Sozialalmanach - Caritas Luxembourg

has been more rapid, and the willingness to run deficits is considerably greater. In short,
policymakers today have been able to avoid the deflationary, protectionist, and nationalistic
policy responses that aggravated the decline in the 1930s. This can in part be attributed to
the fact that policymakers in developed countries learned from the mistakes of the 1930s,
and are now firmly committed to open economies. A second related factor, perhaps is that
international economic interdependence has progressed so far (especially in the EU) that
protectionism is simply no longer a viable option. The crisis indeed revealed how much the
world economy has fundamentally transformed over the past three decades, and this makes
the crisis circumstantially different from any historical precedent. The swift global fallout
after the US sub-prime mortgage crisis demonstrates the stark reality of 21 st century global
economic interdependence – hardly any country in the world has remained unaffected.
The fast response of public authorities, national governments and central banks in concert
attests to effective crisis management, which was so sorely lacking in the 1930s. Of course,
earlier crises may offer interesting analogies but the present circumstances are radically
different to previous crisis situations.
In his inaugural speech, Barack Obama 33 claimed that the economic crisis was ‘a
consequence of greed and irresponsibility’. But conspicuous consumption and greed are
not new. As such, they cannot explain the speed or the depth of the global crisis after
2007. What then are the deeper, more structural and systemic causes of the crisis? Why
did academic economists fail to anticipate the coming crisis? In retrospect, three factors
can be identified that began to merge in the early years of the 21 st century, and eventually
created an unforeseen but lethal combination: (1) loose monetary policy; (2) the global
trade imbalance between the US and China; and (3) lax financial regulation as a result of
the liberalisation of capital markets in the 1980. In addition to these, a fourth contributing
factor was the theoretical bias that developed in the academic profession towards the
economics of market efficiency and human rationality.
Loose monetary policy
The origins of the crisis date back to the aftermath of the ‘dotcom’ bubble in 2000.
When the Fed realised that US aggregate demand was falling sharply and had the potential
to throw the entire economy into a full-blown recession, it responded by radically lowering
interest rates to one percent. Initially, as the US housing sector remained stable, there were
no signs of overheating. However, after another interest rate cut by the Fed, a housing
bubble began to expand. With lower interest rates, people could afford much larger home
mortgages. Greenspan’s loose monetary policy worked well in the beginning: The US
33 Obama (2009).
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