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 ( ...continuation )

Another position maintains that macroeconomic trends were crossed with financial innovation. The interaction between macroeconomic imbalance and the innovations of financial markets grew significantly in the context of financial globalization. However, the macroeconomic trends reflected in global imbalances solely encouraged colossal financial development in part. In the context of this macroeconomic instability, the demand for high returns facilitated a wave of financial innovation whose origin was the packaging, commercialization and distribution of securitized credit instruments. A new model of business emerged, whose fundamental features included growth of the financial sector, increased leverage, changes to maturity transformation, over-confidence in sophisticated mathematical models and high pro-cyclicality (The Turner Review, 2009).

For other authors, the global crisis was due to financial microeconomic factors. One particularly significant point addresses systemic risk. The facts have shown that there was a sort of massive failure in mitigating this risk. Central banks and supervisory agencies did not insist on developing macroprudential instruments that could have been used to address the increase of exposure to aggregate risk. The global regulatory structure was not entirely effective in reaching its objectives, leaving the responsibilities of central banks in the effort to obtain financial stability unclear (Nier, 2009). Ineffective supervision and regulation of financial markets in the United States and in other developed countries has been key to the global collapse. Financial innovation gave rise to new forms of moral risk (Dooley and Garber, 2009).

Borio (2008) explains that the 2007-2008 financial collapse demonstrates new or idiosyncratic aspects while also showing factors in common with other similar collapses. The former refer to the role of “structured credit products” and the model of originate and distribute, which both contributed to risk-taking and the magnitude of the crisis. Initially, new instruments gave their participants a false sense of security. However, when the crisis broke out, these factors aggravated the lack of confidence and led to a disappearance of market liquidity, increasing uncertainty with respect to valuations and the identification of risks in the financial system.

The unprecedented reach of the wave of reintermediation led to serious problems for financial institutions. At the same time, this can be explained by the magnitude of special purpose vehicles, financial instruments that in the context of the shadow banking system, managed to escape follow-up from many people, including the official community. However, the idiosyncratic aspects should not hide the fundamental nature of the crisis. Financial turmoil with an epicenter in the subprime market constitutes a typical example of financial instability with serious macroeconomic consequences that follow the accumulation of financial instability generated in times of prosperity. Although the predominance of the residential real-estate sector was a factor that differed from other episodes of financial turmoil, the qualitative factors are similar in their essence.


The Onset of the Crisis in the Region

Following a past of significant paradoxes in terms of progress and set-backs, the economies of Latin America demonstrated a highly favorable panorama between 2003 and mid-2007. Later, the global economic and financial crisis would bring an end to the longest and most intense stage of economic growth that Latin America has seen since the 1970s. This growth occurred in a context of international economic expansion in the same time period, and lasted up through 2008, when the difficulties of the high-risk mortgage sector in the United States began to spread.

Figure 2. gdp Growth in Latin America: 1975-2010

Source: José Antonio Ocampo, estimated using eclac data, Ensayos Económicos, num. 61-62,
Central Bank of the Republic of Argentina.

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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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