Published online by Cambridge University Press: 21 October 2015
The Three Imbalances
Although the immediate causes of the current global financial crisis were due to both market and regulatory failures, the seeds of the crisis were sown decades ago. These can be traced to structural transformation in the economy that led to three major macroeconomic imbalances in the U.S. and the global economy. They are the imbalance between the financial sector and the real economy, the wealth and income imbalance in the distribution of resources in the United States, and the chronic global current account imbalances in the world economy. Put together, these three imbalances provided a fertile environment for the crisis.
Just as an organic or biological system becomes dysfunctional when its components are out of balance, the same happens to an economic and financial system when things are not balanced.
Imbalance Between the Financial and Real Economy
As pointed out in the previous chapter, the financial sector has grown to a point where it has eclipsed the real economy. Between 1960 and 2006, the financial sector (defined as finance, insurance, real estate mortgages and leasing (“FIRE”)) rose from 14 per cent to 20 per cent of GDP, while the manufacturing sector more than halved from 27 per cent to 11 per cent of GDP. The big shift occurred circa 1990 when the financial sector overtook the manufacturing sector in terms of GDP contribution. By 2006, not only was FIRE the biggest sector, it was twice as large as the next sector which was wholesale and retail trade at 12.2 per cent. See Figure 3.1.
Post-World War II economic development of the U.S. can be divided into two major periods: the first from mid-1940s to mid-1970s, and the second from mid- 1970s to the present. The first thirty years after the war saw rapid growth and also a rise in the real wages and living standards for a majority of the population. This was the Golden Age for the U.S. when it assumed global hegemonic position with the biggest military and economic power and its currency became the international currency. However, after the Vietnam War and the oil shock in the mid-1970s, its rate of growth began to slow down.
To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
Find out more about the Kindle Personal Document Service.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.