JOURNAL
URNALUSA

globalfinancialsystemTHE

U.S. DEPARTMENT 0F STATE / BUREAU OF INTERNATIONAL INFORMATION PROGRAMSU.S. DEPARTMENT OF STATE / May 2009VOLUME 14 / NUMBER 5

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About This Issue

I© AP Images

n hindsight, the bubble in the U.S.
housing market, the first indicationof what would become a global
financial crisis in the fall of 2008, shouldhave been obvious. The prices of houses
had risen beyond the salaries of many
ordinary Americans, but the availabilityof new, riskier mortgage products fueled
the rush to home ownership. What’smore, the inflation in their real estatevalues had many homeowners feeling
wealthy. Historically in the United States,
housing prices had always gone up. So
what went wrong?
At a meeting in the White House with his economic advisers, President Barack Obama speaks
And how did the failure of one sector
to the press on April 10, 2009.
of the U.S. economy help trigger whatmany have seen as the greatest worldwide economic crisis since the Great Depression of the 1930s? For this issue ofeJournal USA, we asked six financial experts to offer their opinions on how the global crisis came about and some of theways the world will react to this shared problem.
Political scientist Mark Blyth begins by listing six events that had a role in causing the crisis. John Judis, a senior
editor with the New Republic, then clarifies international currency by examining agreements from the Bretton Woods
conference in 1944 to the present-day negotiations among nations.
Charles Geisst, a financial historian, writes that improved computing, 24/7 trading around the globe, and the easeof trading contributed to the problem. “Customers were able to obtain executions for their stock trades with a speed
unimaginable in the mid-1990s. The volumes and the appetite for transactions appeared endless.” Once asset values
began to collapse, the banking and insurance crises occurred within months.
Famed investor George Soros contends that regulation is necessary to limit the growth of asset bubbles. But Soros
also warns against going too far: “Regulations should be kept to the minimum necessary to maintain stability.” Law
professor Joel Trachtman seconds the call for more regulation as well as improved corporate governance. In conclusion,
economics professor Richard Vedder describes the history of various international trade agreements and organizations
and their role today.
There is no shortage in the world of experts with opinions about the causes of the current crisis and prescriptions
for getting out of it, and it’s true that a different group of experts might well offer a different set of views from thosepresented here. What is surprising, perhaps, is how often certain common ideas emerge in these articles: that the natureof markets is cyclical, that global trade relationships are interdependent, and that a modicum of market regulation is agood thing.

											eJournal USA 1— The Editors

U.S. Department of State / May 2009/ Volume 14 / Number 5

http://www.america.gov/publications/ejournalusa.html

The Global Financial System:
Six Experts Look at the Crisis
Overview
4

The End of American Capitalism?
Mark Twain, Lake Wobegon, andthe Current Crisis
Mark Blyth, Professor of International
Political Economy, Brown University
While the type of financial crisis we face today isunprecedented, crises of capitalism are not. They
are commonplace.

17

Sidebar: Moving Forward on the
EconomyU.S. leaders look ahead.

18

Timeline of Financial Asset Bubbles

The Role of Regulation
20

Revise Regulation: The Theory ofMarket Equilibrium Is Wrong
George Soros, Chairman, Soros FundManagement
While international regulation must be
strengthened for the global financial system tosurvive, we must also beware of going too far.
Markets are imperfect, but regulations are evenmore so.

23

Global Financial Trouble: Causes,
Cures, Responses
Joel P. Trachtman, Professor ofInternational Law, Tufts University
No doubt, economic historians will argue foryears to come about the causes of the global
financial crisis. The primary causal factor wasmacroeconomic, but appropriate regulation might
have averted or ameliorated the crisis.

International Issues
9

Debt Man Walking
John B. Judis, Senior Editor, The New
Republic
Economists know the fatal flaw in ourinternational monetary system — but they can’t
agree on how to fix it.

13 Globalization and the U.S. Financial
SystemCharles R. Geisst, Professor of Finance,
Manhattan College
Globalization helped fuel the current financial
crisis, and it will undoubtedly be employed tohelp resolve it.

eJournal USA 2

A Historic Look at InternationalTrade
27 The Evolving Global Financial System
Richard Vedder, Distinguished Professor of
Economics, Ohio University
During the late 19th and early 20th centuries, there
was little coordination of international finances. Thatchanged substantially after World War II, and thechange is continuing today.

Additional Resources
31 Glossary
33 Books, Articles, Reports, Web Sites, andVideos Related to the Global Economy

eJournal USA 3

The End of American Capitalism? MarkTwain, Lake Wobegon, and the Current Crisis© AP Images

Mark Blyth

President Barack Obama speaks at the G-20 Summit in London, April 2, 2009.

While the type of financial crisis we face today isunprecedented, crises of capitalism are not. They arecommonplace.
Mark Blyth is professor of international political
economy at Brown University. He is the author of Great
Transformations: Economic Ideas and Political Change in
the Twentieth Century.

I

f you draw what statisticians call a time series of the
returns to the U.S. banking sector from 1947 to 2008,
it is possible to talk with some confidence about
the average rate of profitability of the sector over time,
the peaks (1990s to mid-2000s), the troughs (1947 to1967), and the sharp growth of the sector’s profitability
over the past 10 years. If you then add in the data for theperiod between August 2008 and April 2009, the entire
series, like the banking system it describes, simply blows
up. Averages, means, variances, and the like dissolve,
so extreme have been recent events. Indeed, when theformer chairman of the U.S. Federal Reserve Bank, Alan
Greenspan, admits that his understanding of market
processes was deeply flawed, and when the current
chairman, Ben Bernanke, says that we face the greatest

eJournal USA 4

© AP Images

Federal Reserve Chairman Ben Bernanke testifies before the U.S. Congress.

crisis since the Great Depression, we should probably takeit seriously.
And serious it is. With a grossly diminished $1.3
trillion in assets and as much as $3.6 trillion in liabilities,
coupled with a halving of the stock market, the U.S.
financial system is either severely stressed, insolvent, or,worse still according to some, at the end of its tether. The
end of capitalism has been declared many times before.
And yet, to paraphrase American writer and humorist
Mark Twain, reports of its death have been greatly
exaggerated.
The U.S. capitalism that will emerge from thiscrisis will be different from the highly financialized
consumption-driven and trade-imbalanced version that
we developed over the past two decades. It already haschanged insofar as Wall Street proper no longer exists.
But what people tend to forget is that we have been
here before. While the type of crisis we face today isunprecedented, crises of capitalism are not: They arecommonplace. It’s just that this one has hit the UnitedStates rather than another region of the world. But wehave been here before and have survived, mainly because
the present is not a copy of the past. Remembering thistempers the expectation that U.S. capitalism has run its
course.
The Lake Wobegon Problem(where everyone is above average)
While there are surely many plausible candidates— ranging from the bonus culture of banks to Chinesesavings and German parsimony — to blame for the crisis,
focusing on the immediate present may mask a deeper set

of causes. Putting this crisis in proper perspective requiresthat we begin almost 30 years ago with the unexpectedmarriage of unlimited liquidity and limited asset classes.
Six processes came together to get us where we are today.
First, beginning in the 1980s, the world’s major
financial centers deregulated their domestic credit
markets and opened up their financial accounts. This
“globalization of finance” resulted in a spectacular growthin available liquidity as previously isolated markets became
intertwined. Second, this liquidity was given a huge boost
with the growth of new financial instruments, particularly
techniques of securitization and the increasing use ofcredit derivatives. Third, given this growth of global
liquidity, long- and short-term interest rates began to fall
precipitously. In 1991 the U.S. prime and federal funds
rates (and thus global interest rates) began their longdecline out of double figures to historic lows.
Fourth, given these changes, the commercial
banking sectors of these now finance-driven economies
became increasingly concentrated. Available bank credit
skyrocketed at the same time as the privatization of former
state responsibilities, especially in pensions, encouraged
the growth of large non-bank institutional investors, allseeking “above-average” returns since their jobs depended
upon beating some benchmark average, usually the annual
return of the Standard & Poor’s 500 or an index of theirsector’s performance.
Fifth, the U.S. current account deficit climbed
to historically unprecedented proportions of the grossdomestic product. The United States was effectively
borrowing between 3 and 6 percent of GDP each year for
more than 20 years, and borrowing at such low interest
rates seemed to make money free given the growth rates
that we grew accustomed to.
Sixth, and perhaps what facilitated all of the above,
was a deep seated ideological change that took placein the United States between 1970 and 2000. Namely,markets came to be seen by politicians, pundits, andthe public as self-regulating wonders that could produce
ever higher risk-free returns if only the state’s blunderingand inefficient regulations could be swept away, which
they were by obliging politicians of both parties. Add all
this together and you have a financial sector that is both
dependent on continually finding above-average returns
at the same time as it becomes an increasingly large andimportant part of U.S. gross domestic product.

eJournal USA 5

© AP Images

Container ships with imports from Asian countries are unloaded at New Jersey docks.

The Limits of Lake Wobegon
The problem with chasing a moving average is that it
continually gets bid upwards. Here we run into a problem
of asset classes: the limited number of categories of assets
from which investors can seek above-average returns.
There are only a few such classes around: equities (stock),cash (money market), and fixed income (bonds), to which
one can add real estate and commodities. If equities,
bonds, and money market instruments are regarded asreciprocal investments within a class, then stock markets,
relatively underpriced in the early 1990s, became theobvious place to go for such returns. The massive volume
of liquidity in its search for above-average returns firstflooded U.S. equity markets and quickly thereafter hit
global stock markets during the middle to late 1990s.
Once that particular bubble burst, most spectacularly
in East Asia, neither bonds nor fixed income alone would
provide the above-average returns that the markets —and all of us who depended on them — now expected.

The next stop for investors was therefore the ill-fateddot-com bubble, and thereafter the next most obvious
asset class, real estate — hence, the global housing boom,
which began just as the dot-com bubble popped in thelate 1990s. By 2008 this housing bubble had run outof (good) borrowers, in part owing to Federal Reserve
Chairman Greenspan’s raising of interest rates in the
mid-2000s. The result of looking for a new return wasthat the remaining class of assets, commodities, became
the next bubble, with oil quadrupling in price and basic
foodstuffs rising between 40 and 70 percent in a little overa year. However, with the exception of oil, these were small
markets, too small to sustain such volumes of liquidity,
and these bubbles burst quickly. The commodity market
collapse combined with losses in the subprime sector of themortgage derivatives market triggered the current crisis.
Although it is referred to as the “subprime crisis,”
it is perhaps better described as a subprime trigger for asystemic crisis caused when all these factors came together
through financial actors’ risk management practices. WhileeJournal USA 6

Mark Twain and Three
Reasons to Be Hopeful© Hulton-Deutsch Collection/CORBISIt is worth noting that while
Federal Reserve Chairman Bernanke
said that we faced the greatest crisis
since the Great Depression, he did
not say that we face a crisis as big
as the Great Depression. Twenty
to 40 percent unemployment, acollapse of world trade, ruinous
competitive currency devaluations,absurd tariff levels, and the collapseof democracy were the reality of theGreat Depression across the world.
We face challenging times in thecurrent crisis, and there is always
the possibility that things could
get much worse, but things are
nowhere near this severe. This gives
me reason for optimism regarding
On Black Friday in 1929, investors watch the chalkboard as stock values plummet.
Twain’s observation, mainly because
there is a huge difference between
the
world
of
the
1930s
and
the world that we live in today.
banks and other financial firms have sophisticated models
Time’s arrow means that we always “live it forward,” suchfor managing their various risks (credit, liquidity, and thethat the conditions of the present are never the same aslike), those same technologies can create instabilities in
the conditions of the past. Three of those conditions thatmarkets by either blinding their users to tail risks, whichpertain today and that are different from those of the 1930s
causes a channeling of risk into common portfolios acrossgive us the opportunity to avoid the mistakes of the past.
asset classes as everyone hedges the same way, or by linking
The first lesson learned is that lessons can be learned.
assets together in a search for liquidity as positions are
We are not doomed to repeat the 1930s precisely because
unwound as banks de-leverage. So what is rational for one
bank can create systemic risk for all banks as asset positions we can reflect upon how bad the 1930s were and how
actions taken to protect ourselves individually in thisbecome serially correlated on the upside and the downsideperiod made us all worse off collectively. Those lessonsof the bubble.
learned made states across the world build automaticOnce the entire banking system had loaded up on
stabilizers into their economies in order to stave off
mortgage derivatives and credit default swaps, the crisis
collapses in consumption that would lead to protectionist
was just waiting to happen. It came when losses at several
and nationalist demands in the event of an external crisis,
major U.S. banks triggered the fall of Lehman Brothers,
and to rely on multilateral cooperation to forestall obvious
which in turn caused massive losses in systemically linked
markets, particularly the massive credit default swaps
policy errors. One can legitimately argue that different
market. Liquidity dried up, and the crisis had begun. How
countries learn different lessons. Hence, the Germans
it unfolds from here is really anyone’s guess, but does thisare worried about the inflationary consequences of themark the end of American capitalism? There are several
spending the Americans want the Europeans to undertake
reasons to think that this is not the case, and that Markto avoid the unemployment that the Americans fear.
Twain’s injunction still stands.
But the point of meetings such as the G-20 is to air
those differences and find room for policy agreements.
The question is one of balance between stimulus andregulation, and both sides of the Atlantic know that theyeJournal USA 7

need to find common ground to move forward.
My second reason for optimism derives from the
new MAD. During the Cold War, we spoke of “mutuallyassured destruction,” in which the United States and theSoviet Union had so many nuclear weapons that one side
could not destroy the other without destroying itself. Swap
“mutually” for “monetarily” and you get the new MAD —“monetarily assured destruction” — which exists between
China and the United States. One consequence of thefinancialization of the U.S. economy was that we managed
to get China to swap real goods for paper, and a terrible
rate of return on holding the paper, for more than 20
years, in the course of which the Chinese (and other East
Asian economies) built up astonishingly large trade andcurrent account surpluses. Essentially, without anyone evermaking such a wager formally, the United States made aone-way bet that we could run our economy on finance ina global division of labor in which China made the goods
in return for dollars that would be lent back to us so we
could consume their products. That system has also cometo an end. China needs to consume more and the UnitedStates needs to produce something besides mortgage
derivatives, and both sides know this. Getting there
will be painful, but the alternative, monetarily assured
destruction, where the dollar is dumped and the exchanges
collapse, is another individually rational and collectively
disastrous policy that all parties know, this time around, toavoid.
Third, another ideology has failed. The belief
that markets are uniquely good and self-regulating
entities, while states are always and everywhere bad andoverregulating monstrosities, is a recurring nightmare in
the history of capitalism. The 1930s taught us that thisbelief in markets and self-regulation was fallacious andgave us the Keynesian era of regulated finance and welfare
states. The 1970s, the other crisis period of the 20th
century, taught us that Keynes was wrong and that open
markets and unregulated finance were the way to go. Thatsystem, what might be called neoliberal globalization, wasthe system that just blew up. So what will be the lesson
learned this time?
The lesson still to be fully learned from this crisis
is that markets and states are always and everywheremutually overlapping, constitutive, antagonistic, andgenerative. Capitalism as a system thrives best in anenvironment of prudential regulation provided by states,
and U.S. capitalism is no different. The precise balance
between state and market is a political question to be
decided by different states. But that there needs to be abalance is something that most states, even the UnitedStates, now accept.
So Mark Twain’s injunction stands. Reports of thedeath of U.S. capitalism are exaggerated and will likely
remain so as long as we are willing to learn that lessons
from the past can indeed be learned. n
The opinions expressed in this article do not necessarily reflect the views orpolicies of the U.S. government.

eJournal USA 8

Debt Man Walking© AP Images

John B. Judis

In 1944, the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, decided that the dollar
would replace the British pound as the accepted global currency.

Economists know the fatal flaw in our internationalmonetary system — but they can’t agree on how to fix it.
John B. Judis is a senior editor at the New Republic
and a visiting fellow at the Carnegie Endowment forInternational Peace.

The past few months have been a crash coursein the abstract and obscure instruments andarrangements that have derailed the world’s
economy. From mortgage-backed securities to credit
default swaps, the international monetary system is in big
trouble.
For decades, the United States has relied on a
tortuous financial arrangement that knits together its

economy with those of China and Japan. This informal
system has allowed Asian countries to run huge export
surpluses with the United States, while permitting theUnited States to run huge budget deficits without having
to raise interest rates or taxes, and to run huge trade
deficits without abruptly depreciating its currency. Quitea few bankers, international economists, and high officials
such as U.S. Federal Reserve Chairman Ben Bernanke
think this informal system contributed to today’s financial
crisis. Worse, they fear that its breakdown could turn thelooming downturn into something resembling the global
depression of the 1930s.
The original Bretton Woods system dates from a
conference at a New Hampshire resort hotel in July 1944.
Leading British and American economists blamed theeJournal USA 9

Great Depression and, to some extent, World War II on
the breakup of the international monetary system in theearly 1930s, and they were determined to create a morestable arrangement in which the dollar would replace the
British pound as the accepted global currency.
The dollar became the accepted medium ofinternational exchange and a universal reserve currency.
If countries accumulated more dollars than they could
possibly use, they could always exchange them with
the United States for gold. But with the United Statesconsistently running a large trade surplus — meaning thatcountries always needed to have dollars on hand to buy
American goods — there was initially little danger of arun on the U.S. gold depository.
Bretton Woods began to totter during the Vietnam
War, when the United States was sending billions ofdollars abroad to finance the war and running a trade
deficit, while deficit spending at home sparked inflationin an overheated economy. Countries began trying toswap overvalued dollars for deutschmarks, and France
and Britain prepared to cash in their excess dollars at Fort
Knox (the United States’ gold depository). In response,
President Richard Nixon first closed the gold window andthen demanded that Western Europe and Japan agree to
new exchange rates whereby the dollar would be worth
less gold, and the yen and the deutschmark would be
worth more, relative to the dollar. That would make U.S.
exports cheaper and Japanese and West German imports
more expensive, easing the trade imbalance and stabilizing
the dollar.
By imposing a temporary tariff, Nixon succeeded inforcing these countries to revalue, but not in creating a
new system of stable exchange rates. Instead, the values of
the currencies began to fluctuate. And as inflation soaredin the late 1970s, the system, which still relied on thedollar as the universal currency, seemed ready to explodeinto feuding currencies.
Bretton Woods II
That’s when a new monetary arrangement began toemerge. Economists often refer to it as “Bretton Woods
II,” but it was not the result of a conference or concerted
agreement among the world’s major economic powers.
Instead, it evolved out of a set of individual decisions— first by the United States, Japan, and Saudi Arabia,
and later by the United States and other Asian countries,
notably China.

Bretton Woods II took shape during President
Ronald Reagan’s first term. To combat inflation, Paul
Volcker, then the chairman of the Federal Reserve, jacked
interest rates above 20 percent. That precipitated a steep
recession — unemployment exceeded 10 percent in thefall of 1982 — and large budget deficits as government
expenditures grew faster than tax revenues. The value ofthe dollar also rose as other countries took advantage ofhigh U.S. interest rates. That jeopardized U.S. exports,
and the U.S. trade deficit grew even larger as Americans
began importing underpriced goods from abroad while
foreigners shied away from newly expensive U.S. products.
The Reagan administration faced a no-win situation: Try
reducing the trade deficit by reducing the budget deficit,
and you’d stifle growth; but try stimulating the economy
by increasing the deficit, and you’d have to keep interest
rates high in order to sell an adequate amount of Treasury
debt, which would also stifle growth. At that point, Japan,
along with Saudi Arabia and other OPEC (Organizationof Petroleum Exporting Countries) nations, came to therescue.
At the end of World War II, Japan had adopted astrategy of economic growth that sacrificed domestic
consumption in order to accumulate surpluses thatit could invest in export industries — initially laborintensive industries such as textiles, but later capitalintensive industries such as automobiles and steel. This
export-led approach was helped in the 1960s by anundervalued yen, but, after the collapse of Bretton Woods,
Japan was threatened by a cheaper dollar. To keep exports
high, Japan intentionally held down the yen’s value by
carefully controlling the disposition of the dollars it reaped
from its trade surplus with the United States. Instead ofusing these to purchase goods or to invest in the Japanese
economy or to exchange for yen, it began to recycle themback to the United States by purchasing companies, realestate, and, above all, Treasury debt.
That investment in Treasury bills, bonds, and notes— coupled with similar purchases by the Saudis andother oil producers, who needed to park their petrodollars
somewhere — freed the United States from its economic
quandary. With Japan’s purchases, the United States
would not have to keep interest rates high in order toattract buyers to Treasury securities, and it wouldn’t
have to raise taxes in order to reduce the deficit. As far
as historians know, Japanese and American leaders never
explicitly agreed that Tokyo would finance the U.S. deficit
or that Washington would allow Japan to maintain an

eJournal USA 10

© Thomas D. McAvoy/Time Life Pictures/Getty Images

At a U.S. Senate hearing in 1945, foreign currency is displayed.

undervalued yen and a large trade surplus. But the
informal bargain — described brilliantly in R. Taggart
Murphy’s The Weight of the Yen — became the cornerstoneof a new international economic arrangement.
Over the last 20 years, the basic structure of Bretton
Woods II has endured, but new players have entered thegame. As Financial Times columnist Martin Wolf recounts
in his book Fixing Global Finance, Asian countries, led by
China, adopted a version of Japan’s strategy for export-led
growth in the mid-1990s after the financial crises thatwracked the continent. They maintained trade surpluses
with the United States. And instead of exchanging
their dollars for their own currencies or investing theminternally, they, like the Japanese, recycled them into
Treasury bills and other dollar-denominated assets. This
kept the value of their currencies low in relation to thedollar and perpetuated the trade surplus by which theyacquired the dollars in the first place. By June 2008,
China held more than $500 billion in U.S. Treasury debt,
second only to Japan. East Asia’s central banks had become
the post-Bretton Woods equivalent of Fort Knox.
Upsides and Downsides
Until recently, there have been clear upsides tothis bargain for the United States: the avoidance oftax increases, growing wealth at the top of the income
ladder, and preservation of the dollar as the international
currency. Without Bretton Woods II, it is difficult toimagine the United States being able to wage wars in
Iraq and Afghanistan while simultaneously cutting taxes.
For their part, China and other Asian countries enjoyedalmost a decade free of financial crises. And the world
economy benefited from low transaction costs and relative
price stability from having a single currency that countries
could use to buy and sell goods.
But there have been downsides to Bretton Woods II.
A nation could conceivably blackmail the United Statesby threatening to cash in its dollars. Of course, if a nationsuch as China actually began to unload its dollars, itwould jeopardize its own financial standing as much as it
would jeopardize America’s. But economists Brad Setser
and Nouriel Roubini argue that even the implicit threatof dumping dollars — or of ceasing to purchase them —could limit U.S. maneuverability abroad. “The ability tosend a ‘sell’ order that roils markets may not give China
a veto over U.S. foreign policy, but it surely does increase
the cost of any U.S. policy that China opposes,” they
write.
In Japan, China, and other Asian countries, there has
also been a downside to the grand bargain. The surplus
dollars gained from trade with the United States have notbeen used to raise the standard of living, but rather havebeen squirreled away in Treasury securities. Writes Martin
Wolf: “China has about 800 million poor people, yet
the country now consumes less than half of GDP [grossdomestic product] and exports capital to the rest of theworld.”
Of more immediate concern, Bretton Woods II
contributed to the current financial crisis by facilitating
the low interest rates that fueled the housing bubble.
Here’s how it happened: In 2001, the United States
suffered a mild recession largely as a result of overcapacity
in the telecom and computer industries. The recession
would have been much more severe, but, because
foreigners were willing to buy Treasury debt, the Bushadministration was able to cut taxes and increase spending
even as the Federal Reserve lowered interest rates to 1
percent. The economy barely recovered over the next
four years. Businesses, still worried about overcapacity,remained reluctant to invest. Instead, they paid downdebt, purchased their own stock, and held cash. Banks andother financial institutions, wary of the stock market sinceeJournal USA 11

the dot-com bubble burst, invested in mortgage-backed
securities and other derivatives.
The anemic economic recovery was driven by growthin consumer spending. Real wages actually fell, but
consumers increasingly went into debt, spending morethan they earned. Encouraged by low interest rates —along with the new subprime deals — consumers boughthouses, driving up their prices. The “wealth effect” createdby these housing purchases further sustained consumer
demand and led to a housing bubble. When housing
prices began to fall, the bubble burst, and consumer
demand and corporate investment ground to a halt. The
financial panic quickly spread not only from mortgagebacked securities to other kinds of derivatives, but also
from the United States to other countries, chiefly inEurope, that had purchased these American financial
products.
And that’s not all. As American demand for Chinese
exports has stopped growing, China’s economy has begun
to suffer. China would experience the equivalent of arecession, with repercussions throughout Asia. More
importantly for the United States, China would no longer
have the surplus dollars to prop up the market for U.S.
Treasury bills.
Needed Adjustments
The consequences could be even more dire. In thepast, countries in recession could count on countries withgrowing economies to provide outlets for their exports andinvestments. The hope this time is that economic growthin Asia, and particularly in China, can backstop a U.S.
and European recession. China depends on exports to theUnited States, and the United States depends on capitalfrom China. If that special economic relationship breaks
down, as it seems to be doing, it could lead to a global
recession that could morph into the first depression sincethe 1930s.
Policy makers have to recognize that while Bretton
Woods II is not the product of an international
agreement, it is not a “free-market” system that relies
on floating currencies, either. Rather, it is sustained by
specific national policies. The United States has acquiescedin large trade deficits — and their effect on the U.S.
workforce — in exchange for foreign funding of ourbudget deficits. And Asia has accepted a lower standard ofliving in exchange for export-led growth and a lower riskof currency crises.
China, Japan, and other Asian countries — either
on their own or with prodding from the Obamaadministration — will also have to play a part. Indeed,
China may have already begun to do so by announcing
last fall a $586 billion stimulus plan of public investment
in housing, transportation, and infrastructure. If China
plows its trade surplus back into its domestic economy, it
will increase demand for imports and put upward pressure
on the yuan, reducing China’s trade surplus with the West.
This kind of adjustment — in which the UnitedStates commits itself to reducing its trade deficit, andChina, Japan, and other Asian countries move awayfrom their strategy of export-led growth — is whatmany American policy makers favor. But there is also
growing sentiment, particularly in Europe, that beyond
these measures, the world’s leading economies have toagree on a new international monetary system — or atleast dramatically reform the existing one. British Prime
Minister Gordon Brown has explicitly called for a “newBretton Woods — building a new international financial
architecture for the years ahead.” Brown would strengthen
the International Monetary Fund so it functions as “anearly warning system and a crisis prevention mechanism
for the whole world.” He would also have it or a neworganization monitor cross-border financial transactions.
But adjustments to the dollar’s role are certainly
needed. The era of the dollar may not be over, but the
special conditions under which it reigned during thelast decades are being dashed on the rocks of the current
recession and financial crisis. The original Bretton Woods
was the product of deliberate agreement and laid the basis
for stable growth. A new Bretton Woods agreement will
depend a good deal on the choices of the international
community. n
This article is excerpted from an article of the same title that appeared in
The New Republic, December 3, 2008. Copyright © 2008 The New
Republic, LLC.
The opinions expressed in this article do not necessarily reflect the views orpolicies of the U.S. government.

eJournal USA 12

Globalization and the U.S. Financial System© AP Images

Charles R. Geisst

Speed-of-light technology makes international investing effortless.

Globalization helped fuel the current financial crisis, and it
will undoubtedly be employed to help resolve it.
Charles R. Geisst is professor of finance at Manhattan
College. His many books include Wall Street: A History, andhe is the editor of the Encyclopedia of American BusinessHistory.

In the decades following World War II, the idea ofglobalization became more and more popular whendescribing the future of the world economy. Some day,markets for all sorts of goods and services would become
integrated and the benefits would be clear. The standardof living would be raised everywhere as barriers to trade,
production, and capital fell. The goal was noteworthy
and has been partially realized. But recently it hit a major
bump in the road.
Globalization has many connotations. Originally,
it meant international ease of access. Barriers to tradeand investment eventually would disappear, and theinternational flow of goods and services would increase.
Free trade and common markets were created to facilitate
the idea. A world without barriers would help distributewealth more evenly from the wealthy to the poor.
To date, only financial services have succeeded in
becoming truly global. Fast-moving financial markets,
aided by speed-of-light technology, have swept away
national boundaries in many cases, making international
investing effortless. Government restrictions have been
removed in most of the major financial centers, andforeigners have been encouraged to invest. This has
opened a wide panorama of investment possibilities.
This phenomenon is not new. Since World War II,
many governments have loosened restrictions on theircurrencies, and today the foreign exchange market is
the world’s largest, most liquid financial market, trading
around the clock. And there is no distinction made in it
because of those national peculiarities or restrictions for

eJournal USA 13

the major currencies. If governments allow their currencies
to trade freely, as most in developed countries, then adollar or a euro can trade in Hong Kong or Tokyo as easily
as it does in Dubai or New York.
Cross-Border Trading
Other financial markets quickly followed thisprecedent. The government bond markets, corporatebond markets, and the equities markets all started todevelop links based on new and faster technology. Forty
years ago, Gordon Moore, one of the founders of software
giant Intel, made his famous prediction (Moore’s Law)that microchip capacity would double every two years.
New, faster chips were able to accommodate an increasing
number of financial transactions, and before long thatcapacity spawned even more transactions. Soon, traders
were able to cross markets and national boundaries withan ease that made the supporters of globalization in othersections of the economy jealous. During the same time
period, manufacturers had been promoting the idea of theuniversal car, without the same level of success.
Wall Street and the other major financial centers
prospered. Customers were able to obtain executions fortheir stock trades with a speed unimaginable in the mid1990s. The NYSE (New York Stock Exchange) and the
NASDAQ (National Association of Securities Dealers
Automated Quotations) abandoned their old method of
quoting stock prices in fractions and adopted the decimal
system. Computers did not like fractions, nor did the oldmethod encourage trading at the speed of light. Customers
were now able to trade via computer in many major
markets as quickly as in their own home markets. True
cross-border trading was born, making financial services
the envy of other industries that long had dreamed of
globalization.
The results were astonishing. Volume on the NYSE
increased from a record 2 billion shares in 2001 to arecord 8 billion in 2008. Volume on the foreign exchange
markets was in the trillion-dollar equivalents on a daily
basis. The various bond markets were issuing more thana trillion worth of new issues annually rather than thebillions recorded in previous record years. The value ofmergers and acquisitions equally ran into the trillions
annually. The volumes and the appetite for transactions
appeared endless.

A Traditional Cycle
The U.S. economy traditionally had witnessed long
periods of prosperity before slowing down substantially,usually brought to a temporary halt by an asset bubble
that finally ran out of hot air. The situation had been
replayed many times since 1793, when the first major
economic downturn was recorded in New York. Similar
problems were recorded at least eight times until 1929.
Each boom was followed by a bust, some more severe
than others. The post-1929 depression finally ushered in
far-reaching reforms of the banking system and securities
markets.
Until 1929, these recessions were called “panics.” Theterm “depression” was used once or twice in the early 20th
century, but during the 1930s the term became associatedexclusively with that decade. The traditional cycle is stillin evidence. The recession of 2001 followed the dot-com
bust, and many of the day traders who had employed
the new computer technology retreated to the sidelines
much as their forebears had done in the 19th century. A
recession followed, temporarily slowing down the appetite
for speculative gains.
The 19th and the 21st centuries had more incommon than might have been imagined. After gaining
its independence from Britain, the United States had been
dependent on foreign capital for the first 120 years of
its existence. Until World War I, much of the American
infrastructure and industry had been financed with foreign
money, mostly in the form of bonds. Americans produced
most of the goods and services they needed, but capital
was always in short supply until the war changed the faceof geopolitics.
The situation remained unchanged until the late1970s, when the position again was reversed. The U.S.
household savings ratio declined and foreign capital
poured into the country. Bonds were the favorite again,
but the equities markets also benefitted substantially.
Consumers, accounting for about two-thirds of the U.S.
gross domestic product since the 1920s, bought domestic
and foreign goods, while foreigners supplied the capitalnecessary to finance the federal government and many
American industries. The situation persists today, with
about half the outstanding U.S. Treasury bonds in thehands of the Chinese government alone.

eJournal USA 14

© AP Images

the idea that everyone should own his
or her own home.
Demand for the securitizedbonds proved strong, so strong that
Wall Street securities houses began
cranking them out at increasingly fast
speed. Much of the demand camefrom foreign investors — central
banks, banks, sovereign wealthfunds, and insurance companies —all drawn by their attractive yields.
Dollars were being recycled by theseinvestors, especially central banks andthe sovereign wealth funds, from thecurrent account balances they were
The housing boom in the Silicon Valley, California, before the dot-com asset bubble presaged theaccumulatingwith the United States.
mortgage crisis of 2008.
The money left the United States as
Americans purchased imports fromThe Mortgage Boom
foreign producers and found its way back as investments.
After the dot-com bust and the Enron andVictims of Their Own Success
WorldCom scandals, it appeared that Wall Street was due
to take a breather for lack of new ideas to fuel anotherbubble. But it was a combination of cyclical trends that
The mortgage boom began after 2001, and within
reappeared and together fueled the greatest short-terma couple of years it was in full stride. Demand remained
boom yet. Globalization, an influx of foreign capital,
strong for mortgage-backed securities, and soon subprimeand esoteric financial analytics combined with residential
mortgages, credit default swaps, and other exotic collateralhousing to produce the most explosive — and potentiallybased on derivatives became part of the asset backing. By
destructive — boom/bust cycle ever witnessed in
the late summer of 2007, as short-term interest rates rose
American history.
from historically low levels, cracks began to appear in
The recent market bubble was created by the boom
this collateral and asset values began to collapse, creatingin residential housing. Normally, housing follows stock
the banking and insurance crises within months. In themarket booms but has not caused them. In the wake ofpast, without the technology, the results would have taken
the dot-com bust and the post-September 11 trauma, theyears.
situation became reversed. The home became the center
The boom was aided immeasurably by theof many investors’ attention. First-time buyers abounded,
deregulation of the U.S. financial markets in 1999,
and many others clamored to refinance their existing
officially culminating over two decades of a gradual easing
mortgages. The new thing was really an older thingof once stringent rules. The new financial environment it
dressed up by modern finance.
created allowed banks and investment banks to cohabit,
This phenomenon was difficult to detect in its earlysomething that had not been allowed since 1933. Whenstages. All of the factors that converged to produce itthey began to share the benefits of deregulation under
had been seen before. Many were well-known and timethe same roof, older ideas of risk management began toproven methods in finance. Securitization had been used
crumble in a greater quest for profit.
for several decades by the U.S.-related housing financeThe credit market and collateral crisis marks theagencies to convert pools of residential mortgages intoend of the almost 40-year legacy of the federally related
securities that were purchased by investors. This provided
housing agencies and all of the benefits they provided
even more available funds for the housing market at a time since the social legislation passed during the 1960s. Wallthat demand was very high after 2001. The new thing on
Street, the credit markets, and the U.S. housing industry
Wall Street became financing the “American Dream” —all were victims of their own success when the markets
eJournal USA 15

designed to prevent fraud and deceit. It took almost four
years after the market crash of 1929 to erect a regulatory
structure to separate different types of banks and establish
national securities laws. Moore’s Law suggests that it will
occur faster this time around. The forces that shaped
globalization will demand it. n
The opinions expressed in this article do not necessarily reflect the views orpolicies of the U.S. government.

© FPG/Hulton Archive/Getty Images

collapsed in 2008. Greed, lack of regulatory oversight, andthe sophistication of structured finance, which createdmany of these exotic financial instruments, all played arole in the most recent setback for the markets and theeconomy as a whole.
Most importantly, the crisis demonstrates the pitfallsof deregulation and globalization. Unfortunately, theappropriate skepticism that must accompany every
boom has been missing. Globalization helped fuel thecrisis and will undoubtedly be employed to help resolve
it. Deregulation will be swept aside in favor of more
stringent institutional controls on financial institutions

Newspaper headline from the stock market crash of 1929.

eJournal USA 16

Moving Forward on the Economy
Barack Obama, President of the United States
We must lay a new foundation for growth and prosperity … a foundation
built upon five pillars that will grow our economy and make this new century
another American century: new rules for Wall Street that will reward drive andinnovation; new investments in education that will make our workforce moreskilled and competitive; new investments in renewable energy and technologythat will create new jobs and industries; new investments in health care that will
cut costs for families and businesses; and new savings in our federal budget thatwill bring down the debt for future generations.

© AP Images—President Barack Obama, “A New Foundation for the Economy,” Washington,
D.C., April 14, 2009.
http://www.america.gov/st/texttrans-english/2009/April/20090414142247eaifas0.30
19068.html

Timothy Geithner, Secretary of the Treasury
We are a strong and resilient country. We came into the current crisis without
the authority and tools we needed to contain the damage to the economy fromthe financial crisis. We are moving to ensure that we are equipped with both in
the future, and in the process, that we modernize our 20th-century regulatory
system [to] meet 21st-century financial challenges.
—Treasury Secretary Timothy Geithner, Hearing before the House Financial
Services Committee, Washington, D.C., March 26, 2009.
http://www.realclearpolitics.com/articles/2009/03/geithner_announces_regulatory.
html© AP Images

Ben Bernanke, Chairman of the Federal Reserve
In sum, the challenge faced by regulators is to strike the right balance: to strive for the highest
standards of consumer protection without eliminating the beneficial effects of responsible
innovation on consumer choice and access to credit. Our goal should be a financial system inwhich innovation leads to higher levels of economic welfare for people and communities at all
income levels.
— Federal Reserve Board Chairman Ben Bernanke, “Financial Innovation and Consumer
Protection,” Washington, D.C., April 17, 2009.
http://www.realclearpolitics.com/articles/2009/04/17/financial_innovation_and_consumer_
protection_96048.html© AP Images

eJournal USA 17

BUBBLES ANDPURPORTED BUBBLES
Florida Speculative Building Bubble 1926

© Mary Evans Picture Library

Wikimedia Commons© AP Images

An economic bubble can occur when the price of an asset
rises far higher than the item is actually worth. The
assumption is that the next buyer will pay an even higher
price for the asset. Bubbles can be triggered by inexplicablephenomena (fads or crazes), or kindled by the manipulative actionsof individuals or corporations.

1840s Railway Mania

The Nifty Fifty American Stocks of
the Late 1960s and Early 1970s

1637 Tulip Mania© Bettmann/CORBIS

1720 Mississippi Company

1920s American Economic Bubble

Tulip Mania

Railway Mania

At the peak of the Dutch
tulip mania in February
1637, tulip futurescontracts sold for morethan 10 times the annual
income of a skilledcraftsman.

During the British
Railway Mania of
the 1840s, the newly
emerging middle classinvested their savingsin prospective railway
companies; many of
those lost everything
when the bubble
collapsed.

© AP Images

1720 The South Sea Company

American Economic
Bubble of the 1920s

Florida Speculative
Building Bubble

The Nifty Fifty
American Stocks

Americans overextended
themselves to takeadvantage of the soaring
stock market andexpanding credit. When
the Federal Reserve
raised interest rates, thestock market crashed andthe bank panics began.

Florida’s first real estate
bubble was based onoutside speculators, easy
credit access for buyers,
and rapidly appreciating
property values for
Florida swampland.

Rising prices of stock
shares attracted theattention of investors.
Additional investment
provided buoyancy to theprice, regardless of thetrue value of the asset.

eJournal USA 18

© AP Photo/John L. Russell

Real Estate Bubble

Beanie Babies 1996

1980s Japanese Asset Price Bubble© Images.com/CORBIS

1995 - 2001
The Dot-Com Bubble

1997 Asian Financial Crisis© AP Images© AP Images/ Mark D. Phillips

Sports Cards and Comic Books
in the 1980s and Early 1990s

Spider Man

Beanie Babies

Dot-Com Bubble

The comic book
speculator market
reached a saturation
point in the early 1990s
and finally collapsed
between 1993 and1997.

Stuffed animal Beanie
Baby toys were a craze inthe early 1990s. Scarcity
created increased demandand higher and higher
prices..

The dot-com bubbleof the late 1990s was
based on speculative
activity arising from thedevelopment of newtechnologies.

eJournal USA 19

Asian Financial
Crisis
Large quantities ofcredit became available,
creating a housing boom
and pushing asset prices
to an unsustainable level.

Revise Regulation: The Theory of Market
Equilibrium Is Wrong© AP Images

George Soros

A Chinese investor reacts as he watches the real-time display of the Shanghai Composite Index in September 2008.

While international regulation must be strengthened for the
global financial system to survive, we must also beware ofgoing too far. Markets are imperfect, but regulations are evenmore so.
George Soros is chairman of Soros Fund Management
and founder of the Open Society Institute. He is the authorof nine books, including, most recently, The New Paradigm
for Financial Markets: The Crisis of 2008 and What It
Means.

We are in the midst of the worst financial crisis
since the 1930s. The salient feature of thecrisis is that it was not caused by some external
shock such as the Organization of Petroleum ExportingCountries raising the price of oil. It was generated by thefinancial system itself. This fact — a defect inherent in
the system — contradicts the generally accepted theory
that financial markets tend toward equilibrium, anddeviations from the equilibrium occur either in a randommanner or are caused by some sudden external event towhich markets have difficulty in adjusting. The current
approach to market regulation has been based on thistheory, but the severity and amplitude of the crisis proves
convincingly that there is something fundamentally wrong
with it.
I have developed an alternative theory that holds that
financial markets do not reflect the underlying conditions
accurately. They provide a picture that is always biased or
distorted in some way or another. More importantly, thedistorted views held by market participants and expressedin market prices can, under certain circumstances, affecteJournal USA 20

the so-called fundamentals that market prices are supposed
to reflect.
I call this two-way circular connection between
market prices and the underlying reality “reflexivity.” I
contend that financial markets are always reflexive, and on
occasion they can veer quite far away from the so-called
equilibrium. In other words, financial markets are prone
to producing bubbles.

the dollar and the yen. Commodity prices dropped like astone, and interest rates in emerging markets soared.
The race to save the international financial systemis still in progress. Even if it is successful, consumers,
investors, and businesses are undergoing a traumatic
experience whose full impact is yet to be felt. A deep
recession is inevitable, and the possibility of a depression
cannot be ruled out.

The Roots of the Crisis

Counterbalancing the Markets

So what is to be done?
Because financial markets are prone to creating
asset bubbles, regulators must accept responsibility
for preventing them from growing too big. Until
now, financial authorities have explicitly rejected that
responsibility.
Of course, it is impossible to prevent bubbles
from forming, but it should be possible to keep themwithin tolerable bounds. This cannot be done simply bycontrolling the money supply. Regulators must also take
into account credit conditions, because money and credit
do not move in lockstep. Markets have moods and biases
that need to be counterbalanced. To control credit as
distinct from money, additional tools must be employed— or, more accurately, reactivated, since they wereused in the 1950s and 1960s. I refer to varying margin
requirements and the minimal capital requirements ofbanks.
Today’s sophisticated financial engineering can render
the calculation of margin and capitalrequirements extremely difficult,if not impossible. Therefore, newfinancial products must be registeredand approved by the appropriate
authorities before being sold.
Counterbalancing the mood of
the market requires judgment, andbecause regulators are human, they
are bound to get it wrong. They havethe advantage, however, of getting
feedback from the market, whichshould enable them to correct their
mistakes. If a tightening of margin andminimum capital requirements does
not deflate a bubble, regulators cantighten some more. But the process is
not foolproof, because markets can also
In New York’s Times Square, financial news is displayed on the news ticker in September 2008.
© AP Images

The current crisis originated in the subprime
mortgage market. The bursting of the U.S. housing
bubble acted as a detonator that exploded a much larger
super-bubble that started developing in the 1980s, whenmarket fundamentalism became the dominant creed. That
creed led to deregulation, globalization, and financial
innovations based on the false assumption that markets
tend toward equilibrium.
The house of cards has now collapsed. With thebankruptcy of Lehman Brothers in September 2008,
the inconceivable happened. The financial system went
into cardiac arrest. It was immediately put on artificial
respiration: The authorities in the developed world
effectively guaranteed that no other important institution
would be allowed to fail.
But countries at the periphery of the global financial
system could not provide equally credible guarantees.
This precipitated capital flight from countries in Eastern
Europe, Asia, and Latin America. All currencies fell against

eJournal USA 21

© AP Images

The U.S. consumer
can no longer serve as
the motor of the world
economy. To avoid a global
depression, other countries
must also stimulate theirdomestic economies. But
periphery countries without
large export surpluses are
not in a position to employ
countercyclical policies. It is
up to the IMF to find ways
to finance countercyclicalfiscal deficits. This could
be done partly by enlistingsovereign wealth funds andpartly by issuing Special
Drawing Rights so thatrich countries that can
As global demand for exports slowed, the Chinese pushed forward a stimulus package to increase domestic
finance their own fiscal
spending for goods.
deficits could cede to poorer
countries that cannot.
While international regulation must be strengthened
be wrong. The search for the optimum equilibrium is afor the global financial system to survive, we must also
never-ending process of trial and error.
beware of going too far. Markets are imperfect, butThis cat-and-mouse game between regulators andregulations are even more so. Regulators are not only
market participants is already ongoing, but its true nature
human; they are also bureaucratic and subject to politicalhas not yet been acknowledged. Alan Greenspan, theinfluences. Regulations should be kept to the minimum
former U.S. Federal Reserve Bank chairman, was a master
necessary to maintain stability. nof manipulation with his Delphic utterances, but insteadof acknowledging what he was doing, he pretended that
he was merely a passive observer. That is why asset bubbles
The Daily Star publishes this commentary in collaboration with Project
could grow so large during his tenure.
Syndicate copyright © 2008, The Daily Star. All rights reserved.
http://www.dailystar.com

The IMF: A New Mission
Because financial markets are global, regulations mustalso be international in scope. In the current situation, theInternational Monetary Fund (IMF) has a new mission inlife: to protect the periphery countries against the effectsof storms that originate at the center, namely, the UnitedStates.

The opinions expressed in this article do not necessarily reflect the views orpolicies of the U.S. government.

eJournal USA 22

Global Financial Trouble:
Causes, Cures, Responses© AP Images

Joel P. Trachtman

A currency trader at the Korea Exchange Bank in Seoul, South Korea, April 9, 2009.

No doubt, economic historians will argue for years to comeabout the causes of the global financial crisis. The primarycausal factor was macroeconomic, but appropriate regulation
might have averted or ameliorated the crisis.
Joel P. Trachtman is professor of international law at
the Fletcher School of Law and Diplomacy, Tufts University.
His publications include The Economic Structure ofInternational Law and International Law and Politics.

T

he global financial crisis has eclipsed Iraq,
Afghanistan, North Korea, and other crises as a
topic of concern — making these critical threats
to global stability seem modest by comparison. Evenif our perception is myopic and too greatly focused on
our pocketbooks, the global financial crisis is significant,and it has spread to many places around the world. Inorder to address the current crisis and to prevent future
crises — if, indeed, that is possible — it is necessary tounderstand what caused this crisis. Diagnosis is not easy
because this crisis was caused by a complex interaction ofmacroeconomic mismanagement, incomplete financial
regulation, and defective corporate governance. For thesame reason, prevention of future crises is not a simple
matter.
The financial crisis began in the United States witha housing price bubble and risky mortgages. Mortgages
seemed like solid investments while housing prices
rose, but looked much less attractive as housing prices
declined. And this decline fed on itself, as reduced
willingness to lend and foreclosures on mortgages caused
further reductions in home prices. Many of the original

eJournal USA 23

© AP Images

The currencies of the United States and China.

mortgages were securitized, and banks and other financial
institutions, as well as investors, eagerly purchased andtraded the resulting securities in their never-ending
search for high-yielding investments. But the holders ofthese securities found that their value declined sharply.
For financial institutions, the losses on these securities
impaired their capital and their ability to do business.
This reduced their ability to finance businesses, resulting
in a substantial depressing effect on the real economy. The
credit freeze is only now showing signs of thawing.
While the crisis began in the United States, it is now
global. It became global because the financial system is
global, and the financial institutions that engaged in the
subprime mortgage business in the United States included
both U.S. multinationals and foreign multinationals.
In addition, some foreign financial institutions did
similar businesses abroad, emulating the U.S. domestic
experience. Financial contagion meant that as the first,
mostly U.S., financial institutions were threatened with
failure, their counterparts around the world were also
threatened. Finally, economic contagion through trade andinvestment has brought a sharp reduction in exports to theUnited States and in investment abroad from the UnitedStates.
The Causes
No doubt, economic historians will argue for years tocome about the causes of the global financial crisis. The
primary causal factor was macroeconomic, but appropriate
regulation might have averted or ameliorated the crisis.

Low interest rates in the United States, Japan, andelsewhere, China’s exchange rate policies, and the growthof oil wealth and other wealth in sovereign wealthfunds all contributed to excess liquidity, which in turncontributed to the development of an asset bubble. There
was a lot of cheap money around, and it needed to be
reinvested. Not only that, but because there was a lot ofcheap money, investors were constantly seeking increased
returns. Those who promised them higher returns could
command great followings and fees.
Much of this excess liquidity flowed into U.S.
housing. During the run-up to the crisis, U.S. housing
had the characteristics of a classic bubble. Those who
invested in housing, either as owners or as lenders, looked
like financial geniuses. Mortgage lenders could not reallylose money because the value of their collateral would
continue to rise, forgiving lending mistakes. As legendary
investor Warren Buffett has said, “It’s only when the tidegoes out that you learn who’s been swimming naked.”Mortgage lenders were no longer the traditional
local savings and loan associations, planning to hold themortgage loans that they originated until maturity. Rather,
these loans were packaged into pools and these pools weresecuritized, with individual investors and merchant banks
trading in and investing in these securities. Therefore,
the mortgage lenders often did not take a long-term viewand did not worry about the ability of their borrowers
to service their mortgages in a financial downturn. The
amount of mortgage-backed securities issued skyrocketed
beginning in late 2003. The profit model for manyfinancial institutions had changed from one based oninterest rate spreads to one based on fees and trading. Thischanging business model also brought with it changes incompensation — providing bonuses for executives who
were able to produce these fees and trading profits.
Securitization required good pools of loans, according
to the underwriting requirements specified, and it also
often required credit enhancements through insurance
or other backing. These mortgage-backed securities,
meeting the requirements specified by rating agencies
such as Moody’s and Standard & Poor’s, generally received
top credit ratings. The rating agencies competed with
one another for business and often relied on historicalexperience, rather than on forward-looking models that
included the possibility of an asset bubble, to determine
the creditworthiness of these pools.
The U.S. regulatory structure may be accused ofboth sins of commission and sins of omission. The

eJournal USA 24

— myself especially — are now in a state of shocked
disbelief.” This is a stunning indictment of American
corporate governance: The mechanisms of corporate
governance are insufficient to ensure that executives will
manage in the long-run interests of shareholders, rather
than in their own short-run interest.

© AP Images

The Cures

Former Fannie Mae chief executives testify before U.S. congressional
committees, December 2008.

Bush administration sought to extend home ownershipto lower-income people through zero-equity lending.
Increased capital requirements imposed on U.S.
mortgage giants Fannie Mae (Federal National Mortgage
Association) and Freddie Mac (Federal Home Loan
Mortgage Corporation) opened the home financing
market to securitization by other institutions. The Baselcapital requirements provided incentives for securitization,and the expected reduction in capital requirements
relating to mortgages under Basel II induced U.S. banks
to increase their holdings of mortgage-backed securities.
Investment banks were permitted to increase theirleverage. All of these regulatory changes may be said tohave been driven by the available liquidity and to haveaccentuated the growth of the mortgage-backed securities
market and of its risks. While individual regulators may
have seen some of the problems growing, the authorities
lacked the political will to intervene strongly.
The corporate governance of many financial
institutions was placed under severe stress by the fee andtrading-based model, the drive to promote businesses that
produced greater profits, the competitive pressure resulting
from other firms’ risky activities, and the inability todevelop a persuasive model of long-term risk. Under
these circumstances, shareholders, boards of directors,
and senior management were unable to assess and curtailthe risk that their institutions absorbed. In congressional
testimony in October 2008, Alan Greenspan, former
chairman of the U.S. Federal Reserve Bank, stated that“those of us who have who looked to the self-interestof lending institutions to protect shareholder’s equity

Each of the causes of the financial crisis will meritcareful consideration in order to prevent future crises.
Of course, we need to remember that mere retrospective
prevention of crises like those we have already experienced,
such as the French military’s Maginot Line in WorldWar II, will not prevent future crises. Rather, we must
understand the types of structures that cause crisis, andseek to establish mechanisms to see new crises coming andto restructure our regulation to respond.
First, macroeconomic management must be able toidentify asset bubbles and to muster the political will to
respond. Second, we must be careful to recognize that
regulatory reforms often have pro-cyclical motivations:accentuating dangerous phenomena. As we engage inregulatory reform, we must be careful to ask the Warren
Buffett question: Will we be seen to be naked when
the tide goes out? Third, financial regulation must
be understood as a special response to the particularincentive incompatibilities of financial institutions. We
must recognize that corporate governance alone can beinadequate to restrain short-sighted management. We also
must recognize that shareholders of financial institutions
may themselves have inadequate incentives to ensurethat financial institutions avoid excess risk: The rest of us
may, through deposit insurance and government bailouts,
absorb significant components of the risk. This moral
hazard often requires a regulatory response.
Required Responses
Domestic regulation is often needed when firms do
not bear all the risks of their actions or when the people
who control firms do not bear all the risks of their actions.
Furthermore, international regulation is needed whenstates do not bear all the risks of their regulatory actions.
International externalities may occur through contagion:
Financial institutions maintain dense international webs
of interbank relationships, and the failure of one bank
may hurt others. International externalities may alsoeJournal USA 25

© AP Images

As homeowners default on mortgages, “For Sale” signs pop up on the street.

occur through regulatory competition: When one state
reduces its standards, it may increase the short-termcompetitiveness of its financial institutions, imposing
competitive harm on foreign financial institutions. Finally,a U.S. economic slump has repercussions around theworld through the mechanism of trade and investment.
What kind of international regulatory response isrequired? States must take greater responsibility for thesolvency regulation of their financial institutions in order
to limit the risk of contagion. It may be appropriate forstates to agree on the scope of this responsibility.
But this will not be enough. Corporate governanceproblems that induce firms to take excessive risk must
be addressed, either through regulation or through selfregulation by the financial industry. An international

regulatory response will be needed to ensure that states
do not have incentives to reduce regulation in order topromote the competitiveness of their own firms. The Baselcapital regulation was partially motivated by this concern,but much more work needs to be done.
Finally, greater sobriety and humility inmacroeconomic management, and greater attention to theconcerns of other states regarding national macroeconomic
management, will be needed in order to avoid theconditions for asset bubbles or other macroeconomicbased crises. n
The opinions expressed in this article do not necessarily reflect the views orpolicies of the U.S. government.

eJournal USA 26

The Evolving Global Financial System© AP Images

Richard Vedder

Seamstresses in Mexico sew clothes for the U.S. market.

During the late 19th and early 20th centuries, there waslittle coordination of international finances. That changed
substantially after World War II, and the change is continuing
today.
A specialist in economic history and public policy,
Richard Vedder is distinguished professor of economics at Ohio
University. His books include Out of Work: Unemployment
and Government in Twentieth-Century America and The
American Economy in Historical Perspective.

T

he prosperity of the world has been immeasurablyenhanced by the growth in international economic
relations — trading in goods and services, andthe migration of labor, capital, and ideas across theplanet. The principle of comparative advantage suggeststhat the wealth of nations is enhanced by each country
specializing in those economic activities for which it has
low opportunity costs. Yet all this economic activity mustbe financed, and the stability of the world financial systemis critical to the continued growth in world trade. This iscomplicated by the fact that most nations have their own
currency, and that the rules and regulations governing
financial transactions vary widely between countries.

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During the late 19th and early 20th centuries, there
was little coordination of international finances. The
world’s financial capital was London, and most major
trading nations were on the gold standard, meaning
financial obligations were settled in currencies redeemablein gold. If a nation used its currencies excessively to buy
imports or invest overseas, it lost gold reserves, forcing
it to restrict money supply and credit, usually causing
deflation. This made the country’s exports more attractive
and imports less desirable, thereby correcting the balanceof-payment imbalance problem. Many scholars believe thesystem worked reasonably well between 1871 and 1914.
World War I involved vastly larger international
capital flows than ever before, as European nations suchas Britain and Germany went deeply in debt, borrowing
heavily from other nations, especially the United States.
The Versailles Treaty (1919) provided for punitive
reparation charges against Germany, which then engaged
in hyperinflationary policies that severely damaged thatnation economically. An attempt to restore the gold
standard in the 1920s was short-lived: Britain left the fullgold standard permanently in 1931, as did the UnitedStates two years later.
The Great Depression of the 1930s resulted partiallyfrom sharply declining international trade caused, inpart, by high tariffs. Beginning in 1934, however, nations
started to reduce ruinous trade barriers, led by the
Reciprocal Trade Agreements Act in the United States.
However, return to normalcy in international finance
was shattered by the outbreak of World War II in 1939,
the most costly war ever fought, which disrupted world
trade and led to international cooperative arrangements tofacilitate economic stability and growth.

The IMF would help nations with balance-ofpayments problems and with difficulties maintaining
reserves consistent with agreed upon fixed exchange rates
defined in terms of gold. While the fixed-rate systembroke down after 1971, the IMF continues with expanded
responsibilities. For example, it has played a key role inaverting or reducing national and regional financial crises,
serving as a lender of last resort to nations in fiscal stress.
The World Bank originally provided loans to war-torncountries to finance reconstruction, although by the 1950s
the bank had moved to broader lending to finance newdevelopment projects. Although both the IMF and WorldBank are headquartered in Washington, D.C. (given
America’s prominence as a global financial power), theseorganizations are truly international in orientation andcontrol.
The most important international organization, theUnited Nations, began in San Francisco in 1945. While
not focusing primarily on economic and financial issues,

A large number of major developments between
1944 and 1960 profoundly altered the nature of theinternational financial system. Concerned about huge
deficiencies of hard currencies to pay for goods, services,and the reconstruction of war-torn economies, Britain’s
John Maynard Keynes and the United States’ Harry
Dexter White successfully proposed a new international
financial order at the Bretton Woods Conference in1944. The International Monetary Fund (IMF) and theInternational Bank for Reconstruction and Development(World Bank) were created.

© Boris Roessler/dpa/CORBISNew International Institutions

The European Central Bank in Frankfort, Germany.

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© AP Images

perhaps, was India’s independence in
1947, but large parts of Asia and Africa
also became independent nations in thenext two decades. This greatly accelerated
the need for international financialorganizations such as the IMF and World
Bank. Each new nation typically had
to establish a currency that would gainwidespread international acceptance,needed to borrow considerable sumsof money from foreign nations despite
uncertain abilities to repay loans, andoften had to learn to live within the ruleof law and the discipline imposed bymarket conditions. Organizations suchas the IMF and the World Bank became
increasingly important in facilitatingthese factors.
The move toward world economic/
financial integration was advanced by important new
institutions, especially in Europe. A European Payments
Union was developed in 1950 to facilitate ways of dealing
with the dollar shortage that made international payments
difficult. The Organization for Economic Cooperation
and Development (OECD) began to collect uniform
economic information on major industrial countries,
ultimately including nations in Asia and Latin America as
well as Europe and North America. Most important was
the Treaty of Rome, signed in 1957, creating the European
Economic Community (Common Market), which has
grown from a six-nation customs union in 1958 to a
27-nation group that has integrated much of its economic
structure into today’s European Union, including acommon currency covering over half the area (the euro)
and an EU central bank.
The European effort has been duplicated elsewhere
on a much smaller scale, with Asian, African, and Latin
American nations moving to integrate their economies
more regionally. The Asian Development Bank, forexample, is an institution of about 40 nations designed
to further the creation and free flow of capital in one
important region of the world (making over $10 billion
in loans in 2008), while the North American Free Trade
Agreement (NAFTA) of 1994 extended the customs union
approach to the Americas.
Four further extensions of the world financial system areimportant. In 1995, the World Trade Organization (WTO)
replaced the GATT, and it was given wide authority toWorkers walk near a container ship in Tianjin Port, China, March 2009.

those issues have been important to U.N. agencies such as
UNCTAD (U.N. Conference on Trade and Development)
and UNESCO (U.N. Economic, Social, and Cultural
Organization). The principle of international assistanceto meet financial strains received a prominent boost
with the Economic Recovery Program (Marshall Plan)of the United States (1948-1952), which provided aid tomany European nations. The Marshall Plan promoted
international cooperation among the recipients of its
more than $12 billion in economic assistance in theform of loans. The Cold War after 1945 led to newforms of political and economic regional cooperation asa by-product of the creation of two military alliances,
NATO (North Atlantic Treaty Organization) and theWarsaw Pact of nations allied with the Soviet Union.
More direct forms of financial cooperation began,leading to the creation of a system of international
financial arrangements. In 1947, the General Agreement
on Tariffs and Trade (GATT) began, which provided
a framework for a series of negotiations (such as the
Kennedy Round and the Uruguay Round) that over the
next half century led to dramatic reductions in barriers tointernational trade, especially in goods and services.
World Economic and Financial Integration
The financial stress of World War II contributed
to the hastening of an abrupt decline in colonialism, asliterally dozens of new nations emerged. Most dramatic,eJournal USA 29

© Asif Hassan/AFP/Getty Images

Beyond that, institutions
such as the IMF and WorldBank have been critical bothin terms of financing longterm development needs andstabilizing shaky financial
systems. Two noteworthy
examples are the financial
crises of 1998 beginning in
Asia but ultimately spreading
beyond, especially to Russia,
and the 2008 worldwide crisis
that has caused significant
stress to financial institutions
and economies worldwide. In
both instances, the IMF andWorld Bank made importantfinancial infusions in stressedcountries such as Thailand
Foreign currency notes are displayed in a commercial area of Karachi, Pakistan, October 2008.
and Russia. The development
arm of the World Bank makes
enforce international standards relating to trade and cross“soft” loans of around $10 billion annually, for example.
border financial dealings. The Group of Seven (G-7) was
Additionally, large-nation central bankers and financeoriginally a meeting of the finance ministers of seven leading ministers have met and coordinated the provision of credit
industrial nations, but it has expanded numerically, now
to ease panic and the potential collapse of major banks,
encompassing 20 nations (the G-20) that meet regularly
insurance companies, and other financial institutions.
to agree on policies governing international economic and
As international economic and financial interaction
financial arrangements. Other, nongovernmental sponsored
grows, the need for coordinated rules of behavior becomes
conferences, especially in Davos, Switzerland, bring together
greater than ever — uniform accounting rules, international
corporate and financial leaders, often sowing seeds for later
standards of permissible conduct, provision for emergency
policy reforms. Finally, a number of multilateral tax treaties
loans, and the like. No doubt existing institutions will
have tried to standardize to some extent tax treatment forcontinue to evolve, perhaps into a new umbrella organization
those engaged in international activities; recently, small taxencompassing all facets of financial regulation. nhaven nations have agreed to modify bank secrecy provisions
to deal with tax evasion.
The opinions expressed in this article do not necessarily reflect the views orpolicies of the U.S. government.

Coordination Is Key
The evolving global financial system has beenboth a cause and a consequence of the rapid growthin globalization. For most nations, international tradecomprises a larger portion of output than a generationor two ago. International capital flows have grownextraordinarily.

eJournal USA 30

Glossary
Bretton Woods
A 1944 conference held at Bretton Woods, New
Hampshire, that designed the structure of theinternational monetary system after World War II and
set up the International Monetary Fund (IMF) and theWorld Bank. It was agreed that the exchange rates of IMF
members would be pegged to the dollar, with a maximum
variation of 1 percent on either side of the agreed rate.
bubbleA situation that can occur when the price of an asset rises
far higher than the item is actually worth. The assumption
is that the next buyer will pay an even higher price forthe asset. Major speculative economic bubbles have been
known to occur from time to time, often with ruinous
effects. Sometimes they are triggered by inexplicablephenomena (fads or crazes) or are kindled by the
manipulative actions of individuals or corporations.
corporate governanceAn internal company system — encompassing policies,
processes, and people — that serves the needs ofshareholders and other stakeholders by directing andcontrolling management activities with good businesssavvy, objectivity, accountability, and integrity. Sound
corporate governance relies on external marketplacecommitment and legislation, plus a healthy board of
directors culture that safeguards policies and processes.
credit debt swap
A contract between a protection buyer and a protection
seller. The buyer makes a series of payments to the seller
and, in exchange, receives a payoff if the bond or loan
goes into default (is not paid). Credit debt swap contracts
have been compared with insurance because the buyer
pays a premium and, in return, receives a sum of money if
one of certain specified events occurs.

derivatives are characterized by high leverage, that is, theinvestor only pays a small amount of the actual cost of thecontract and borrows the rest from the seller or the broker.
dot-com
A company whose operations are Internet-based; itsbusiness model would not be possible if the Internet
did not exist. While dot-com can refer to present-day
companies, it is also used to refer to companies with thisbusiness model during the late 1990s.
externality
The side effect of an economic transaction on people whoare not involved in it. A classic negative example is the air
pollution produced by a power plant.
Fannie Mae
The Federal National Mortgage Association (FMNA), a
congressionally chartered corporation that buys mortgages
on the secondary market, pools them, and sells themas mortgage-backed securities to investors on the open
market. Monthly principal and interest payments areguaranteed by FNMA but not by the U.S. government.
Federal Reserve
The central bank of the United States, which provides
the nation with a safe, flexible, and stable monetary andfinancial system.
Freddie Mac
The Federal Home Loan Mortgage Corporation(FHLMC), a government-chartered corporation that buys
qualified mortgage loans from the financial institutions
that originate them, securitizes the loans, and distributes
the securities through the dealer community. The
securities are not backed by the U.S. government. The
market value of these securities prior to maturity is notguaranteed and will fluctuate.

derivative
A financial contract whose price is derived fromunderlying assets such as stocks, bonds, commodities,
currencies, interest rates, and market indexes. Most
eJournal USA 31

G-20
Established in 1999, the Group of Twenty financeministers and central bank governors from industrialized
and developing economies that meet and discuss key issues
in the global economy.
International Monetary Fund
An organization set up in 1944 to lower trade barriers
between countries and to stabilize currencies bymonitoring the foreign exchange systems of member
countries and lending money to developing nations.
Lake Wobegon“The town that time forgot and the decades cannot
improve” as described by radio host Garrison Keillor. Overthe past 30 years, Keillor has shared with listeners to theweekly A Prairie Home Companion the latest news fromthe little fictional town where “all the women are strong,
all the men are good looking, and all the children areabove average.”liquidity
The ability of an asset to be converted into cash quickly
and without any price discount.
macroeconomics
The branch of economics that deals with the performance,
structure, and behavior of a national economy as a whole,as opposed to the level of subgroups or individuals(which is called microeconomics). It is useful in helping
determine the aggregate effect of certain policies on an
economy as a whole.

marginThe minimum amount of collateral, in either cash or
securities, an investor must have in his accounts to tradein certain investment instruments. The margin is also
the difference between the market value of an investment
instrument and the loan a broker makes to the investor inorder to purchase the investment.
securitization
The process of aggregating similar instruments, such asloans or mortgages, into a negotiable security.
subprime loans
Loans for persons with blemished or limited credit
histories. The loans carry a higher rate of interest
than prime loans to compensate for increased credit
risk. Subprime lending evolved with the realizationof a demand in the marketplace for loans to high-riskborrowers with imperfect credit.
wealth effect
The tendency of consumers to spend more because they
believe they are wealthier. Sometimes they actually arericher (by objective measurement, for example, when
receiving a bonus or a pay raise at work), or they perceive
themselves to be “richer” (for example, when the assessedvalue of their home increases, or a stock they own has
gone up in price).
World Bank
An organization whose focus is on foreign exchange
reserves and the balance of trade.
Definitions are adapted from glossaries at http://www.investorwords.com, http://
www.economist.com/research/economics/, http://encyclopedia.thefreedictionary.
com, and other Web sources.

eJournal USA 32

Related Books, Articles, Reports,
Web Sites, and Videos
Books and Articles
Ahamed, Liaquat. Lords of Finance: The Bankers Who
Broke the World. New York, NY: Penguin Press, 2009.
Allen, Franklin, and Douglas Gale. Understanding
Financial Crises. New York, NY: Oxford University Press,
2007.
Drezner, Daniel W. All Politics Is Global: Explaining
International Regulatory Regimes. Princeton, NJ: Princeton
University Press, 2008.
Florida, Richard. “How the Crash Will Reshape
America.” The Atlantic Online (March 2009).
http://www.theatlantic.com/doc/200903/meltdown-geography
Fraser, Steve. Wall Street: America’s Dream Palace. New
Haven, CT: Yale University Press, 2008.
Gjerstad, Steven, and Vernon L. Smith. “From Bubble
to Depression?” Wall Street Journal Online (April 6, 2009).
http://online.wsj.com/article/SB123897612802791281.html
Krugman, Paul R. International Economics: Theory and
Policy. Boston, MA: Pearson/Addison Wesley, 2009.
Hogan, Michael. “Niall Ferguson: America Needs toCancel Its Debt.” Vanity Fair: Politics and Power Blog
(January 20, 2009).
http://www.vanityfair.com/online/politics/2009/01/niallferguson-america-needs-to-cancel-its-debt.html
Murphy, Dan. “Stimulus Goes Global. Will It Be
Enough?” Christian Science Monitor Online(January 9, 2009).
http://www.csmonitor.com/2009/0109/p12s01-wogn.html”

Rebonato, Riccardo. Plight of the Fortune Tellers: Why We
Need to Manage Financial Risk Differently. Princeton, NJ:
Princeton University Press, 2007.
Shiller, Robert. The Subprime Solution: How Today’s
Global Financial Crisis Happened, and What to Do About
It. Princeton, NJ: Princeton University Press, 2008.
Soros, George. The New Paradigm for Financial Markets:
The Credit Crisis of 2008 and What It Means. New York,
NY: Public Affairs, 2008.
Taleb, Nassim Nicholas. “The Fourth Quadrant: A Mapof the Limits of Statistics.” Edge (2008).
http://www.edge.org/3rd_culture/taleb08/taleb08_index.html
Wolf, Martin. Fixing Global Finance. Baltimore, MD:
Johns Hopkins University Press, 2008.

Reports
Carlson, Mark. Alternatives for Distressed Banks and the
Panics of the Great Depression. Washington, DC: Federal
Reserve Board, 2008
http://www.federalreserve.gov/pubs/ feds/2008/200807/200807abs.html
Elwell, Craig K. Dollar Crisis: Prospect and Implications.
Washington, DC: Congressional Research Service,
January 8, 2008.
http://assets.opencrs.com/rpts/RL34311_20080108.pdf“Financial Bailout.” CQ Researcher (October 24, 2008).
Jackson, James K. The Financial Crisis: Impact on
and Response by the European Union. Washington, DC:
Congressional Research Service, March 9, 2009.
http://assets.opencrs.com/rpts/R40415_20090309.pdf

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Jinkling, Mark. Causes of the Financial Crisis.
Washington, DC: Congressional Research Service, January
29, 2009.
http://www.taxpayer.net/user_uploads/file/Reports/
CRS/1-29-09%20CRS%20Causes%20of%20the%20
Financial%20Crisis.pdf

International Monetary Fund: Financial Crisis
http://www.imf.org/external/np/exr/key/finstab.htm

Morrison, Wayne M. China and the Global Financial
Crisis: Implications for the United States. Washington, DC:
Congressional Research Service, February 9, 2009.
http://assets.opencrs.com/rpts/RS22984_20090209.pdf

The University of Iowa Center for International
Finance and Development: The Global Financial Crisis
http://www.uiowa.edu/ifdebook/issues/financial_crisis/index.
shtml
See the timeline:
http://www.uiowa.edu/ifdebook/timeline/Financial_Crisis_
Timeline.pdf
and statements from world leaders:
http://www.uiowa.edu/ifdebook/issues/financial_crisis/links/
statements.shtml

Web Sites
CNN: The Road to Rescue
A collection of news and analysis about the problems with
U.S. financial markets.
http://money.cnn.com/news/specials/crisiswallstreet/2008/
Council on Foreign Relations: Global Economy in
CrisisContains expert briefs; interviews; backgrounders;
podcasts; Must Reads; and essential documents, graphs
and charts.
http://www.cfr.org/thinktank/greenberg/
Federal Reserve Board: About the Fed
Background information about the Federal Reserve
System, which serves as the United States’ central bank.
Covers the Federal Reserve Act of 1913 (which establishedthe system), the structure of the system, purposes andfunctions, board of governors, banks, and bank presidents.
http://www.federalreserve.gov/aboutthefed/default.htm
Financial Times: The Future of Capitalism
http://www.ft.com/indepth/capitalism-future
G-20
Web site for the Group of Twenty (G-20) financeministers and central bank governors. Provides
background and frequently asked questions about the
G-20; descriptions of working groups; press releases;
and publications from summits, working groups, andother activities. Includes links to participating banks andgovernment agencies from member countries.
http://www.g20.org/”http://www.g20.org/

New York Times: Credit Crisis — The Essentials
http://topics.nytimes.com/topics/reference/timestopics/subjects/c/
credit_crisis/index.html

World Bank: Financial Crisis
http://www.worldbank.org/html/extdr/financialcrisis/VideosAcademic Earth: Understanding the Financial Crisis
Lectures from well-known authorities and university
professors taped at Yale University.
http://academicearth.org/playlists/financial-crisis
The Ascent of Money (2009)
Director: Adrian Pennick
Running time: 120 minutes
Summary: Niall Ferguson, a professor of history at
Harvard University, traces the evolution of money anddemonstrates that financial history is the essential backstory behind all history. As he traverses historic financial
hot spots around the world, Ferguson illuminates
fundamental economic concepts and speaks with leading
experts in the financial world.
http://www.pbs.org/wnet/ascentofmoney/
Frontline: Inside the Meltdown (2009)
Director: Michael Kirk
Running time: 60 minutes
Summary: An account of how the United States ended up
in the worst financial crisis since 1929.
http://www.pbs.org/wgbh/pages/frontline/meltdown/

eJournal USA 34

I.O.U.S.A. (2008)
Director: Patrick Creadon
Running time: 85 minutes
Summary: Examines the rapidly growing national debt
and its consequences for the United States. The film
blends interviews with both average American taxpayers
and government officials to demystify the nation’s financial
practices and policies; follows U.S. Comptroller General
David Walker as he crisscrosses the country explaining
America’s unsustainable fiscal policies to its citizens; andinterweaves archival footage and economic data to paint a
profile of America’s current economic situation.
http://www.imdb.com/title/tt0963807/

Maxed Out: Hard Times, Easy Credit and the Era of
Predatory Lenders (2006)
Director: James D. Scurlock
Running time: 90 minutes
Summary: When Hurricane Katrina ravaged America’s
Gulf Coast, it laid bare an uncomfortable reality: America
is not only far from the world’s wealthiest nation; it is
crumbling beneath a staggering burden of individual andgovernment debt. Maxed Out shows how the modern
financial industry really works, explains the true definitionof “preferred customer,” and tells why the poor are getting
poorer and the rich getting richer.
http://www.imdb.com/title/tt0762117/
The U.S. Department of State assumes no responsibility for the content andavailability of the resources listed above. All Internet links were active as of
May 2009.

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