This is the final installment of a four-part series excerpted from the Political Economy Research Institute (University of Massachusetts-Amherst) working paper “The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach,” by Junji Tokunaga and Gerald Epstein. Tokunaga is an Associate Professor in the Department of Economics and Management, Wako University, Tokyo. Gerald Epstein is a Professor in the Department of Economics, University of Massachusetts-Amherst, and Co-Director of the Political Economy Research Institute (PERI). See Part 1, Part 2, Part 3, and the full paper.
Junji Tokunaga and Gerald Epstein
The Nature of the Global Financial Crisis
The Endogenously Dynamic Process of Balance Sheet Expansion at LCFSs
In this section, we show how our approach is much better for understanding the nature of the global financial crisis than the arguments of the global imbalance view that many mainstream economists, policymakers, and even heterodox economists advocate.
Firstly, we argue that the global financial crisis was inherently caused by the dynamic process of balance sheet expansion at large complex financial institutions (LCFIs), driven by the elastic growth of global dollar in the global shadow banking system. … The global imbalances view attributes the emergence of global financial crisis to an excess of saving over investment in emerging market countries. According to that view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which were the epicenter of the financial crisis. In this view, LCFIs have a negligible role in the global financial crisis in the 2000s.
Recall our discussion of the endogenously dynamic process of balance sheet expansion, which, driven by the endogenously elastic finance of global dollar supplies in the global shadow banking system, contributed to the buildup of global financial fragility that led to the global financial crisis. Accordingly, it is clear that the global financial crisis is strongly affected by the endogenous dynamics of balance sheet in the global shadow banking system, rather than the emergence of excess savings in emerging market countries, as the global imbalances view stresses.