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Global Financial Crisis of 2007: Analysis of Origin & Assessment Of Global financial crisis of 2007 : analysis of origin & assessment of contagion to emerging economies : lessons & challenges for financial regulation Shazia Ghani To cite this version: Shazia Ghani. Global financial crisis of 2007 : analysis of origin & assessment of contagion to emerging economies : lessons & challenges for financial regulation. Economics and Finance. Université de Grenoble, 2013. English. NNT : 2013GRENE011. tel-00987627 HAL Id: tel-00987627 https://tel.archives-ouvertes.fr/tel-00987627 Submitted on 6 May 2014 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. 1 La crise financière de 2007 Analyse des origines et impacts macroéconomiques sur les économies émergentes. Quels sont les leçons et les défis de régulation financière ? Global Financial Crisis of 2007 Analysis of Origin & Assessment of Contagion to Emerging Economies Lessons & Challenges for Financial Regulation Présentée par Shazia GHANI Thèse dirigée par Faruk ÜLGEN 2 ACKNOWLEDGEMENTS It is a pleasure to thank the many people who made this thesis possible. I am profoundly indebted to my supervisor Mr ULGEN Faruk for his sound advice, his great patience, and hour‘s long attentiveness over the last three and half years for being a model of excellence in my research area. His experiences and academic support has constituted an invaluable asset for my learning process. Without his sustenance and encouragement I would not have been able to complete this thesis. I am deeply grateful to the honourable jury/committee members for their helpful comments and their encouraging reports. I would like to express my deepest gratitude for the financial support from the Higher Education Commission of the Government of Pakistan for the completion of my PhD from France. Uninterrupted flow of funds despite all the economic constraints of the country permitted me to complete this thesis. I would like to thank Mr Michel TROMMETTER (Director of the Ecole Doctorale Sciences Economiques) for providing me the financial support to attend the Cournot International Doctoral Days organised by the University of Strasbourg, France. Ecole Doctorale also financed my participation in the International Summer School organised by the University of the Cracow and the National Bank of Poland. I am also grateful to the ―Conseil régional Rhône Alpes‖ for funding my four months stay at the Hyman Minsky Department of Economics, University of Bergamo, Italy. I would like to say thanks to Professor Annalisa CHRISTINI from the University of Bergamo, Italy for extending me an invitation to visit the Hyman Minsky Department of Economics as a visiting PhD student and providing me the chance to attend the various seminars and lectures by the prominent professors like Jan TOPOROWSKI of the SOAS University, London and Alain PARGUEZ on Modern Monetary Theory. I would also like to thanks to Professor Riccardo BELLOFIORE of the University of Bergamo, Italy for suggesting me valuable references and discussions to improve the structure of my dissertation. I would like to say my thanks to Professor Roxana BOBULESCU for introducing me the Grenoble Ecole de Management. Undoubtedly, this teaching experience go a long way to immaculate my concepts. I would like to say thanks to ―The Association des doctorants de Grenoble en économie‖ who twice provided the forum to present my work. I appreciate the positive feedback and valuable comments of participants at the 2nd JDEG 2012. I dedicate this work to my parents. So far any accomplishment in my life, I will always be thankful to my parents whose constant struggle, sacrifices and strength opened me the doors of the impossible and allowed me to do the best I can. I thank my parents for their trust; nevertheless, I will never be able to thank them enough for their love and support. GRENOBLE March 2013 3 SUMMARY GENERAL INTRODUCTION CHAPTER 1 RISE OF FRAGILE FINANCE, RECURRENT FINANCIAL CRISIS AND ECONOMIC THEORY Section 1: The Rise of Fragile Finance and Recurrent Financial Crisis Section 2: Financial Crisis and the Macroeconomic Theory Section 3: Efficient Market Hypothesis versus Financial Instability Hypothesis: Policy Implication of Two Paradigms CHAPTER 2 ANATOMY OF THE GLOBAL FINANCIAL CRISIS (GFC) of 2007 Section 1: Historical Overview of Some past Episodes of Financial Crisis Section 2: Anatomy of the 2007 Global Financial Crisis Section 3: Important Lessons from the Global Financial Crisis of 2007 CHAPTER 3 FRAGILE FINANCE GOES GLOBAL: SOME EMEs CASES Section 1: Financial Liberalisation, Financial Crisis and EMEs Section 2: Case Studies of Resilient Group Emerging Economies Section 3: Case Studies of Non-Resilient Group Emerging Economies CHAPTER 4 REGULATORY CHALLENGES AND REFORMS AFTER THE GFC of 2007 Section 1: Fundamental Goals and Principles of Regulations Section 2: Critical Assessment of the Introduced Regulatory Reforms Section 3: Macroprudential Approach to Financial Regulation GENERAL CONCLUSION 4 TABLE OF CONTENTS LIST OF ABBREVIATION ................................................................................................................. 9 LIST OF FIGURES ............................................................................................................................ 11 LIST OF TABLES .............................................................................................................................. 11 LIST OF ANNEXURES ..................................................................................................................... 11 RESUME ............................................................................................................................................. 12 ABSTRACT ........................................................................................................................................ 13 GENERAL INTRODUCTION .......................................................................................................... 14 CHAPTER 1: RISE OF FRAGILE FINANCE, RECURRENT FINANCIAL CRISIS AND ECONOMIC THEORY ...................................................................................................................... 29 Section 1: Fragile Finance and Recurrent Financial Crisis ................................................................................ 33 1.1. Fragile Finance and Financial Crisis ............................................................................................................ 34 1.2. Main factors behind Instability/Fragility/ Recurrent Financial crisis ......................................................... 35 1.2.1. De-Regulation of Financial Markets ................................................................................................... 35 1.2.2. Financial Innovation ........................................................................................................................... 38 1.2.3. Financial Globalisation (Financial Markets Liberalisation) ................................................................. 41 1.3. Post–World War II Financial Settings ......................................................................................................... 42 .. Asedae of Moe Maager Capitalis ad Fiaializatio as Global System .............................. 45 Section 2: Financial Crisis and the Macroeconomic Theory ............................................................................ 48 2.1. Review of Theoretical Approaches about Financial Crisis/Financial Fragility ............................................ 49 2.2. An Orthodox Theory/Approach of Financial Crisis..................................................................................... 50 2.2.1. The Monetarist Approach towards Financial Crisis ............................................................................ 52 2.2.2. Asymmetric Information, Moral Hazard and Random Selection ........................................................ 56 2.3. The Heterodox Approach (Debt and Financial Fragility View) of Financial Crisis ...................................... 57 2.3.1. Irving Fisher (Debt-Deflation) ............................................................................................................. 58 ... Misk’s Iterpretatio of Euphori Eoo: Eolutio of Fiaial “truture fro Hedge to Speculative and Ponzi ................................................................................................................................... 60 2.3.3. Kindleberger (from Displacements to Financial Distress) .................................................................. 62 2.4. Comparative Analysis and Relative Superiority of the Heterodox Approach ............................................ 64 Section 3: Efficient Market Hypothesis (EMH) versus Financial Instability Hypothesis (FIH): Policy Implications of Two Paradigms ........................................................................................................................................... 69 3.1. Efficient Market Hypothesis (EMH) ..........................................................................................................
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