analyse the impact of financial turmoil on emerging economies during a crisis.

Keywords : US Financial Crisis, FIIs, FDIs, Globalisation, Financial Markets, Bretton Woods System, Developing economies, Capital inflows, Mortgage Backed Securities, Global economies, capital flow regulations, Most Financially Integrated Countries, Less Financially Integrated Countries, Degree of Financial Openness, Portfolio flows