Chapter 2: The Financial Crisis

The financial turmoil that originated in 2007 and developed into an unprecedented crisis battering financial and real markets is the latest manifestation, on a grand scale and with new attributes, of a welldefined pathology in the process of market liberalization and integration in the post-Bretton Woods era. At the root of the crisis lies a fundamental inconsistency between financial globalisation – the process of liberalization and deregulation driving the impressive growth of world financial markets – and existing public rules and policies at both domestic and international levels. This pathology underlies virtually all the episodes of instability that have affected the developing and the emerging economies since the constraints on capital mobility started to be removed during the 1970s: from the debt crisis in the early 1980s to the financial and currency crisis in South-East Asia in 1997–98. Globalisation of financial markets has systematically and vastly outpaced the development of their governance: governments have lagged behind in reshaping domestic and international institutions as well as in changing and adapting policy behaviour.