Why Is The 2008 Crisis Taking So Long To Resolve?

The Real News Network has the interview Why Is The 2008 Crisis Taking So Long To Resolve?

Economist Yilmaz Akyüz on how excessive reliance on the US Federal Reserve created more problems than it has solved

Here is an excerpt to get you started.

AKYÜZ: The top 1 percent actually got the entire increase in income in the United States since 2009. And, in fact, the share of the rest of the population has been falling. So inequality is increasing in Europe too because of the austerity policies. So we have actually [incompr.] a bigger deflationary gap, because the workers are unable to afford the goods and services they are producing.

Now, how are we going to grow again brings you to the fundamental problem. Are we going back to business as usual? That means we’re going to have debt-driven bubbles in the United States or in Europe, or we’re going to be stuck in a long stagnation

FRIES: And what other policy shortcomings do you see in the U.S. and Europe post-crisis?

AKYÜZ: Well, one problem I mentioned in the crisis intervention was fiscal austerity after the initial expansion. A second shock coming in the policy response was actually the inability, and, in fact, unwillingness, of the governments to remove debt overhang by timely, orderly, and comprehensive debt restructuring.


Some people have had trouble understanding the interviewee. If you have such trouble, you might want to read the transcript at The Real News Network web site.

The paper that the interviewee discusses in this video is The Uncertain Future of the World Economy.

The world economy suffers from an under-consumption bias because of low and declining share of wages in the gross domestic product (GDP) in all major advanced economies including the U.S., Germany and Japan, as well as China.

Still, until 2008-2009 the threat of global deflation was avoided thanks to consumption binges and property booms driven by credit and asset bubbles, particularly in the U.S. and the European periphery.

The crisis has not removed but reallocated global trade imbalances.

Longer-term global prospects depend a lot on the U.S. due to its central position in the world economy and the international reserves system. It is highly unlikely that the U.S. can move to wage-led growth in the near future.

The end of this short paper speaks about an issue for the emerging economies.

The normalisation of monetary policy in the U.S. will also cause problems for emerging economies. Despite occasional complaints about the “currency war” entailed by liquidity expansion in several major advanced economies simultaneously, the policy of ultra-easy money has generally been benign for emerging economies.

It has been a major factor in the sharp recovery of capital inflows after the sudden stop caused by the Lehman Bank collapse in September 2008.

Many major emerging economies such as India, Brazil, South Africa and Turkey have come to depend on such inflows as their current accounts started to deteriorate. They have invariably welcomed the asset bubbles that such inflows have helped generate and often ignored the financial fragilities caused by increased exposure to interest rate and exchange rate risks by private borrowers abroad.

Such exposures are on the rise since the beginning of 2012. As funds have started to be withdrawn from domestic securities markets, emerging economies have increasingly relied on international debt contracted in reserve currencies, which reached, in net amounts, 600 billion dollars between the beginning of 2012 and mid-2013.

As the Fed has got closer to ending the QE3 and the long-term U.S. rates have edged up, strong downward pressures have started to build up on the currencies, stocks and bonds of several emerging economies such as Brazil, India, South Africa and Turkey, which were widely seen as rising stars only a couple of years ago.

And the longer-term prospects of the eurozone are even less encouraging than the situation in the U.S. Deleveraging and recovery are likely to remain extremely slow in the periphery and many countries cannot expect to recuperate the output losses incurred after 2008 for several years to come.

This explanation answers some of the questions I had about an interview featured in a previous post Tapering of Quantitative Easing Is Throwing Emerging Markets into Chaos.

February 23, 2014

Part 2 has been published – Wage Shares Fall in the US, Germany and Many Other Countries While Financial Shocks Hit Emerging Economies


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