Those Global Imbalances

Abstract

A remarkable feature of the FinCR was that as time passed there was no evidence of an agreement being reached on the underlying causes. Everybody felt it was of great significance for the future of our societies, but there was heated debate about what that ‘significance’ consisted of. This analytical confusion contrasted with experience after comparable shocks in the previous 50 years. For example, the causes of the developing country debt problem of the 1980s were quickly identified: inflationary monetary policies in leading countries, accompanied by low or even negative real interest rates, had, in the course of the 1970s, stimulated a burst of financial innovation (‘syndicated bank lending’), which culminated in a flood of short-term capital to developing countries, followed by a sudden stop after the Federal Reserve raised interest rates abruptly in 1979–80. This hit less developed countries with increases in their interest payments, which some were unable to pay, and so many (starting with Mexico in August 1982) defaulted, threatening to bring down the western banking system. There was much disagreement on what to do about that, but little disagreement on what had happened and why. This was the first big cross-border credit bubble of the post-Bretton Woods global economy, and it set a pattern.

The problem of global imbalances, like the other major challenges facing the GFS — the crisis of reserve currencies, the dysfunctional financial system and its liability to cross-border currency and credit bubbles — added to pressures for systemic change. These challenges are reviewed in the following chapters.