The Global Financial Crisis: How It Changed the World | Jonathan Kirshner | TEDxHunterCCS

The Global Financial Crisis: How It Changed the World | Jonathan Kirshner | TEDxHunterCCS

thank you so before I start let me say that it's a just a tremendous pleasure to be here I'm always happy to have the opportunity to help out hunter in fact and I promise you this is a true story I had a dream last night that before I came here I was having breakfast with a bunch of Hunter students and they were kind of talking about you know what advice could I possibly give hundred students and we were chatting away about this and that and then there was a very obscure song on the radio playing and I stopped what I was saying to the students and I said by the way that's Lou Reed so if you get nothing else from what I have to say today you can go check that out so having said that let me jump right in because I do have probably too much to say and I will probably speak very quickly question is how did the global financial crisis change the world and my argument is it changed the world by bringing an end to something called the second post-war American order and the end of that order will bring about an era of new thinking and more importantly new contestation about how to best manage the international economy and that it is an area that will be associated with reduced u.s. power and influence and new American vulnerabilities as well so again this will be one of the less inspirational I think talks of the day second American or your first response to that should be huh what do you mean second American order well I think to understand the global financial crisis you have to understand where it came from and what's interesting if you study these things as as I am forced to the u.s. kind of built two very distinct international orders after the Second World War one was called the Bretton Woods system it worked from around 1948 to 1973 but then there was a second one called the globalization project of around 1994 to 2007 and crucially as I will emphasize these two orders were built on different types of thinking of ideas the first was kind of a Keynesian flavored what they called embedded liberal order meaning that the national economy should be oriented toward an expanding international economy but that it would be their policies would be embedded in sort of domestic social purpose to protect national policy from the power of disruptive international market forces and so the assumption was that states would for example use capital controls and other things like that to mediate these dangers and the second order had very different ideas it was more classical or market fundamentalist the idea that markets even markets were financial assets always knew best and as I study international politics I need to emphasize to you that not coincidentally this idea coincided with the widely shared assumption among American foreign policy elites that US power and interest would be advanced in a world characterized by kind of the encroachment of unfettered international global market forces or the processes of globalization as we call them now the first order crashed on the rocks of the economic distress –is of the 1970s and in the following decades people didn't really talk much about the American order that's what a lot about American decline indeed the second American order was really a surprise it was brought about by a confluence of completely unexpected events the collapse of the Soviet Union at the end of the Cold War the collapse of the Japanese economy the resurgence of the American economy none of these things were seen as likely to occur at the moment that they happen and as a combination they put the u.s. back in the building the world order business and I think in the ideas front this mattered in that it also was attended with in the Academy an apparent deal legitimation of Keynesian ideas about how to manage the economy and so for the u.s. suddenly a colossus suddenly and this mattered absent a peer military competitor new ideologies and a new recognition of American power when hand and had and a new American or was indeed forged and this new order was rooted in the liberation of Finance at home and abroad in the 1990s there was a dramatic escalation of the deregulation of Finance on the domestic front as the Clinton administration led a bipartisan charge to dismantle the Depression era firewalls that have been designed to contain instability in the domestic financial sector these trends were only accelerated in the transition to the George W Bush administration and with continuity at alan greenspan at the federal reserve in the 21st century both the administration and the Federal Reserve opposed the idea not simply a regulation of the financial sector but of basic supervision and oversight and it oversaw it even encouraged what became the financialization of the American economy the financial sector became larger more concentrated and as we came to learn much riskier but most important it became the biggest and fastest growing sector in the American economy very different from what had happened for the previous say 70 years and again there's an important role for ideas here in this story in the 1990s economists that kind of come around this view a new macroeconomic consensus that embraced something called the theory of rational expectations and it's fellow-traveller the efficient markets hypothesis which held that current market prices accurately Express the underlying value of all assets always because they accurately reflect the sum of a collective rational calculus sounds good small problem rational expectations theory if you go out and test it is actually wrong that is real-world outcomes are inconsistent with the expectations of rational expectations theory and in fact there are areas in which rational expectations theory does better or worse and it's in the financial sector where it does particularly bad it's particularly ill suited to explain outcomes in finance will laugh now because from a rational expectations perspective financial markets always know best and therefore can be left essentially to supervise themselves in the words of one analyst the efficient market hypothesis quote justified and even demanded financial deregulation but of course we live in a real world and those markets did not liberalize themselves fueled by a massive lobbying effort by the financial sector at the turn of the century true key pieces of legislation were passed one was the gramm-leach-bliley Act of 1999 which many of you have heard of that's the one that dismantled the glass-steagall Act the regulation in the 1930s the Depression era laws that were designed to prevent financial crises from occurring the second was more obscure is something called the Commodity Futures Modernization Act of 2000 and it was at least as consequential this Act was the culmination of a fight not to supervise new fantastically expanding sectors of the financial economy which produced massive wealth fueled rapid growth of the industry but were at the same time inherent carriers of systemic risk the interrelated phenomena of securitization and the astonishing growth in the trading of derivative products were enormous ly profitable for their issuers and traders and were largely unsupervised by an oversight and regulatory apparatus that was designed before such phenomena came into existence these markets grew at astonishingly fantastic rates like science fiction levels of expansion but following the logic of the theories of the day rational expectations efficient markets no one worried these prices of all these pieces of paper were accurately reflective of their fundamental underlying values determined by the collective wisdom of savvy well-informed market players growing on sophisticated understandings of the underlying logic of those markets or not and at the time a few voices were raised and concerned about this in 1994 the US Government Accountability Office issued a very dispassionate but important report pressing the question of systemic financial risk in the economy and it's said and I quote the size and concentration of derivatives activity combined with derivatives related linkages could cause any financial disruption to spread faster and be harder to contain and an urge Congress to quote revamp and modernize the entire US financial regulatory system the conservative magazine The Economist also sounded the alarm about unregulated products like these but said don't worry they will soon be regulated Paul Volcker very prescient man and a small hero in the story of these financial crises said at the time I think it is obvious that if you have a large investment bank aligned with a large commercial bank the possibility of a systemic risk arising is evident but again these were not the thoughts that were dominating the day Financial Regulation however modest however market-friendly was anathema to the new American economy of efficient markets and the expansion and ascendancy of the financial sector and so Paul Volcker was no longer chairman of the Federal Reserve Board alan greenspan was and he as a champion of free markets testified repeatedly and forcefully against the concept of systemic risks arising on derivatives a man known for speaking unclearly spoke very plainly quote regulation of derivatives transactions that are privately negotiated are unnecessary now to summarize what I've just said there was this second us post-war order built on the faith that financial markets left to themselves were efficient self-regulating and self-correcting and also as I suggested earlier they were also part of a larger international geopolitical strategy and here the u.s. played its had very aggressively with this financial globalization project as Treasury secretary official Lawrence Summers explained at the time pushing for global financial deregulation is quote a critical part of the US agenda but and is another important part of my story the style of that push primed actors throughout the world in Asia and Latin America in Russia and elsewhere to push back one day if and when they were given the chance and they didn't really have the chance to do this in the late 1990s when the US was still extraordinarily powerful and the US and its ally the IMF were not of a mood to encourage financial liberalisation they were of a mood to insist on it and to aim to force other states for example to eliminate all of their capital controls now and again I want to pause here and make an observation for if an economic theory which is that with regard to the drive to dismantle the world's capital controls and leave financial flows completely unfettered and unregulated two things one is there's actually no evidence this is a good thing that it would lead to better economic outcomes are more efficient economic outcomes and secondly one thing we do know empirically is that periods of high capital mobility and free-flying finance are associated with the increase in financial crises around the world and it ought not be shocking therefore that at around this same time the Asian financial crisis erupts 1997-1998 and the Asian financial crisis is an important part of my interpretation of the consequences of the global financial crisis because it exposed a key rift in the world in Asia and elsewhere around the world many observers saw the crisis as a classic international financial crisis international financial crisis are actually sort of common for Japanese officials and they were not affected by this crisis they saw the crisis as exposing quote the inherent instability of liberalized international capital markets others like Chinese officials also not affected by the Asian crisis agreed in that assessment but at the IMF and at the u.s. this view was quote-unquote emphatically rejected and the continued dry for capital deregulation continued but what's important about this experience is the the seed that was planted this clash of views on how to best manage the International economy and also in many states that were save assets from the IMF there was deep resentment by those who has received this assistance because it was often tied to very aggressive conditions conditions that were often asked for by the u.s. in the past of which these countries had rebuffed and now they had no choice but to say yes so to summarize this part of the story the US emerge from the 1990s triumphant confident and unrivaled but by embracing the financialization of its own economy and by designing a second post-world war to order to press these advantages the us both erred and over reached in the 1990s the u.s. surveyed the financial wreckage visible around the world Mexico Asia Russia South America and concluded that financial crises were things that happened to others others who for one reason or another perhaps even had it coming whereas the US financial system was seen as the jewel in the crown of the envied American economy and it is this that brings us to the global financial crisis of 2007-2008 about which I want to note four things one is that for much of the world the global financial crisis was the second major financial crisis of freewheelin capital within the past ten years that the epicenter of this crisis was the US this is my second point and this is astonishingly novel previously the US was seen as immune from financial crises the global financial crisis however originated in America thirdly for many actors around the world the crisis revealed finally the folly of fully unregulated finance which a good study of unregulated finance would have revealed to those interested but fourth and most important post-crisis u.s. public policy reflects a different perspective in some after the global financial crisis what I observe is continuity in the US with regard to macroeconomic policy whereas change abroad macroeconomic policy he referring to regulation of the financial sector why so little change in the u.s. one because it had this enormous lead powerful financial sector that did not want change and in 2009 it spent about 350 million dollars lobbying Congress as Congress was writing the legislation that might reregulate the final sector and secondly the ideology of unfettered finance never really became unstuck in the US as it did to greater or lesser extents around the rest of the world and so after the crisis the u.s. emerges with fewer larger more powerful financial firms the u.s. today is playing by most of the old rules and all of the old norms of behavior that weren't in place before the global financial crisis again in contrast in many places around the world the global financial crisis as the second major financial crisis suffered by many states undermine the legitimacy of that second post-war American order that I described what really changed is that with the end of the Cold War and with the Asian financial crisis the American financial model was grudgingly seen in many courts as the only one left standing maybe we like it maybe we don't like it but it's the only one left standing progress towards financial development is understood as converging towards the American Way of governing finance and after the global financial crisis this is no longer the case for the US the global financial crisis is described as a freak accident the so called Black Swan you can't predict it it's extremely rare and we can tinker with the margins but it is what it is but for many in the rest of the world the global Haunter crisis was a fool me twice moment the recognition that no unregulated finance don't try this at home don't manage your global economy this way so after the global financial crisis my argument is that what we're seeing in the world is this so-called new heterogeneity of thinking about the management of international money and finance and that this will affect both national choices and international politics countries will commonly have divergent beliefs about the global financial order and this will reduce US political influence abroad and it will make cooperation about the governance of money and finance more problematic so we're in for a bumpy ride on International Economic Cooperation moreover many countries now view for the first time in living memory the u.s. itself as vulnerable to future financial crises and there is also widespread disenchantment around the world with the u.s. led stewardship of global international economic institutions and there is a palpable preference out there for a variety of options and for new governance structures thus with the deal edge innovation of the second u.s. order and a new heterogeneity of thinking around the world about how best to manage money and finance the global financial crisis has changed the world in that way are now living in a world where US international political influence is somewhat reduced we will see a more conflictual and contested international economic order and we are still living in a world in which the US remains vulnerable to yet another financial crisis and on that cheerful note I will thank you for your time

4 thoughts on “The Global Financial Crisis: How It Changed the World | Jonathan Kirshner | TEDxHunterCCS

  1. Liberal liberated financial sector? More like carnage take no prisoners blood of the homeless waist deep in the streets kind of liberalism. Smells like financial fascism to me. Use crypto. EFF em'

  2. Trump is a meat puppet just like Stormy Daniels. The only difference is that Stormy is a professional and Trump is just an amateur and enjoys the physical sensations.

  3. Bring this guy back to talk about what's going to happen to the economy now that we have Trump making a bunch of greedy decisions that will benefit him, Putin, and Boeing financially. Also, is it a good idea to buy a million dollar house in Los Angeles right now? Are we in another bubble? Tell us, Mr. Kirshner.

  4. Clearest analysis of the crisis and its meaning. The implication is especially prescient in light of the instability that Trump political gymnastics may mean for trust in US financial and economic leadership. If people fear that the US economy may stumble, and if they have set up financial controls which will protect their economies, like the French, Chinese, Germans, Australians, South Americans, current Brazil and Venezuelan turmoil, not withstanding, African, etc, the possibility becomes very real. If any of these regions or nations set up effective financial controls, the US dollar is susceptible to loss, in which case we would see capital flight from the US, for the first time on a large scale, leading to a panicked scuddling of our currency, and thus sudden multiplication of our debt. In effect, the very fear of this, which in tea part got Trump elected, will lead to dollar destabilization, a terribly ironic self fulfilling prophesy. Beautiful, masterful presentation. Thanks Dr. K.

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