Economics and Financial Markets Essays

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Global Financial Crisis of 2008-09: Triggers, Trails, Travails, and Treatments †
Ganti Subrahmanyam *
The present world economy has, increasingly, been interconnected in terms of small units such as industries, regions and national economies as discontinuous systems. Changes in these systems have varied impact across the world economies. This paper tries to trace out various triggers, trails and travails of the present crisis, with a view to suggest solutions or treatments for the global financial crisis of 2008-09. For instance, one of the triggers identified is the prolonged implementation of low interest rate policy. This, coupled with the savings glut in the world economy has led to sub-prime lending in the US, as it was used to finance the US mortgage debts. The author indicates that some new lessons have been learnt from the current financial crisis, the most important of them being the need for retooling the finance and economics models. Further, globalization, along with its bestowed benefits, brings in increased frequency and spread of financial and economic crises.
Our system is depressive—manic; it runs to boom, or else to panic. In view of this it would be wise for government to stabilize.
– K Boulding

The Anatomy of Cyclical Change
The world economy is a large discontinuous system made up of many smaller units such as the national economies, regional economies and industries. As these smaller units go through their growth and decline phases, they create long wavelike cyclical patterns. Systems change as a matter of fact and when discontinuous systems change, the best way to characterize that change is to view it as happening in cycles. However, there is a ‘trap’ in viewing change as occurring in cycles. Cyclical change depicts repetitious happenings or reoccurrences. The most interesting fact, then, about these repetitious change patterns is that their actual manifestations will be different in different cycles over time. Every cycle has a mindset of its own. As the success pattern of a cycle ages, its mindset also recedes yielding place to a new one.

This is a revised version of the paper presented at a seminar on ‘Global Financial Crisis: Implications for India’, held on April 15, 2009, University of Hyderabad, Hyderabad. The paper has benefited immensely from the inaugural and keynote addresses delivered at the conference respectively by Dr. C Rangarajan and Dr. Y V Reddy, Former Governors, Reserve Bank of India.

* GITAM Chair Professor in Monetary Economics, GITAM Institute of International Business, GITAM University, Visakhapatnam, India. E-mail: © . 3 2 2009 IUP All Rights Reserved. The IUP Journal of Applied Economics, Vol. VIII, Nos. 5 & 6, 2009

For instance, the cycle of the 1930s was built on steel, trains and farms; that of 1970s on planes, plastics and electronics. The present cycle of the 21st century is build on computers, robots and satellites. Thus, each reoccurrence rests upon a different foundation in terms of its environment, values and safeguards. During a cycle’s climb era, innovation, entrepreneurship and development of new markets take precedence. During the cap era, drive for efficiency dominate. Then the rent-seeking activities try to get on the bandwagon for a share in the prosperity. There emerges the bureaucracy, the accountants, the financial speculators and the layers of lawyers to share the gains through their so-called ‘value-adding’ services. The success pattern tends to induce change, also in peoples’ values. Prosperity propels change of values. Then the downhill slide starts towards a trough. A new cycle starts up again on the stockpiles of new ideas, new technologies and new values accumulated during the downhill slide of the earlier cycle.

The Crises of 1929, 1987 and 2000
The Great Depression
The Great Depression of the 1930s originated from the Wall Street Crash of 1929 first by 13% on October 24 (Black Thursday) and then by