In September 2008, as bank failures spread and the depth of the crisis became clear, there was fear that the crisis would instigate a financial and economic disaster as profound as that of the Great Depression. Certainly, Eichengreen and O’Rourke (2009) show that the beginning of the US financial crisis was worse than the Great Depression in terms of declines in global stock markets and the volume of world trade. A Great Depression was avoided only through countercyclical fiscal and monetary policy. Indeed, the idea that fiscal and monetary policy used worldwide in the Great Recession, as compared to the Great Depression, effectively combated the crisis, has been successfully empirically tested by Almunia et al. (2010) and others. Without countercyclical policy approaches, the crisis would have a much worse impact around the world.

The extreme fallout from the US portion of the crisis had mainly dissipated by the end of 2009, but the real effects of the crisis continued to be strongly felt. Jobs continued to lag and many citizens in the US remained disgruntled, fueling union protests. The Occupy Wall Street movement included a series of continuing, national protests against corporate greed and unemployment. Sixty percent of American households experienced a decline in wealth between 2007 and 2009 (Deaton 2011). Corresponding worry and stress followed, particularly as unemployment climbed.

In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed to create a consumer protection bureau, discourage “too big to fail” bailouts, create an advance warning system of potential financial instability, and eliminate loopholes used to create destabilizing financial instruments (US Senate Banking Committee 2010). The law addressed both microeconomic- and macroeconomic-level regulation. In order to accomplish these goals, the bill created a Consumer Financial Protection Bureau, to regulate consumer protection, and a Financial Stability Oversight Council which would have the important responsibility of making recommendations to the Federal Reserve for stricter rules on capital and liquidity, increased regulation of non-bank financial institutions, and the break-up of large companies as a last resort. The Financial Stability Oversight Council would move toward designating particular shadow banking institutions as systemically important, and put them under further supervision and further regulation (Lowrey 2012). Creation of the council was an attempt to prevent future crisis caused by systemic financial failure; whether it will be successful has yet to be seen.

Emerging market economies were more strongly affected by the 2007-08 portion of the financial crisis (US and European financial crisis) than by the 2010-11 portion of the crisis (sovereign debt crisis) (Chudik and

Fratzscher 2012). The liquidity squeeze caused by a flight-to-safety reaction to the financial crisis in 2008 removed much-needed funds from emerging markets; but after the shock was overcome, funds to emerging markets resumed, and the eurozone crisis did not cause another reversal of capital inflows. Capital flows from emerging markets increased as a result of “push” factors (flight to safety) and flowed back into emerging markets because of “pull” factors (divergences in profitability between developed and emerging markets) (Fratzscher 2011).

There was little movement, at the national or regional levels, toward improving the impact of the current world financial order on the poor in both developed and developing nations. The United Nations (UN) and the World Trade Organization (WTO) made suggestions for revising the global financial structure to improve the lot of the poor (UN 2009a). Some suggestions were to reduce procyclicality and volatility, to protect food and energy (commodities) from speculation, to implement global stimulus measures, and to ensure that commercial practices do not destroy the environment. During the US financial meltdown, attention was certainly not trained on the world’s poor, and eurozone austerity measures further impoverished families in the developed nations themselves. Although the IMF suggested that eurozone authorities refrain from cutting programs that provide assistance to the poor, there was little the countries could do to avoid it in meeting eurozone-IMF conditionality measures. What is more, the ongoing eurozone crisis is affecting developing countries through trade channels, as well as through declines in remittances, foreign direct investment, cross-border bank lending and aid flows (Massa et al. 2012).

The crisis disproved the idea that financial markets tend toward efficiency. It was largely assumed, before the crisis, that financial crisis was a developing-world phenomenon and that most developed countries did not experience such events because markets were efficient. However, the crisis showed that all financial markets are unstable and require constant supervision and regulation. In response to this the IMF, in 2009, included a successor to the Financial Stability Forum called the Financial Stability Board, which has a strengthened mandate to watch for systemic risks. In addition, the G-20 summit in April 2009 resolved to reduce procyclicality by year end, by working with accounting standard setters, including a requirement for banks to build buffers of resources in good times that they can draw down when conditions deteriorate (G-20 2009).9

A number of models examined the impact of the Great Recession, seeking to draw conclusions about crisis effects and policy impacts. As Sarafrazi et al. (2014) point out, the crisis experience throughout the eurozone countries was dissimilar. In some countries, the main trouble origi?nated in the real estate market, while in others it stemmed from problems in the banking sector or from budget deficits. The extent and direction of the impact on eurozone countries varied; Matousek et al. (2015) find that bank efficiency in eurozone countries declined as a result of the direct and policy impacts of the Great Recession, with the exception of Belgium, Sweden, and Portugal in 2008, and Germany and Portugal in 2009. The UK was hit more strongly than other countries in terms of bank efficiency, while the highest efficiency level in 2012 was in Greece, whose crisis was not triggered by the banking sector. Bank efficiency levels were generally slow to rebound across what the authors classify as original EU-15 countries, as liquidity declined and non-performing loans rose. Relatedly, MacDonald et al. (2015) use a financial stress index within a multivariate analysis to find that eurozone countries are mainly responsive to their own financial stress, and to a lesser extent to regional financial stress. The financial stress index used is comprised of data from the banking sector, money market, equity market, and bond market. Financial conditions in Greece and Portugal were not found to strongly affect the eurozone area.

The study of regional and country-level impacts of the crisis has resulted in assertions of a decoupling-recoupling among international financial markets (Dooley and Hutchison 2009), with contradictory evidence in the case of Greece (Floros et al. 2013). Before the crisis hit in earnest - that is, up to 2007 - some economists asserted that emerging markets in Asia and Latin America had “decoupled” from advanced economies and in particular the US, in that they were able to generate growth without being affected by changes in the business cycles of developed nations. This can be explained, to some extent, by the emergence of China and its strength in the global economy, as some emerging markets “coupled” to the Chinese economy (Yeyati and Williams 2012). As the crisis spread abroad and heavily impacted emerging markets in late 2008, this theory was exchanged for the “recoupling” theory that emerging markets were closely connected to that of the advanced economies. Going even further, Felices and Wieladek (2012) provide some evidence that decoupling occurred in only a few cases and that “coupling” around global factors has remained the norm.

Galbraith (2014) puts forward the idea that traditional economics played a role in bringing about the 2008 crisis, at least in its ignorance of the necessary importance of government or money. Therefore, when the 2008 crisis hit, the crisis could only be conceived of as an external shock, rather than as a breakdown of the existing system.

What is more, the critical assumption in modern economics, which allowed the economics profession to become more like science, was that the economic future could be estimated based on past behavior. But, as we have seen, complex financial models cannot predict the future. Factors such as human psychology and people’s expectations of the futures are not usually incorporated into such models. Pricing principles stem from a set of assumptions about the underlying asset as well as equilibrium criteria. Risk is hedged by balancing the asset with other assets that neutralize risk. Structured products are evaluated based on historical data, which in many cases is missing, requiring the input of results from simulations incorporating arbitrary assumptions on correlations between risk and default probabilities. These models incorporated many assumptions that are potentially pernicious, particularly when assumptions do not incorporate major changes in the economic reality (Colander et al. 2009).

In recognition of the riskiness of model-priced assets, banks in the United States became increasingly aware of the need to hold low- risk assets like cash and treasuries within liquidity pools, and of the need to stress test liquidity buffers. Stress tests were altered to reflect contingency risks: risks of off-balance sheet assets given a potential liquidity shortage (Sooklal 2012). This is a step in the right direction toward reducing financial sector risk. At present, however, the larger question of regulating off- balance sheet or shadow banking sector assets is still under consideration. Many assets are traded within the shadow banking sector and there is no guarantee that the pricing and risk of these assets will not present a future threat to financial stability.

The eurozone crisis demonstrated that the structure of the eurozone does not work for all countries. The eurozone does not allow for countries to engage in higher domestic spending, wage increases, and inflation (Moravcsik 2012). Deficit countries needed to be committed to adopting German spending behavior, at no small cost to the local populace. However, they were not, and external shocks from the US and European financial crisis induced a severe debt crisis in a number of nations. It is unlikely that the eurozone will be restructured after the crisis, but this remains to be seen.

The eurozone crisis was much more than a financial crisis. It also represented a challenge to European integration. Glencross (2014) discusses the importance of national leaders in determining the outcome of the eurozone crisis. This is because bailout funds for imperiled debtor countries had to be guaranteed by national leaders. What is more, in response to implementation of the European Stability Mechanism, creditor countries created the Treaty on Stability, Coordination, and Governance in the Economic and Monetary Union, which made it constitutionally impossible to run up long-rerm government debt. Eurozone countries were thus required to commit to balanced budgets. This exacerbated internal tensions within debtor countries, in particular regarding integration in the eurozone.

This type of crisis, preceded by the Exchange Rate Mechanism (ERM) crisis of the early 1990s and the Great Depression, in which nations faced adverse economic conditions transmitted in part by adherence to the gold standard, is more than “just” a currency crisis. It is a crisis caused by monetary union, in which a group of countries agrees upon a relatively rigid exchange rate or adopts a single currency through a region, and is as much of a currency crisis as it is a policy and political crisis. The policy crisis begins when necessary adoption of center country monetary policies results in a conflict of interest in peripheral countries, and the political crisis stems from rising political dissent as a result of economic hardship in non-core countries. Under the gold standard and the ERM crisis, the way out of the crisis was to end or alter the currency union. In the eurozone crisis, little was done to improve the economic structure of the European Monetary Union, which might attempt to improve the flexibility of the system and allow member governments to implement monetary and fiscal policies when needed. It does appear that austerity measures and conservative monetary policy from the center have created abysmal social and economic conditions in peripheral countries, namely Greece. To this author, based on the lessons from history, it does not appear that the European Monetary Union can continue without experiencing similar crises going forward.

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