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continued from front flap Praise for “Padma Desai explains the World Financial Crisis in human terms. Desai From
Desai, From Financial
In every chapter she associates the abstract principles of economics “Padma Desai provides a wide-ranging
Crisis to Global Recovery
From
and South America, and the extent and with stories about real people in real situations. These stories focus analysis of the economic problems of the past
Contact: Lisa Hamm
value of U.S. and E.U. regulatory proposals. on who was making what decisions and when and why they were decade and the prospects for the future of Columbia University Press
Financial Financial
Refocusing on American financial practices, made. It is what we need to understand the crisis.” the global economy. She brings the unique 212 459-0600 x 7105
F
Desai evaluates hedge funds and derivatives, —George A. Akerlof, University of California, Berkeley, r perspective of someone who has taught
credit default swaps, and rating agencies, Crisis and Nobel Laureate in Economics o trim: 6 x 9
in the United States for decades but also
m 4-color process only
pondering whether the dollar can remain
to “Insightful, far-ranging, and complete, yet still manages to be a lot Crisis is deeply rooted in her native India and gloss lam.
a reserve currency. She concludes with a
of fun to read.” F the developments in the Soviet Union and
historical comparison of the Great Depression All art is live and in position
and the Great Recession, weighing the effect Global — Robert J. Shiller, Yale University in Russia, the focus of her academic research.”
of the economic collapse on the future of a to —Martin Feldstein, Harvard University,
Recovery “Students keep asking me: where can I read about the financial n
American capitalism. President Emeritus of the National Bureau of
crisis and what we are—or are not—doing about it? Without c
Economic Research and former chief economic
i
putting together a reading list of twenty to thirty items, there aren’t a advisor to President Reagan
many good answers. Padma Desai’s new book, which l Global
is at once comprehensive and brief, remedies that.” C
r
—Alan S. Blinder, Princeton University, former Vice Chairman i I
n this book, Padma Desai makes the
Padma Desai is the of the Board of Governors of the U.S. Federal Reserve s
i Recovery complexities of economic policy and
Gladys and Roland Harriman s
“There are an abundance of books by journalists providing an financial reform accessible to a wide
Professor of Comparative t
insider’s chronology of events. Yet there are few books that o audience. Merging a compelling narra-
Economic Systems and
Tdriarencstiotiro onf Ethceo nCoemntieers for Christopher Butt Psmtaeedplmt dbaoa wcDkne a sananid dp p rtrohovevi diGderese aainnt Rtahenicasel sybstoiicooaknl.. ” pTehrsapt eisc ttihvee gorne atht es efirnviacnec ial Glo Padma ttaio vs eAy smwteietmrhi acstaci’chs obrlreaecraelykn dtr oersweecnae rsocsfhi ot,h nse,h defae bcstecogrriisbn islne wagd itihn g
at Columbia University. She has served as b
—Douglas A. Irwin, Dartmouth College, author of the monetary policy, tax practices, subprime
president of the Association for Comparative a
Peddling Protectionism: Smoot-Hawley and the Great Depression mortgage scandals, and lax regulation that
Economic Studies and as advisor to the Russian l Desai
R contributed to the crisis. She also discusses
Finance Ministry for the U.S. Treasury. She is
“Padma Desai provides a very wise and thoughtful account of the e the Treasury-Fed rescue deals that saved sev e r -
the author of Conversations on Russia and
origins of the financial crisis, the prospect and policies for recovery, c al financial institutions and the involvement
Financial Crisis, Contagion, and Containment: and the future of national and international economic management. o
of Congress in passing restorative policies.
From Asia to Argentina. She also draws very effectively on her great experience and v
e
distinction as a scholar of economic transformation, economic Desai follows with an analysis of stress tests
r
history, and international economics.” y and other economic measures, and she frankly
—Nicholas Stern, London School of Economics and former assesses whether the U.S. economy is truly
Columbia
Chief Economist of the World Bank on the mend. Expanding her view, she
University considers the prospects for recovery in North
America as a whole, as well as in Europe, Asia,
Press l ISBN: 978-0-231-15786-5
Jacket illustration: Reinhard Blumenschein 52750
New York
[email protected]
continued on back flap
Jacket design: Lisa Hamm cup.columbia.edu 9 780231 157865 printed in the u.s.a. Columbia
FROM
FINANCIAL CRISIS
TO
GLOBAL RECOVERY
F RO M
F I NA N C AI L
C RI SI S
T O
G L O BA L
REC OV E RY
Padma Desai
COLUMBIA UNIVERSITY PRESS
NEW YORK
C olumbia University Press
Publishers Since 1893
N ew York Chichester, West Sussex
C opyright © 2011 Columbia University Press
All rights reserved
L ibrary of Congress Cataloging-in-Publication Data
Desai, Padma.
From fi nancial crisis to global recovery / Padma Desai.
p. cm.
I ncludes bibliographical references and index.
ISBN 978-0-231-15786-5 (cloth : alk. paper)—ISBN 978-0-231-52774-3 (ebook)
1 . Global Financial Crisis, 2008–2009. 2. Financial crises—United States.
3. Recessions—United States. 4. United States—Economic conditions—2009–
5. United States—Economic policy—2009– I. Title.
HB37172008.D47 2011
330.973—dc22
2011002617
C olumbia University Press books are printed on permanent and durable acid-free
paper.
Th is book is printed on paper with recycled content.
P rinted in the United States of America
c 10 9 8 7 6 5 4 3 2 1
R eferences to Internet Web sites (URLs) were accurate at the time of writing. Neither
the author nor Columbia University Press is responsible for URLs that may have
expired or changed since the manuscript was prepared.
For
Martin Wolf
Th e economics journalist of the day
Contents
Preface i x
1
Financial Crisis Origin 1
2
Banking Sector Stress Tests: United States Versus
the Eur op ea n Union 21
3
Is the U.S. Economy on the Mend? 45
4
Global Recovery Prospects: North America and
Eur ope, Asia, and South America 80
5
Hedge Funds and Derivatives, Credit Default Swaps,
and Rating Agencies 110
6
U.S. and EU Regulatory Proposals: How Strict?
How Cooperative? 127
7
The Dollar’s Future as a Reserve Currency 173
viii CONTENTS
8
The Great Depression and the Current Financial Crisis 192
9
The Future of American Capitalism 214
Notes 2 35
Index 2 43
Pre f ac e
Th e fi nancial crisis has prompted a vigorous outpouring of books from econ-
omists, journalists, and fi nancial commentators who have analyzed it from a
variety of perspectives. From beginning to end, they tell a complete story of
why the American economy spiraled into a devastating fi nancial mess, how
the fi nancial crisis evolved into a global phenomenon, and how policymakers
sought to put out one fi re before turning to the next one. Th e economists stay
away from a personalized narrative, stick with the economic features, explain
them engagingly, and occasionally suggest an alternative policy framework
that provides a more promising outcome. Th e journalists create entertaining
narratives around the decision making and the personalities involved in the
pro cess without providing an analytical model of the origin of the crisis and
the policy handling. Th e fi nancial commentators do set out a rigorous ana-
lytical underpinning of the turmoil’s origin and its evolution, but without
explaining brain twisters such as over-t he-c ounter derivatives and credit de-
fault swaps, which are beyond the grasp of most economics students. Even
the diff erence between quantitative monetary soft ening by the Federal Re-
serve and discretionary easing via a change in the federal funds rate needs to
be spelled out for beginners.
Th is book is diff erent. I have written it for my undergraduate students
who plan to major in economics or fi nancial economics. I have also used
