Volume 44, Number 175,
October-December 2013
The Implications of the Global Financial
and Economic Crisis in Latin America
Susana Nudelsman
Global Instability and Financial Deregulation

The nucleus of the recent global crisis revolves around the interaction between global instability and financial deregulation. The origin of instability may be interpreted as a function of different approaches. The perception of deficient savings in the United States reinforces the idea that the drop in their savings rate since the beginning of this decade has been crucial to the deterioration of current accounts. Simultaneously, national savings were reduced because the fiscal balance went from a surplus in 2000 to a deficit over the course of a decade. The new economy maintains that the favorable tendencies of productivity have turned the US into an extremely attractive destination for the rest of the world to invest, which translated into a significant inflow of capital that financed the deficit of the current account of this nation. The excess of global savings shows that diverse factors such as financial development, high oil prices and demographic aspects encouraged saving outside of the US. In particular, emerging economies implemented new strategies to manage capital flows, going from net capital importers to net exporters. Finally, codependence between the US and China confirms that Asian countries, motivated by a high aversion to risk following the 1997-1998 crisis and commitment to export-driven growth, have opted to satisfy external demand rather than internal, achieving surpluses in their current accounts through the under-valuation of their currencies. The over-valuation of the dollar and deficits in current accounts have allowed the US to live beyond its economic means. It is important to highlight that these approaches, far from incompatible, can be understood as the components of a larger story (Eichengreen, 2009).

The diverse hypotheses as to the role of global instability and financial deregulation in the 2007-2008 crisis vary widely. Obstfeld and Rogoff (2009) emphasize that global instability and the financial crisis were the result of common and closely linked causes, generated in the political economies implemented by a series of nations in the 2000s and by the disturbances that affected the transmission of these policies through the United States, as well as through global financial markets. In the United States, the combination of the monetary policy of the Fed, real global interest rates, failures in the credit markets and a wave of financial innovation would prove far from benign. The United States constituted the epicenter of the global financial collapse, but it quickly spread to other countries. At the same time, the economic policy of emerging countries such as China allowed the US to finance its macroeconomic instability through cheap debt. The voracity of foreign banks to acquire assets was effectively an immediate source of external financing for the deficit of the United States. In total, the policies in place maintained an artificial situation where China was far from its lowest autarchic interest rate and the US was far from its highest self-sufficient interest rate.

Similarly, Smaghi (2008) ascertains that global instability and the financial crisis interacted as two sides of the same coin. The crisis was generated as a result of both global macroeconomic conditions and the conditions of financial markets. It is tempting to attribute the origin of the crisis to the excesses of the financial system in the United States. However, other macroeconomic factors were behind the broadening of global instability, related to strong asymmetries of the international financial and monetary systems as well as insufficient macroeconomic discipline in a variety of economies.

From another perspective, Portes (2009) maintains that global instability was the fundamental factor involved in the outbreak of the 2007-2008 global crisis. Although ambition, financial innovation and deficient financial regulation are no small problems, the instability formed in the decade prior to the crisis drove the markets and financial instruments to being dysfunctional, and they finally proved to be highly problematic. At the same time, global oscillations led to reduced interest rates, the search for higher yields, significant leverage of financial institutions and excessive financial intermediation. Moreover, dispersion of current accounts in absolute values starting in 1996 and the pattern of capital flow from emerging markets and developing nations to developed countries were two distinctive features of global instability. It is useful to note that the new pattern of capital flow was not benign. Far from financing investment, capital revenue in the United States financed consumption and the government deficit. Nor did this pattern channel the savings of emerging markets to investment projects in these countries. Part of the funds financed the current account deficit in the US and the rest went through the US to markets in advanced countries.

Figure 1. Global Instability in Current Accounts

Source: imf and calculations from “The Financial Services Authority," The Turner Review, March 2009.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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