Magazine article The Times Higher Education Supplement : THE

Crash and Beyond: Causes and Consequences of the Global Financial Crisis: Books

Magazine article The Times Higher Education Supplement : THE

Crash and Beyond: Causes and Consequences of the Global Financial Crisis: Books

Article excerpt

Crash and Beyond: Causes and Consequences of the Global Financial Crisis. By Andrew Farlow. Oxford University Press. 448pp, Pounds 25.00. ISBN 9780199578016. Published 30 May 2013

The journalist Martin Wolf once likened attempts to assess the financial crisis to the old saw about examining an elephant in the dark: one person feels around, finds the trunk and wrongly identifies it as a snake; another discovers four legs and pronounces it a rhino; yet another finds just one leg and mistakes it for a tree trunk. Similarly, the financial crisis has been identified as many things: excesses in banking, the mismanagement of risk, a housing bubble, boom and bust driven by low interest rates, and a global imbalance. No single explanation, however, is enough to understand the full gravity of what has happened. While books on the crisis are now numerous - bad times for the economy are good times for sales of pop-economics titles - Andrew Farlow's book is rare in showing how these various factors interacted to create the gravest situation faced by the global economy since the Great Depression that followed the crash of 1929.

However, rather than just connecting the usual stream of explanations, Farlow also highlights one other: rising income inequality in the years preceding the crisis. Low wages in China meant too little spending in the East compared with its newfound and seemingly ever-expanding ability to produce. The solution was for China to lend to the US, giving the West the means to import the surplus of Chinese goods. The inflow of funds helped to increase the availability of loans and mortgages, pushing up house prices and encouraging Western consumers to take on debt and spend - all in a way that their wage growth (or lack of it) would not allow. Central banks across the world kept interest rates low in an effort to encourage spending to plug the hole of insufficient demand. These low interest rates in turn encouraged financial institutions to search for newfangled products that could deliver higher returns - including the slicing and dicing of (sub-prime) mortgage debt. The lack of oversight meant that the increased riskiness of the financial sector was missed. Furthermore, while house and stock prices were increasing, which by itself could have suggested the economy was overheating, cheap imported goods from China were pushing down prices in shops, acting in the opposite direction; so long as inflation and unemployment were low, many economists and policymakers seemed to think there was nothing to worry about. …

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