The Ideological Roots of the Global Financial Crisis: Lessons for CARICOM

• Author: Courtney Blackman
• Pages: 85-94

THE IDEOLOGICAL ROOTS OF

THE GLOBAL FINANCIAL CRISIS:

LESSONS FOR CARICOM

Courtney Blackman

8

of the President’s Council of Economic

Advisors, have summed it up this way in a

joint statement:

The f‌inancial system failed to perform its

function as a reducer and distributor of risk.

Instead, it magnif‌ied risks, precipitating an

economic contraction that has hurt businesses

and families around the world…. The current

f‌inancial crisis had many causes. It had

its roots in the global imbalance in saving

and consumption, in the widespread use of

poorly understood f‌inancial instruments,

in shortsightedness and excessive leverage

at f‌inancial institutions. But it was also the

product of basic failures in f‌inancial supervision

and regulation.2

They put forward proposals for “a new

f‌inancial foundation…through modernisation

of f‌inancial regulation and supervision.”

Understandably, the diagnosis of the causes of

the crisis by these two superb technocrats, and

the proposed policy responses, are intuitive

and pragmatic as, indeed, the urgency of the

situation requires. But they do not explain

why, in the land where two-thirds of the

living Nobel Laureates in Economics reside,

economic policy makers and corporate leaders

failed to recognise the gathering threats to the

f‌inancial system, and why the initial policy

responses to the crisis were so tentative and, at

times, bumbling. Since the CARICOM and

US economies are so dissimilar, the Geithner-

Summers analysis and prescriptions are of only

limited value to us. Caribbean economists and

policymakers need an understanding of the

Introduction

There is general consensus that the

current global f‌inancial crisis, which originated

in the United States of America, is the most

devastating since the Great Depression of the

1930s. Martin Wolf described the unfolding

events as the “disintegration of the f‌inancial

system, without which, no modern economy

could survive.”1 Iconic Wall Street institutions

like Lehman Brothers, Bear Stearns and

Merrill Lynch have vanished or been absorbed

by other banks, and more than 50 banks across

the country have failed and been closed by the

Federal Deposit Insurance Corporation. The

US Treasury and the Federal Reserve have also

injected billions into major f‌inancial and non-

f‌inancial institutions that had become insolvent

but were deemed ‘too large to fail’. The effects

of the crisis have been felt worldwide, not least

of all in the CARICOM Caribbean.

Meanwhile, millions of Americans have

lost their jobs; more than a million have lost

their homes to foreclosure, and millions more

have seen sharp reductions in their pensions

and retirement funds. What is more, the

crisis threatens the very position of the United

States as the world’s sole Super Power, for it

is the tremendous advantage it enjoys as the

world’s leading f‌inancial centre and issuer

of the international currency, that provides

the f‌inancial resources to support its global

responsibilities and ambitions.

Timothy Geithner, Secretary of the US

Treasury, and Lawrence Summers, Chairman