Edward B. Barbier
(also available in Portuguese at INESC)
The survey by Gary Gorton and Andrew Metrick on what happened during the 2008-9 financial crisis, “Getting Up To Speed on the Financial Crisis,” to be published by the Journal of Economic Literature, focuses on an important cause of this crisis: global imbalances in the world economy. As Gorton and Metrick suggest, such imbalances include the “institutional cash pools” caused by sovereign wealth funds and the “global savings glut”.
While the United States has been amassing large current account deficits, China, Japan, other Asian emerging market economies and some oil exporters have been generating trade surpluses. Similar structural imbalances were occurring within major regional economies, such as the European Union, where the large current account surpluses of France and Germany were offset by deficits in Ireland, Greece, Portugal, Spain and the United Kingdom. The result was that economies with chronic trade deficits were receiving large and sustained capital inflows from surplus economies seeking new asset investments. These massive credit flows precipitated the bubble and subsequent bust in financial markets, and the persistence of such global imbalances continues to add to the uncertainty and instability of the world economy.
Understanding how the global imbalances caused the financial crisis and subsequent recession is important. But addressing these imbalances in the world economy will need a much more profound change in global economic development.