Sozialalmanach - Caritas Luxembourg

economy remained strong – although this was largely thanks to the housing bubble –
and companies diligently repaired their balance sheets. This cheap money created a very
competitive environment for financial institutions, which could only get high returns if
they made ever-riskier investments.
Global imbalances
Macro imbalance in trade has accelerated dramatically over the past ten to fifteen
years, partly as a result of loose US monetary policy. Asian emerging economies and
the oil-exporting countries accumulated large current account surpluses, and these were
matched by large current account deficits in the US, as well as the UK, Ireland, and Spain.
A key driver of these imbalances was the high savings rates in countries like China. The
run-up to the crisis should actually be traced back to the 1997 Asian financial market
crash. Following this disaster, Asian governments (and citizens) felt increasingly insecure
and ramped up their reserves – primarily in US dollars – in order to avoid becoming
vulnerable to such a scenario in the future. This exacerbated the US debt burden, further
perpetuating the trade imbalance.
Lax financial regulation
Loose monetary policy and the international trade imbalance were compounded by
a third factor: the deregulation of the financial sector. With the liberalisation of capital
markets, finance became global, but regulation remained national. In addition, throughout
the neo-liberal epoch, even domestic financial markets were systematically deregulated,
allowing financial innovations to evolve unchecked. As the financial sector grew and became
truly global, insufficient latitude was reserved for domestic government regulation and
international supervision 34 . Financial sector deregulation allowed the macro-imbalances in
savings rates to stimulate a massive wave of financial innovation, focused on the origination,
packaging, trading and distribution of derivatives, credit default swaps, and other securitised
credit instruments. Since the mid-1990s there has been huge growth in the value of credit
securities, an explosion in the complexity of the securities sold, and a related explosion of
the volume of credit derivatives, enabling investors and traders to hedge underlying credit
exposures. As securitisation grew in importance from the 1980s on, this development was
lauded as a means to reducing banking system risks and to cutting the total cost of credit
intermediation. The politics of international deregulation, together with computer-based
finance mathematics, finally extricated the capacity to produce money by credit from
public control – which to some extent at least had tied it to production and consumption
34 Posner (2009).
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