Table Of ContentTHE GLOBAL FINANCIAL CRISIS
Although banking and sovereign debt crises are not unusual, the crisis that has
unfolded across the world since 2007 has been unique in both its scale and scope.
It has also been unusual in being both triggered by and mainly affecting developed
economies. Starting with the US subprime mortgage crisis and the recession in
2007–9, the problem soon erupted into financial crisis in Europe. A few of these
countries came to the brink of bankruptcy and were rescued by the EU and the
IMF on the condition they adopt austerity measures. The detrimental social effects
of the crisis in both the US and Europe are still emerging.
Although there have been several studies published on the US crisis in particular,
there has so far been an absence of an accessible comparative overview of both crises.
This insightful text aims to fill this gap, offering a critical overview of causes, policy
responses, effects, and future implications. Starting with the historical context and
mutation of the crisis, the book explores the policies, regulations, and governance
reforms that have been implemented to cope with the US subprime mortgage crises.
A parallel analysis considers the causes of the European sovereign debt crisis and the
responses of the European Union, examining why the EU is as yet unable to resolve
the crisis. This book is supported with eResources that include essay questions and
class discussion questions in order to assist students in their understanding.
This uniquely comprehensive and readable overview will be of interest
and relevance to those studying financial crises, financial governance, international
economics, and international political economy.
George K. Zestos is Jean Monnet Chair for European Integration Studies and
Professor of Economics at Christopher Newport University, USA.
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THE GLOBAL FINANCIAL
CRISIS
From US subprime mortgages
to European sovereign debt
George K. Zestos
First published 2016
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2016 George K. Zestos
The right of George K. Zestos to be identified as author of this work has
been asserted in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means,
now known or hereafter invented, including photocopying and recording,
or in any information storage or retrieval system, without permission in
writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
Zestos, George K.
The global financial crisis : from US subprime mortgages to European
sovereign debt / George K. Zestos.
pages cm
Includes bibliographical references and index. 1. Financial crises. I. Title.
HB3722.Z42 2015
330.9’0511–dc23
2015016222
ISBN: 978-1-138-80019-9 (hbk)
ISBN: 978-1-138-80021-2 (pbk)
ISBN: 978-1-315-75559-5 (ebk)
Typeset in Bembo
by Cenveo Publisher Services
To My Family
Eva, Kostis, and Alex
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CONTENTS
List of figures viii
List of tables xi
List of boxes xii
Preface xiii
Acknowledgments xix
List of abbreviations xxi
About the author xxv
1 From the Great Depression to the Great Recession 1
2 Causes of the US subprime mortgage crisis 21
3 The crisis spreads to Europe 42
4 Why the European sovereign debt crisis has lasted so long 69
5 US fiscal and monetary policy to cope with the
Great Recession 97
6 The role of Germany in the financial crisis 130
7 Greece: the epicenter of the Eurocrisis 165
8 Financial struggles in the EU and EA 207
9 Concluding comments 246
Index 260
FIGURES
1.1 US and Canadian home ownership rate 9
1.2(a) Case-Schiller two composite home price index 14
1.2(b) Case-Schiller 20 US city home price indices 14
1.3(a) US unemployment rate 16
1.3(b) US real GDP growth rate 16
1.4 US recessions as indicated by the unemployment rate
(1916–2014) 17
2.1 US balance of payments accounts 24
2.2 Derivative financial instruments traded over the counter
and on organized exchanges 26
3.1 Southern European countries’ interest rate spreads vs.
German bonds 48
3.2(a) Northern European countries’ ten-year interest rate
spreads vs. German bonds 49
3.2(b) Southern European countries’ ten-year interest rate
spreads vs. German bonds 49
3.3(a) Southern EA gross public debt as a percentage of GDP 54
3.3(b) Northern EA gross public debt as a percentage of GDP 54
3.4(a) USA, UK, and Japanese ten-year interest rate
spread vs. German bonds 56
3.4(b) USA, UK, and Japanese public debt to GDP ratio 56
3.5 Greek debt as a percentage of GDP 59
3.6(a) Gross private savings Southern EA countries 61
3.6(b) Gross private savings Northern EA countries 61
3.7(a) Southern EA countries’ Current Accounts 63
3.7(b) Northern EA countries’ Current Accounts 63
3.8 Net international investment position 64
Figures ix
3.9 Rebalancing in the EA 65
4.1(a) Real effective exchange rate for Eurozone countries 76
4.1(b) Real unit labor costs for Eurozone countries 76
4.2 US dollars per euro exchange rate 77
4.3 ECB REPO rate vs. US federal funds rate 78
5.1(a) US real GDP in 2009 dollars 100
5.1(b) US unemployment rate 100
5.2 Federal government public surplus/deficit 105
5.3(a) US GDP and public debt in current dollars 107
5.3(b) US public debt to GDP ratio 107
5.4 Three US interest rates 108
5.5 Excess reserves balances of US banks 109
5.6 Short-term lending to financial firms and markets 111
5.7(a) Debt owed to Fed by US banks 114
5.7(b) Debt owed to Fed by European banks 114
5.8 Quantitative easing timeline 117
5.9 Treasury- and mortgage-backed securities 118
5.10(a) Total number of US workers employed 122
5.10(b) US unemployed workers 122
A5.1(a) Cumulative debt owed to Fed by US banks 125
A5.1(b) Cumulative debt owed to Fed by European banks 125
A5.2(a) Discouraged workers in the US 126
A5.2(b) Labor force participation and unemployment rate 126
A5.3 Average weekly earnings of production 127
6.1 Growth of German GDP 1951–2013 131
6.2 German trade balance as a percentage of GDP 1950–2014 132
6.3 German GDP and trade balance indices 1950–2014 133
6.4 German unemployment rate 1950–2014 134
6.5(a) Trade union membership rate in Germany 1980–2013 141
6.5(b) Trade union membership rate in Northern EA countries 141
6.6 German trade balances by region 2000–14 143
6.7(a) Election results: 2009 153
6.7(b) Election results: 2014 153
7.1 Greek public debt and GDP at current prices 170
7.2 Greek private and gross national saving as a percentage
of nominal GDP 172
7.3 Real Greek GDP growth 173
7.4 Greek trade, current account and government deficit
as a percentage of GDP 174
7.5 Greek government revenue vs. government expenditures 180
8.1 European housing price indices 208
8.2 Housing price indices of US and seven EA countries 209
8.3 Greece: public deficit and debt to GDP ratios 216
8.4 Greece: credit ratings during the debt crisis 217
