Treichel, VolkerLin, Justin Yifu2012-03-192012-03-192012-01-01https://hdl.handle.net/10986/3222The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform.CC BY 3.0 IGOASSET MANAGERASSET PRICEASSET PRICESASSET-LIABILITY MISMATCHBAILOUTBALANCE OF PAYMENTSBALANCE OF PAYMENTS CRISESBALANCE OF PAYMENTS CRISISBALANCE SHEETBANK LENDINGBANKING INSTITUTIONSBANKING SYSTEMBANKRUPTCYBORROWERBORROWING COSTSBUDGET DEFICITBUDGET SURPLUSESBUSINESS CYCLEBUSINESS CYCLESCAPITAL ACCOUNTCAPITAL FLOWSCAPITAL INFLOWSCAPITAL MARKETSCAPITAL OUTFLOWSCENTRAL BANKCENTRAL BANKSCOLLATERALCOMMERCIAL BANKCOMMERCIAL BANKSCOMMERCIAL PAPERCOMMERCIAL PAPER MARKETCOMMODITY PRICECOMMODITY PRICESCONSUMER CREDITCONSUMER GOODSCONSUMPTION EXPENDITURESCORPORATE SAVINGCREDIT DEFAULTCREDIT DEFAULT SWAPSCREDIT MARKETCREDIT MARKETSCREDITORCREDITORSCURRENCYCURRENT ACCOUNT DEFICITCURRENT ACCOUNT DEFICITSCURRENT ACCOUNT SURPLUSCURRENT ACCOUNT SURPLUSESDEBT BURDENSDEBT CRISISDEBT OBLIGATIONSDEFAULT RISKDEFAULTSDEFICITSDEPOSIT ACCOUNTSDEPOSIT INSURANCEDEPOSITSDERIVATIVEDERIVATIVE PRODUCTSDERIVATIVESDEVELOPING COUNTRIESDISCLOSURE OF INFORMATIONDURABLEDURABLE GOODSECONOMIC POLICIESEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET ECONOMIESEMERGING MARKETSEQUITIESEQUITY FUNDEQUITY INVESTMENTEQUITY MARKETEQUITY MARKETSEXCESS LIQUIDITYEXCHANGE COMMISSIONEXCHANGE RATEEXPORT COMPETITIVENESSEXPORT SHAREEXPORTERSFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL ASSETSFINANCIAL CRISISFINANCIAL DISTRESSFINANCIAL FLOWSFINANCIAL INSTITUTIONSFINANCIAL INSTRUMENTFINANCIAL INSTRUMENTSFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL SYSTEMFISCAL DEFICITSFISCAL POLICIESFISCAL POLICYFIXED INCOMEFOREIGN CURRENCYFOREIGN DIRECT INVESTMENTFOREIGN EXCHANGEFOREIGN EXCHANGE RESERVESGLOBAL CAPITALGLOBAL CAPITAL MARKETSGLOBAL ECONOMYGLOBAL TRADEGLOBALIZATIONGOVERNMENT BUDGETGOVERNMENT POLICYHEDGE FUNDHEDGE FUNDSHOME EQUITYHOME EQUITY LOANHOME EQUITY LOANSHOME LOANHOME MORTGAGEHOUSEHOLD INCOMEHOUSEHOLD WEALTHINCOME INSTRUMENTSINFLATIONINFLATIONARY EXPECTATIONSINFLATIONARY PRESSURESINSURANCEINSURANCE COMPANIESINSURANCE COMPANYINSURANCE CORPORATIONINTEREST PAYMENTSINTEREST RATEINTEREST RATE POLICYINTEREST RATESINTERNATIONAL BANKINTERNATIONAL BORROWINGINTERNATIONAL ECONOMICSINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL MARKETSINTERNATIONAL SETTLEMENTSINTERNATIONAL TRADEINVESTMENT BANKSINVESTMENT PORTFOLIOINVESTMENT RATELACK OF TRANSPARENCYLENDERSLETTERS OF CREDITLEVEL OF DEBTLEVEL OF RISKLIABILITYLIENLIENSLIQUIDATIONLIQUIDITYLIQUIDITY CRISISLOANLOAN OBLIGATIONSLONG-TERM INTERESTLONG-TERM INTEREST RATESLONG-TERM MATURITYMACROECONOMIC MANAGEMENTMACROECONOMIC POLICIESMARKET CONFIDENCEMARKET DISTORTIONSMARKET INDICESMARKET PARTICIPANTSMARKET STABILITYMATURITYMICRO-DATAMONETARY AUTHORITIESMONETARY FUNDMONETARY POLICYMONEY MARKETMONEY MARKETSMORTGAGEMORTGAGE LOANSMORTGAGE MARKETMORTGAGE OBLIGATIONSMORTGAGE-BACKED SECURITIESMORTGAGESMUTUAL FUNDSNATIONAL SAVINGSOIL PRICESPENSIONPENSION FUNDSPERSONAL INCOMEPOLICY RESPONSEPRICE MOVEMENTSPRIVATE EQUITYPUBLIC DEBTPUBLIC DEBTSPUBLIC FINANCESPURCHASING POWERREAL EXCHANGE RATEREAL INTERESTREAL INTEREST RATESREMITTANCESREPAYMENTSRESERVESRESIDENTIAL MORTGAGERETURNRISK AVERSIONRISK OF DEFAULTRISK PROFILERISKY ASSETSSAVINGS RATESAVINGS RATESSECURITIESSHAREHOLDERSSHORT-TERM DEBTSHORT-TERM DEPOSITSOVEREIGN DEBTSTOCK MARKETSTOCK MARKET PRICESSTOCK MARKETSSTOCKSSWAPTAXTRADE BALANCETRADINGTRANCHESTRANSACTIONTREASURIESTREASURYTREASURY BILLTREASURY BILLSTREASURY BONDSVALUATIONWEALTH EFFECTWEALTH EFFECTSWorld Bank10.1596/1813-9450-5937