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Begin New Search Topic Financial Crisis Political Geography United States of America Content Type Working Paper Publication Year within 5 Years Publication Year within 10 Years

1. The European Banks’ Role in the Financial Crisis of 2007-8: A Critical Assessment

Author:
Photis Lysandrou
Publication Date:
03-2022
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
Since the outbreak of the financial crisis in 2007, opinion has been divided over whether its root cause was credit arbitrage or safe asset demand. New research on the European banks' role in the crisis may finally help to resolve the issue. Far from being peripheral players in the crisis, European banks were deeply implicated in its causal origins as evidenced by their activities in the two US debt markets that were at the heart of the crisis: those for collateralised debt obligations (CDOs) and for asset backed commercial paper (ABCP). These activities would seem to lend weight to the credit arbitrage story, a conclusion that has been reached by several authors. However, it is a conclusion only made possible by ignoring the connection between the federal funds rate and the rate of ABCP demand from the institutional money market mutual funds (MMMFs) in the pre-crisis era. This paper argues that when this connection is closely examined, it turns out that the evidence surrounding the European banks' role in the financial crisis gives greater weight to the safe asset demand explanation of the crisis.
Topic:
Markets, Financial Crisis, Banks, Debt Securities, Assets, and Federal Funds Rate
Political Geography:
Europe and United States of America

2. The Long Search for Stability: Financial Cooperation to Address Global Risks in the East Asian Region

Author:
C. P. Chandrasekhar
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Forced by the 1997 Southeast Asian crisis to recognize the external vulnerabilities that openness to volatile capital flows result in and upset over the post-crisis policy responses imposed by the IMF, countries in the sub-region saw the need for a regional financial safety net that can pre-empt or mitigate future crises. At the outset, the aim of the initiative, then led by Japan, was to create a facility or design a mechanism that was independent of the United States and the IMF, since the former was less concerned with vulnerabilities in Asia than it was in Latin America and that the latter’s recommendations proved damaging for countries in the region. But US opposition and inherited geopolitical tensions in the region blocked Japan’s initial proposal to establish an Asian Monetary Fund, a kind of regional IMF. As an alternative, the ASEAN+3 grouping (ASEAN members plus China, Japan and South Korea) opted for more flexible arrangements, at the core of which was a network of multilateral and bilateral central bank swap agreements. While central bank swap agreements have played a role in crisis management, the effort to make them the central instruments of a cooperatively established regional safety net, the Chiang Mai Initiative, failed. During the crises of 2008 and 2020 countries covered by the Initiative chose not to rely on the facility, preferring to turn to multilateral institutions such as the ADB, World Bank and IMF or enter into bilateral agreements within and outside the region for assistance. The fundamental problem was that because of an effort to appease the US and the IMF and the use of the IMF as a foil against the dominance of a regional power like Japan, the regional arrangement was not a real alternative to traditional sources of balance of payments support. In particular, access to significant financial assistance under the arrangement required a country to be supported first by an IMF program and be subject to the IMF’s conditions and surveillance. The failure of the multilateral effort meant that a specifically Asian safety net independent of the US and the IMF had to be one constructed by a regional power involving support for a network of bilateral agreements. Japan was the first regional power to seek to build such a network through it post-1997 Miyazawa Initiative. But its own complex relationship with the US meant that its intervention could not be sustained, more so because of the crisis that engulfed Japan in 1990. But the prospect of regional independence in crisis resolution has revived with the rise of China as a regional and global power. This time both economics and China’s independence from the US seem to improve prospects of successful regional cooperation to address financial vulnerability. A history of tensions between China and its neighbours and the fear of Chinese dominance may yet lead to one more failure. But, as of now, the Belt and Road Initiative, China’s support for a large number of bilateral swap arrangements and its participation in the Regional Comprehensive Economic Partnership seem to suggest that Asian countries may finally come into their own.
Topic:
Regional Cooperation, Bilateral Relations, Financial Crisis, Central Bank, IMF, Liberalization, Financial Globalization, and Financial Integration
Political Geography:
China, Asia, and United States of America

3. Causal Mechanism and Explanation in Social Science

Author:
Renate Mayntz
Publication Date:
04-2020
Content Type:
Working Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
In the social sciences, the development of a specific social event or structure is often explained by a statistical correlation between an independent variable and a variable assumed to be dependent upon it. This mode of explanation is contested by a methodology of causal reconstruction that operates with the concept of mechanisms. A mechanism is a process in which a set of linked steps leads from initial conditions to an outcome or effect. Mechanisms are general concepts, subjecting individual cases to a general category. Except for the literature dealing specifically with the concept, the term “mechanism” is often used without definition of its substantive content; there is no agreement with respect to the unique or plural character of the initial conditions, nor to the structure of the causal path leading to a specific outcome. Nevertheless, mechanisms have played a crucial role in detailed causal analysis of complex historical events, such as the financial crisis of 2008 and German unification of 1989.
Topic:
Financial Crisis, Reconstruction, Unification, Social Science, and Mechanism
Political Geography:
Europe, Germany, and United States of America

4. The Cost of Holding Foreign Exchange Reserves

Author:
Eduardo Levy Yeyati and Eduardo Gómez
Publication Date:
05-2019
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effects empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
Topic:
Financial Crisis, Exchange Rate Policy, International Reserves, and Capital Flows
Political Geography:
Global Focus and United States of America