The Global Crisis: Contagion and Vulnerability

Roubini and Mihm contend that the global reach of the 2007–9 crisis was the consequence of similar faults in financial markets around the world, rather than global transmission of the problems of sub-prime mortgage markets in the United States. They nevertheless recognise ‘contagion’ as an important factor. The failure of Lehman Brothers resonated around the world. Reinhard and Rogoff assess the relative importance of ‘contagion’ and ‘shared vulnerabilities’ in the origination of the global crisis. The main shared vulnerability lay in rising house prices. These explanations suggest limited understanding of transmission processes. In the support-bargaining and money-bargaining frame of reference a main channel of transmission is through dissemination of information. Financiers share the concepts and vocabulary of their profession, and information transmitted globally leads to similar behaviour. The ideas behind financial arrangements in the United States were transmitted globally, leading to similar financial arrangements in other countries. A second mode of transmission is through money-bargaining chains. These are prominent in the frame of support-bargaining and money-bargaining; less prominent if money is conceived as a ‘veil.’ Credit constraints contract money-bargaining chains, and heavy contraction constitutes crisis. Contraction of money-bargaining chains affects all agents of money-bargaining systems, whether financial or providers of ‘real’ goods.