Global Financial Crisis

Views from one of my Prof.

Causes - 3 imbalance of the U.S

1) Real sector & Financial sector imbalance

The imbalance results in over leverage in the financial system, creation of a shadow banking systems where liabilities were taken off the balance sheet, coupled with weak regulations and wall street lobbying.

2) Income & Wealth imbalance

This results in

- majority under-savings, ended up taking on debts to finance their spending, leading to a debt bubble.

- minority over-savings, ended up chasing for ever higher yields, leading to an asset bubble.

3) Current Account imbalance

This leads to erosion of confidence in the economy of U.S, and fear feed upon itself.


Why Asian Economies are impacted

1) Reliance on exports
2) Lack of domestic financial systems resulting in instability due to currency and debt maturity mismatch

Solution

1) Build up domestic demand
2) Build up domestic/regional financial system