The global financial crisis: genesis, impact and lessons
Introduction (Via BIS)
The world economy today seems to be recovering from the most severe crisis since the Great Depression of the 1930s. As you know, it surfaced in the subprime mortgage sector in the US in August 2007 and took the character of a global crisis in September 2008 following the collapse of Lehman Brothers. It is also dubbed as the greatest crisis in the history of financial capitalism because of the way it simultaneously propagated to other countries. The impact of the crisis can be gauged from the sharp upward revisions to the estimates of possible write-downs by banks and other financial institutions from about US$ 500 billion in March 2008 to about US$ 3.5 trillion in October 2009. More than the financial cost, theadverse impact on the real economy has been severe: in 2009, the world GDP is estimated by the IMF to have contracted by 0.8 per cent and the world trade volume is estimated to have declined by 12 per cent.
The expanse of the crisis has tested all the limits of conventional and unconventional policy options available to policymakers around the world. In fact, the speed and intensity with which the US subprime crisis turned into a global financial crisis and then into a global economic crisis has led to a whole new debate on dominant tenets in macroeconomics. It has challenged the conventional views on the self-correcting nature of financial markets. The debate on the role of finance in economic growth has again come to the centre stage. Against this backdrop, I will reflect on the following set of questions. How similar or different is the recent crisis from the past crises in terms of its cause and manifestation? How did policies in different countries respond to the crisis? How and why was India impacted and how did we respond? What are the key lessons from the crisis? I will conclude with a focus on India.