global financial crisis

Bank transactions by internet and mobile banking have sharply increased since the 2008 global financial crisis. In this digital environment, new technologies – such as advanced analytics and big data, in addition to the use of robotics, artificial intelligence, besides new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services. The current wave of financial innovations is being increasingly oriented to more friendly digital channels through apps in the context of mobile banking strategies that privilege the development of open bank softwares and the interaction with social media.

Indeed, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the intense growth of the startups called fintechs, especially since 2010, has revealed a new articulation between finance and technology. Such fintechs are companies organized as digital platforms with business models focused on costumer relationship in the areas of payment systems, insurance, financial consultancy and management, besides virtual coins. The advantages of their business models are low operating expenses, greater operational agility and the ability to generate data for the design of customized financial products and services. As a result of the advance of these new non-bank competitors, big banks have begun to establish collaborative partnerships with selected fintechs in order to produce new technological solutions and to promote the development of a culture of technological entrepreneurship among bank workers.

Taking into account the global changes in the provision of financial products and services, Central Banks have closely followed the recent expansion of fintechs. Indeed, the transformations provoked by these startups in the financial markets have raised a relevant discussion about the impacts of recent technological innovations on the financial regulation agenda- mainly focused on the Basel Accords. The intense advance of fintechs is settling new questions for regulators: How to deal with loan activities that are being performed by means of electronic platforms? How to regulate the fintechs’ activities of consultancy and financial management that are characterized by the collection, treatment and custody of information from users? Which is the scope of the Central Bank and of other financial regulators when considering the surveillance over the fintechs? Moreover, there are legal concerns related to information security practices, legal validity of electronic documents, digital signatures and data storage in the cloud.

As a result of the new competitive digitalized and deregulated environment, the current wave of technological innovations will decisively affect the future of bank workers. Currently, one of the main cost-reducing bank strategies is centered on administrative expenses mainly labour costs that remain tightly controlled by banks in order to improve operational efficiency. In this scenario, technological strategies aimed to increase profitability will foster further organizational innovations and changes in labor relations. Thus, the future impacts on jobs in the financial sector will deepen the power of financial holdings, that is to say, of centralized blocks of financial capital that base their global expansion on the digitalization of products, services and delivey channels .


roulettefinancePrior to the Global Financial Crisis (GFC 2007), many senior economists and policy makers expressed confidence that they had finally solved the problem of business cycles, booms and busts, that plagues capitalism. Because of this over-confidence, early warnings of a looming crisis by Nouriel Roubini, Ann Pettifor, Peter Schiff, Steven Keen, Dean Baker, and Raghuram Rajan, were ridiculed and dismissed. Even after the crisis, many economists thought this was a minor glitch, which would soon be remedied. Now however, while conventional economists continue to search for reasons for the mysterious stagnation besetting capitalistic economies, the weak and jobless recovery from the GFC has been labeled as an illusion and a false dawn by Schiff. Like him, deeper analysts are converging on the idea that the problems run deep, and that radical changes in the global financial architecture are required to solve current problems and prevent future crises.

For instance, consider Lord Mervyn King, the Governor of the Bank of England from 2003 to 2013. His experience at the heart of the global financial system led him to the conclusion that   “Of all the many ways of organising banking, the worst is the one we have today. … (can we) think our way through to a better outcome before the next generation is damaged by a future and bigger crisis?” Similarly, Minneapolis Federal Reserve President, Narayana Kocherlakota , after viewing the stark conflicts between the empirical evidence and the macroeconomic theories over the past ten years, writes the economists use “Toy Models” which do not work in face of the complexities of real life

There are two central elements which lie at the core of the fragility of the financial system. The first problem is credit-creation by banks. This means that when banks give loans, they create credit out of thin air. This ability enables corporate raiders to buy multi-billion dollar corporations without any money in their pockets using financial gimmicks. The second problem, closely related to the first one, is the use of interest instead of equity in the lending process. This means that banks can lend for mega-projects designed to fail, because they are guaranteed a return of their money regardless of outcomes. Bankers have successfully created the illusion that they are necessary, so that when borrowers can’t pay back outrageously risky loans, the government re-imburses the banks for their losses. Both of these problems at the heart of the financial system can be fixed, but the ability of high finance to create huge amounts of money at will gives the financiers ample resources to block any attempts at solving the problems. The 1% who benefit from this financial system have created a robust and resilient multidimensional system of defense to protect, preserve, and sustain the current fragile and crisis prone financial architecture. Using billions of dollars of funding, many different institutions, which include academia, media, think tanks, policy makers, regulators, politicians, and the military-corporate-industrial complex, have been co-opted by high finance. In an article entitled “It Takes a Village to Maintain a Dangerous Financial System,” Stanford professor Anat Admati describes how these different institutions work together to maintain and perpetuate the current financial system. In this article, I focus on the how economic theory itself has been captured by the top 1% and changed to serve their interests.

The role of economic theory should have been to clarify and expose the structure of the economic system, so that economists could understand it and make it work better for all. Instead, economic theory has been captured by the financiers and turned into a propaganda machine, which hides the realities of the system. Modern economics textbooks continue to teach myths which are overwhelmingly contradicted by the empirical evidence. In particular, they teach that the quantity of money and the levels of debt do not have any long run effects on the economy. They teach that consumers and businesses can accurately foresee that path of future prices, and of government policy, and plan purchases and investments accordingly. They teach that levels of inequality do not matter because wealth will trickle down. The distinction between needs and wants has been erased from the textbooks. Economists used to be concerned about rentiers – people who earn money without doing any work to deserve it. Current economics textbooks no longer mention the concept. Instead they teach that markets efficiently recognize and reward participants: if you make money, it means that you deserve to make money. This leads to the idea that the more wealthy you are, the greater is your contribution to society. When this myth is combined with the trickle-down myth, it leads to tax cuts for the rich advocated by Trump, and a guiding policy principle in the USA since the Reagan era. Small wonder that ex IMF Chief Economist Olivier Blanchard wrote that modern models used for conduct of monetary policy are based on “assumptions profoundly at odds with what we know about consumers and firms”.

Like Blanchard, economists who have contact with reality have come to recognize the deep flaws in the economic theories used for the conduct of monetary and fiscal policy around the globe. Highly respected economist Paul Romer, recently appointed Chief Economist at the World Bank, has created shock waves among economists by a trenchant critique entitled “The Trouble with Macroeconomics.”  He writes that for more than three decades, macroeconomics has gone backwards, losing knowledge instead of gaining it. Since banks, financiers, money, unemployment, debt, inequality, rentiers, and all other major drivers of the modern economy have been removed from the picture by economists, contemporary macroeconomic models  “attribute fluctuations in aggregate variables to imaginary causal forces .”  Romer notes that economists’ blatant disregard for facts in conflict with their imaginary theories is so extraordinary that it deserves its own label – he suggests “post-real”.   Even though there are formidable obstacles in the path from this imaginary post-real world of economists to reality, humanity urgently needs to find a way, if the bottom 99%, and the planet we live on, is to survive.

Originally published in Express Tribune, Dec 4, 2016. Related materials on the Global Financial Crisis. My author page on LinkedIn Index to my writings: AZPROJECTS. Closely related: Unlearning Economics. My personal webpage: Transforming Knowledge.

Global financial integration has augmented the exposure to macroeconomic and financial vulnerabilities. In this scenario, prudential financial regulation presents challenges to success. First, banking assets and liabilities are vulnerable to changes in macroeconomic conditions. Second, segmented supervisory authorities do not cope with the universal scope of banks. Third, new regulatory patterns are generally proposed after banking innovations. At last, the consolidation of larger banks, stimulated by financial liberalization, changes in financial savings, capital adequacy requirements and information technology, have favoured the action of central banks as agencies that arbitrate competitive struggles.

Looking back, in the late 1980s,  there was a  global concern  around the development of a new regime of prudential banking regulation, founded on the ratio of capital to risk-adjusted assets. The first Basel Capital Accord introduced the 8 % capital requirement on the risk-weighted value of a bank’s assets, mainly credit-risk.  As of 2004, a new Capital Accord, Basel II, was settled and underlined three pillars: a bank’s core capital requirement; supervision and market discipline. This Accord aimed to spread out mechanisms of protection  in order to avoid financial systemic risk and to favour informational transparency (disclosure). Therefore, the institutional set up would enhance more efficient financial leverage systems and greater transparency to financial regulators and investors.

Throughout the implementation of Basel II, banks proved to enhance asset-liability management (ALM), or even, balance sheet management, to reduce legally capital requirements. At the operational level, ALM involves new management practices and techniques to manage risks that arise due to imbalances in assets and liabilities.  For example, banks could manage the credit risk with further securitization transactions. ALM could also be used to analyse market risks related to trading in capital markets. Besides, low capital requirements were supported by off balance sheet assets since great volumes of their trading books were shifted into SIVs (structured investment vehicles).  The 2008 global crisis showed that innovations, such as banks’ asset-liability management, have reinforced systemic risks.

In the aftermath of the crisis, global  biggest banks increased write-downs on loans while credit losses put pressure on profitability. The reduction of leverage and new strategies related to the internal reassessment of risks (credit, currency, interest, liquidity) have been implemented to maintain existing capital levels. Besides, uncertainty about the future evolution of the global economy has reduced the bank’s interest in foreign markets, mainly in  U.S. and Europe.

Supervisory authorities have searched for setting new rules that could make the financial system more resilient in response to the crisis,. Among other issues, i) banks will need to hold larger capital requirements against further potential losses, ii) financial products’ approval would involve extensive disclosure requirements and iii) banks would be induced to negotiate standardized products. As a result, capital market transactions and trading income would lose their importance in a context where regulators would demand that some credit risk would be retained on the banks’ books. Due to higher equity ratios, future banks’ profitability (returns on equity) would probably shrink.

In the attempt to face the regulators’ potential actions,  global biggest banks have already been seeking for new strategies and practices. Nevertheless, lower risk-weighted assets and higher capital ratios represent a challenge for increasing assets and profitability.  As a result, global biggest banks seem to shrink under pressure  from regulators.


Further reading

Bank of International Settlement (BIS) (2012)  “Post-crisis evolution of the banking sector”, In:  BIS 82nd Annual Report, Basel: BIS. Available at (accessed on June 25th, 2013).

Carey, B. (2016)  Cleaned up, shrunken banking sector may now be too small, The Sunday Times, August 7th.   Available at

Dermine, J. and Bissada, Y. (2007), Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, London and New York: Financial Times and Prentice Hall.

Saunders, A. (1994), Financial Institutions Management: A Modern Perspective, Burr Ridge, IL: Richard D. Irwin.

Saunders, A. and Cornett, M.  (2002), Financial Institutions Management: A Risk Management Approach, Columbus: McGraw-Hill College.

Popper, N. and  Corkery, M. (2016),  Shrunken Citigroup Illustrates a Trend in Big U.S. Banks, New York Time, April 15th, on line edition

The Economist (2011) The great unknown. Can policymakers fill the gaps in their knowledge about the financial system?, Jan 13th, print edition

In the wake of the Global Financial Crisis (GFC 2007), the Queen of England asked academics at the London School of Economics why no one saw it coming. TcrisisGFChe US Congress constituted a committee to investigate the failure of economic theory to predict the crisis.  Unfortunately, economists remain unable to answer this critical question. Some say that crises are like earthquakes, impossible to forecast. Others take refuge behind technical aspects of complex mathematical models. With monotonous regularity, more than 200 monetary crises have occurred globally, ever since financial liberalization started in the 1980’s. the methodology currently in use in economics systematically blinds economists to the root causes of these crises. Many leading economists have called for radical changes to bring economic theory into closer contact with reality.

Many who had hoped that the  GFC would serve as a wake-up call for the profession have been extremely disappointed by subsequent developments. Although there has been a flurry of papers on various aspects of the crisis, there has been no fundamental re-thinking. Theories which assume free markets will create full employment and maximal growth, continue to be taught at  universities. The rational expectations theory of Eugene Fama says that the stock market prices always correctly reflect the information available to the market, and there is no possibility of a bubble – a systematic over-valuation of all stock market prices. Under the influence of this theory, Robert Shiller’s demonstration that the stock market prices were over-inflated went unheeded. Similarly, warnings by many Cassandras like Steve Keen, Raghuram Rajan, Dean Baker, Nouriel Roubini, were ridiculed and ignored by senior level policy makers infatuated with free market dogma.

The last nail in the coffin of the US Economy was driven in when the Glass-Steagall act was repealed in 1999. The Great Depression in 1929 had been caused by irresponsible speculation by banks. In 1933, the Glass-Steagall act prohibited banks from investing in stocks, in order to prevent recurrences of this disaster. This prevented system-wide banking crises for 50 years, until the era of financial de-regulation ushered in by Reagan & Thatcher. Repeal of the act, combined with a lax monetary policy, led to precisely what it was meant to prevent. Banks went on a wild orgy of credit creation, enabling stock purchases of trillions of dollars backed by defective mortgage based securities. Banking crises like this routinely happen when banks are not strictly regulated, since they gamble with the depositors’ money. Financial moguls have created and popularized the misconception that banks are the backbone of the financial system, and must be supported regardless of misdeeds. Thus big banks are routinely bailed out when they indulge in wild gambles. This incentivizes banks to speculate: if they win, it is their personal gain. If they lose, someone else pays.

Even though economists blinded by free market ideologies could not predict it, the global financial crisis was very predictable. Giving permission to banks to gamble with other people’s money led to a financial crisis within the short span of eight years. However, what was surprising and perhaps unpredictable was the aftermath. Instead of being tarred and feathered, Eugene Fama went on to win a Nobel Prize in Economics. Nobel Laureate Robert Lucas, who confidently asserted that economists have learned how to prevent recessions, continues to enjoy the respect of the profession. Ben Bernanke, who presided over the Federal Reserve during the Global Financial Crisis, is being lauded as a hero. He has written a self-congratulatory book entitled “The Courage to Act” in which he praises himself for taking the heroic actions necessary to save the world from the complete collapse of the financial system. As Princeton economists Atif Mian and Amir Sufi have shown in their celebrated book “The House of Debt”, these actions were wrong, and harmful to the economy. The trillion dollar bailout given to banks by Bernanke should have been given to the distressed homeowners with the defaulting mortgages. That would have been just, and would also have saved the economy from the Great Recession, by preventing the large scale transfer of wealth from the impoverished mortgagers to the rich and criminal bankers.

Not only do the faulty theories which led to the crisis continue to be taught to unsuspecting students all over the world, but all efforts to reform the defective system have been blocked. In the US Congress, proposals to bring back the highly successful regulatory system which was created after the Great Depression failed. A few bills which were passed were quietly repealed later. There have been large numbers of seminars and conferences on the need for a new regulatory framework to protect the global financial system, but no action has been taken to create effective new regulations. Thus the system is ripe for another crisis, and there are many signs that another one is on the way.

The reader might wonder, like the author, why there has been no learning from experience? The answer lies in the statistics recently published by Oxfam. The number of people who own half of the wealth of the planet shrank rapidly from 388 in 2010 to only 62 in 2015. The richest people benefit vastly from the financial crises which destroy the wealth of the middle class. This is because the middle class is forced to borrow at interest from those who have the money. This enables the already wealthy to get rich much faster than in normal times where people have enough money for their own needs. To top it all, current economic theories make no mention of debt as an important economic factor. These seriously defective theories are of vital importance in concealing the workings of the mechanism which creates this massive concentration of wealth in the hands of a tiny minority. In subsequent articles we will explore the large number of ways in which current economic theory is defective, and the radical reforms needed to create a better economic theory for the twenty first century.