Home > Uncategorized > Sapir in May 2008 on the Great Financial Crisis

Sapir in May 2008 on the Great Financial Crisis

Two days ago this blog published a blogpost by Jaques Sapir, a French economist, who stated that access to his RussEurope blog had been suspended because his posts had become to political… Interestingly, in the May 2008 issue of theReal World Economics Review, at a time when Jean-Claude Trichet, a French economists and former head of the ECB, still denied the crisis and even increased interest rates (22 July 2008: +0,25%), Sapir already had a keen insight into the nature and severity of the crisis. Silence him – at your peril!

The current financial crisis has become a major international event and can be compared to the 1997-1999 world financial crisis3. The current crisis has spread from the US mortgage market, where it exploded in the spring of 2007, to the global banking and financial system. It now, spring 2008, threatens a systemic collapse of the banking system. It has pulled the US economy into recession and already by late 2007 its consequences were being felt in the Euro-Zone. Most analysts now forecast a GDP fall of between 0.5% to 3.0% in the US economy and very slow growth in the Euro Zone. However, a major difference with the 1997-1999 crisis is that emerging markets look much less impacted than developed economies.

  1. October 2, 2017 at 7:18 pm

    What always amazes me when economists discuss the Great Financial Crisis of 2007-8 is that there is rarely a mention of the fraud that was being perpetrated by the mortgage and banking industry. The FBI knew about these frauds as far back as 2004! ( http://articles.latimes.com/2008/aug/25/business/fi-mortgagefraud25 )

  2. October 6, 2017 at 2:13 pm

    Kindleberger (Manias, Panics, and Crashes (1978)) saw financial crises as the product of mob psychology among investors. The wild optimism of a “mania” is typically fed by a surge in the supply of credit, and Kindleberger pinpointed this as a core issue. Easy access to credit enables investors to purchase assets through debt. During the overoptimistic “mania” of rising prices, such investors get into vast amounts of debt—while assuming the prices of their assets will continue to rise forever. When the prices of such assets stop rising (as they inevitably must), a sudden “panic” sets in, leading to a “crash” in asset values. Banks and other financial institutions are liable to go bust, as loans are not repaid, and they themselves can be heavily indebted. A wave of insolvency can then develop, and spread to several countries at once through international contagion. Kindleberger identifies two of the basic principles of modern economics as fundamental for such crises – rational economic actors and economic efficiency of markets. But even without these factors it’s still likely crises will continue in capitalist economies. Kindleberger asserts that in such economies such crises cannot be stopped, but only contained. Alfred Marshall contends that, “The evils of reckless trading are always apt to spread beyond the persons immediately concerned.” Kindleberger concurs but I wonder if such crises are not an inherent part of capitalism, since capitalism fosters recklessness of all sorts. Likely to destroy it eventually, but in the meantime likely to create chaos and great harm for those living (by choice or by coercion) in societies with capitalist economy. All this makes me wonder why today’s policy makers and regulators in government don’t work harder to contain such crises. This is clearly a failure to protect society from well-known and substantial threats. This question has been examined by historians and social scientists, but not by economists. It is a vital concern for the future of modern society.

  3. October 12, 2017 at 3:58 pm

    Unscrambling cause and effect is a critical part of understanding financial panics as Ken Zimmerman has done in his post. I would suggest that valuable indicators are also available from the open market actions of the Fed prior to and in the aftermath of the 08 crash.

    • October 20, 2017 at 9:31 am

      Charles3000, excellent suggestions. The transcripts of the FOMC in 2007, 2008, 2009 are fascinating and filled with enlightening information. If the transcripts can be accepted as accurate.

      • October 20, 2017 at 1:03 pm

        I am persuaded the open market records are accurate because they seem to show an FOMC operating in a panic mode rather than in a strategic manner.

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