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



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 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


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



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

Director, Planning & Development, Bangladesh Open University.



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.



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 6 globalization.



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



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



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



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 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



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 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



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.



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



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



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.



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.



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



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



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 19811982 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



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.



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 nearterm global outlook. Notwithstanding extraordinary actions by major central banks, interbank spreads have widened sharply, underlining heightened risk aversion and uncertainty. Strains in termfunding 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,



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 $640735 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



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, nonfinancial 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.



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



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 passthrough, 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



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



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



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



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



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.



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.



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;



(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 procyclical character of the financial institutions.



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 bankholding 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.



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.



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



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 lenderof-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?



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 nonvoting 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



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 taxcollecting 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,



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



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



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 realeconomy sector. How to do that? Claimed superiority of Islamic banking95 in this regard may be studied as an alternate possibility. References

Each month since 1976, Blue Chip Economic Indicators has polled America's top business economists, collecting their forecasts of U.S. economic growth, inflation, interest rates, and a host of other critical indicators of future business activity. 30+ year track record of providing survey results based on corporate and government decision-makers’ views has made Blue Chip Economic Indicators synonymous with the latest in expert opinion on the future performance of the American economy. http://en.wikipedia.org/wiki/Late_2000s_recession#cite_note-1.


NEW YORK (CNNMoney.com) -- The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy . The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures. 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.

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. Kanaga Raja, Economic Outlook Gloomy, Risks to South, say UNCTAD, Third World Network, September 4, 2008
6 5




"Crude oil prices set record high 102.08 dollars per barrel".

World Bank. 2008. “Rising food and fuel prices: Addressing the risks to future generations”. leadershipnigeria.com



10 11

http://www.ft.com/cms/s/0/23ab788a-967c-11dd-9dce-000077b07658.html "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

^ "dollar hits record low against euro, oil prices rally".




^ 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 ^ CJJ Staff, "Massive Job Cuts Across the Country",


accessed October 6, 2008


^ "Recession in the US 'has arrived'". ^ "US recession is already here, warns Merrill". ^ "Poll: Majority of people believe recession underway". ^ Greenspan, 2008-09-22.
20 19

Alan. "We will never have a perfect model of risk", Financial Times. Retrieved on

^ "Rosenberg: Debunking Five Myths", 18). Retrieved on 2008-05-19.

Mish's Global Economic Trend Analysis (2008-05-

^ 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-August20071#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

http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-115#cite_note-115 Ibid. 29 http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-122#cite_note-122 30 http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-NS-125#cite_note-NS125 31 http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-128#cite_note-128 32 http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-133#cite_note-133 33 http://en.wikipedia.org/wiki/2007_subprime_mortgage_financial_crisis#cite_note-136#cite_note-136 34 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-35#cite_note-35 35 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-36#cite_note-36 36 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-37#cite_note-37 37 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-38#cite_note-38 38 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-39#cite_note-39 39 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-44#cite_note-44 40 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-54#cite_note-54 41 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-61#cite_note-61 42 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-68#cite_note-68 43 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-69#cite_note-69 44 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-Recessionwarnings-70#cite_noteRecessionwarnings-70 45 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-Europeanrecession-62#cite_noteEuropeanrecession-62 46 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-Recessionwarnings-70#cite_noteRecessionwarnings-70




47 48

http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-78#cite_note-78 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-79#cite_note-79 49 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-80#cite_note-80 50 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-86#cite_note-86 51 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-90#cite_note-90 52 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-94#cite_note-94 53 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-98#cite_note-98 54 http://en.wikipedia.org/wiki/Economic_crisis_of_2008#cite_note-101#cite_note-101

— Kanaga Raja, Economic Outlook Gloomy, Risks to South, say UNCTAD, Third World Network, September 4, 2008


Hasan Imam, Impact of the financial crisis on Bangladesh capital markets Financial Express: Home Page, Dhaka, Friday January 16 2009.


Jasim Uddin Haroon, Financial Express: Home Page, Dhaka, Friday January 16 2009


Toufiq M Seraj. Real Estate Sector bracing another slump, Financial Express, Home Page, Dhaka, Friday January 16 2009

59 60

Mushir Ahmed, The Financial Express 08 Feb 2009

RGE Monitor - 2009 U.S. Economic Outlook, Delicious Digg Facebook reddit Technorati , RGE Lead Analysts | Jan 13, 2009

Nouriel Roubini | Jan 7, 2009 From Foreign Policy: 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:
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]





^ 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


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 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.



Akkas, SMA. (2008). Text Book on Islamic Banking, Islamic Economics Research Bureau, Page 73-77.

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.


The Progressive Economic Forum, Posted by Marc Lee, August 2nd, 2007 A Minskian analysis of US economy and financial markets. Ibid. 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.
85 84




93 94

Ibid. 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. ..,