Hacioglu dincer (eds ) global financial crisis and its ramifications on capital markets; opportunities and threats (2017)

Contributions to Economics

Ümit Hacioğlu
Hasan Dinçer Editors

Global Financial
Crisis and Its
Ramifications on
Capital Markets
Opportunities and Threats in Volatile
Economic Conditions


Contributions to Economics


More information about this series at />

¨ mit Hacio
U
glu • Hasan Dinc¸er
Editors

Global Financial Crisis
and Its Ramifications
on Capital Markets
Opportunities and Threats in Volatile
Economic Conditions


Editors

¨ mit Hacioglu
U
Istanbul Medipol University
Beykoz, Istanbul
Turkey

Hasan Dinc¸er
Istanbul Medipol University
Beykoz, Istanbul
Turkey

The views expressed in this book are those of the authors, but not necessarily of the publisher
and editors.
ISSN 1431-1933
ISSN 2197-7178 (electronic)
Contributions to Economics
ISBN 978-3-319-47020-7
ISBN 978-3-319-47021-4 (eBook)
DOI 10.1007/978-3-319-47021-4
Library of Congress Control Number: 2017930401
© Springer International Publishing AG 2017
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Foreword

Understanding human behavior begins with questioning our own passions, desires,
and expectations with respect to future benefits. In this effort, we should be aware of
risks and ambiguities in the external environment surrounding us. We all have
concerns about using certain words because we find their meaning vague. For a
student or an investor, “crisis” is not such a simple word. Defining this confusing
concept, for example, “any event that is, or is expected to lead to, an unstable and
dangerous situation affecting an individual, group, community, or whole society” or
“a condition that presents an unstable situation with devastative effects on our
investment position, occur abruptly, with little or no warning,” does not help
scholars so much. Is the concept of “crisis” linked with our efforts of maximizing
our benefits or just a systemic issue?
It becomes meaningful when you look up the concept including your attitude,
desire, or position on any kind of action in the external environment. The concept of
crisis referring to either financial or economic means can be ponderous. But the
definition should not be illuminating the subject “crisis that indicates how stress
transforms and how it should be interpreted in terms of economic or financial
means; stress surrounding the actions of all parties causing negative effects on
each opposing parties.”

This book gathers colleagues and professionals across the globe from multicultural communities to understand the nature of global financial crisis and its ramifications on capital markets with a new design and innovative practices for the entire
global society of financial services industry.
The authors of these chapters have accepted a challenge. The global financial
crisis is the most studied subject in the field, so how can the contributions in this
book help us to interpret the impacts of it on capital markets? These effects on
investment positions or new ways out of global financial crisis are hardly the
answers. I prefer people to make their positions clear in their research and do not
want to tell what outputs they should be expecting from the content of the book.
The inclusion of the words “global,” “crisis,” and “ramifications” in the title
does nothing to lessen the challenge facing the authors. Global financial crisis
v


vi

Foreword

within its historical context has been theoretically explained in the first part. The
case studies that are geographically fragmented are about stock markets, banking
system, price fluctuations, and calendar anomalies during crisis, market volatility,
and risks in emerging markets. Although there are contributions from Serbia,
France, Norway, Greece, Hungary, Italy, India, Nigeria, Saudi Arabia, Australia,
and South Africa, this book mainly reflects work from Turkey and Western Europe.
Accordingly, the question of “How should scholars from the USA have tackled
these issues” arises?
The final challenge to the contributors is the subtitles of “Opportunities and
Threats in Volatile Economic Conditions.” Are they attempting to apply the
traditional models of assessing the global financial crisis or to replace those
traditional models with something new?
How do the authors address these multiple opportunities and threats in volatile

economic conditions and what does the book have to tell us?
Its first lesson is that there is no consensus on the cycle of financial crisis and
probably never will be. The latest global financial crisis is merely the latest turmoil
that we experienced and see unreasonable conditions or losses in the next decades.
The author of the opening chapter, Dr. Tatliyar, evaluates the 2008–2009 financial
crises from the historical context as the largest one since Great Depression of the
1930s. Several reasons are asserted in this chapter and question why such a massive
crisis happened in the first place. He addresses the causes of the global financial
crisis were, ostensibly, the formation of a housing bubble and ensuing subprime
mortgage crisis in the US economy. However, the true story of the crisis is much
more complicated than this. Actually, the fundamental causes, which stemmed
from systemic problems in the global economy, paved the way for economic
instabilities throughout the world and numerous financial crises occurred from
1980s on. Dr. Kontic´ evaluates economic crisis and the changes in the functioning
of international financial institutions in European developing countries. Dr. Kontic´
assesses the international financial institutions’ response to the global economic
crisis in the European developing countries. In their response to the global crisis,
the international financial institutions have increased funds for shock financing as
well as significantly reformed their instruments. Dr. Kuzucu briefly describes the
regulatory changes in bank capital, shadow banking system, trading and financial
reporting of the financial products, and credit rating agencies. The criticisms to
bank capital regulations are presented.
Market anomalies and price fluctuations in capital markets during crisis in the
third part have been guiding investors to clarify their positions during the recession
period. Dr. Yalaman and Dr. Saleem forecast emerging market volatility in crisis
period comparing traditional GARCH with high-frequency-based models.
Dr. Vasileiou figures out the calendar anomalies in stock markets during Financial
Crisis. Dr. Akbalık and his colleague assess the day of the week effect in the stock
markets of fragile five countries after 2008 Global Financial Crisis.
Some of the contributing authors build on assessment of financial stability in

emerging markets, business cycles, and impact of crisis, economic recovery, and
sectoral developments.


Foreword

vii

The virtue of this book, Dr. Hacıoglu and Dr. Dincer’s earlier collection of
studies and editorial series on Finance and Banking, is that it exposes and explores
the challenges of working at the frontiers of theory and practice. It is also very hard
to gather international scholars from different countries in this specific field due to
time constraints and significant geographical distance. The passion and scholarly
attitude behind the project has eliminated all boundaries and obstacles during
editorial process. Academics are motivated to work hard to foster the parts of this
book as an interesting contribution about an attempt by different countries just like
developing a joint venture.
I believe this book will provide valuable insight to satisfy the readers’ varying
expectations regarding the practice of global finance. Accordingly, readers who are
involved in this book will find much more that they can calibrate with their own
experience in building better practices for the future.
Istanbul Commerce University
Istanbul, Turkey

Ali Osman G€urb€uz


Preface

The latest global financial crisis and its ramifications on capital markets have led to

a growing attention on investment decisions in emerging markets. During the year,
doubts related to the debt crisis in the Euro zone also caused anomalies and price
fluctuations in the global financial markets. Risky developments, price fluctuations,
increasing rate of unemployment, and the lack of regulatory adaptations in the
financial system became the source of concerns for decision makers and professional investors.
The financial ramifications of instability in the economic system and its imbalances caused significant constraints on the performance of banking system and the
functionality of trade mechanism in emerging markets. Additionally, the current
market conditions and systemic issues in emerging markets significantly possess
risks to stability in financial system. Negative conditions also deteriorate the
sufficient market access by emerging market borrowers across the globe. Notwithstanding this, the volatile environment in global financial system should be assessed
based on its risks and returns for many investors.
In this book, it is aimed to assess the 2008–2009 Financial crises with its
ramifications on capital markets from a multidisciplinary perspective. The authors
of the chapters in this publication have contributed to the success of our work by the
inclusion of their respective studies.
This book is composed of four contributory parts. The first part evaluates the
2008–2009 financial crises in historical context, International Financial Institutions,
and Regulatory developments. The distinguished parts of the first part cover the
evaluation of financial crisis, global economy, Euro Crisis, international financial
centers, and monetary coordination with regulatory advances. This book continues
with Part II by assessing the business cycles and financial stability in emerging
markets. In Part II, external financial conditions, global imbalances, financial
instability, economic outlook, and the effects of economic crisis on emerging
markets have been assessed. The next part covers empirical studies on market
anomalies and price fluctuations in capital markets during crisis. Stock markets,
banking system, price fluctuations, and calendar anomalies during crisis, market
volatility, and risks in emerging markets are some topics in this part. Finally, the
ix

x

Preface

last part demonstrates the impact of crisis, economic recovery, and sectoral
developments.
The authors of the chapters in this premium reference source in the field with the
contribution of scholars and researchers overseas from different disciplines examined the ramifications of global financial crisis on capital markets, financial stability
in emerging markets, price fluctuations and anomalies in capital markets during the
recession, and sectoral developments by assessing critical case studies. Consequently, this book gathers colleagues and professionals across the globe from
multicultural communities to design and implement innovative practices for the
entire global society of finance and banking. We believe this book with its scope
and success makes it even more attractive for readers and scholar in this field.
Istanbul, Turkey
August 2016

¨ mit Hacıoglu
U
Hasan Dinc¸er


Acknowledgment

We have many colleagues and partners to thank for their impressive contribution to
this publication. First, we would like to praise the people at Springer International
Publishing AG: Dr. Prashanth Mahagaonkar, who has the attitude and substance of
a genius: he continually and convincingly conveyed a spirit of advanture in regard
to our research at each stages of our book development process; Sivachandran
Ravanan, our Project coordinator, without his persistent help this publication would
not have been possible; and others who assisted us to make critical decisions about

the structure of the book and provided useful feedback on stylistic issues.
We would like to express our appreciations to the Editorial Advisory Board
Members. The members who helped with the book included Dursun Delen, Ekrem
Tatoglu, Ekrem Tatoglu, Idil Kaya, Ihsan Isik, Martie Gillen, Michael S. Gutter,
Nicholas Apergis, Ozlem Olgu, Ulas Akkucuk, and Zeynep Copur. The excellent
advice from these members helped us to enrich the book.
We would also like to thank all of the authors of the individual chapters for their
excellent contributions.
We would particularly like to thank the Center for Strategic Studies in Business
and Finance for the highest level of contribution in the editorial process.
The final words of thanks belong to our families and parents separately:
Dr. Hacıo
glu would like to thank his wife Burcu and his son Fatih Efe as well as
his parents; Dr. Dincer would like to thank his wife Safiye as well as his parents.
They deserve thanks for their enthusiasm, appreciation, help, and love. Their pride
in our accomplishments makes it even more rewarding to the editors.
Istanbul Medipol University
Istanbul, Turkey
August 2016

¨ mit Hacıoglu
U
Hasan Dinc¸er

xi


The Editors would like to acknowledge the following international advisory board
members
Dursun Delen, Oklahoma State University, United States

Ekrem Tatoglu, Bahcesehir University, Istanbul, Turkey
Idil Kaya, Galatasaray University, Turkey
Ihsan Isik, Rowan University, NJ, United States
Martie Gillen, University of Florida, United States
Michael S. Gutter, University of Florida, United States
Nicholas Apergis, University of Piraeus, Greece
Ozlem Olgu, Koc¸ University, Istanbul, Turkey
Ulas Akkucuk, Bogazic¸i University, I˙stanbul, Turkey
Zeynep Copur, Hacettepe University, Ankara, Turkey

xiii


Contents

Part I

2008–2009 Financial Crisis, International Financial Institutions
and Regulation

The 2008–2009 Financial Crisis in Historical Context . . . . . . . . . . . . . .
Mevl€
ut Tatlıyer

3

Global Economy at Turmoil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G€
okc¸e C
¸ ic¸ek Ceyhun

19

International Financial Centers After the 2008–2009 Global Financial
Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mehmet Fatih Bayramoglu and Sinan Yilmaz

27

Economic Crisis and the Changes in Functioning of International
Financial Institutions: The Case of European Developing Countries . . .
Ljiljana Kontic´

43

Deindustrialization, Public Debts and Euro Crisis . . . . . . . . . . . . . . . . .
Engin Sorhun

53

Public Debt Management in Developed Economies During the Crisis . . .
Christophe Schalck

67

Fiscal Framework Changes in European Monetary Union Before and
After Sovereign Debt Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hale Kırmızıo
glu
The Impact of the Eurozone Crisis on Turkish Foreign Trade . . . . . . . .

I˙mre Ersoy and Bilgehan Baykal

79
95

Regulating Financial Markets After the Global Crisis . . . . . . . . . . . . . . 107
Narman Kuzucu
Fiscal Sustainability in the G-7 Countries . . . . . . . . . . . . . . . . . . . . . . . 123
Ece H. Guleryuz
xv


xvi

Contents

Monetary Coordination and Regulation Policies of Spillover Effects
on Asset Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Erdem Kilic
Is the Link Between the Real and Financial Sectors Affected by
Mechanism of Governance? A Cross-Country Analysis in Asia . . . . . . . 147
Kamal Ray and Ramesh Chandra Das
Part II

Assessment of Financial Stability in Emerging Markets and
Business Cycles

External Financial Conditions and Slower Growth in Emerging
Economies: 2013–2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Ece H. Guleryuz

Mortgaging the Future? Contagious Financial Crises in the Recent
Past and Their Implications for BRICS Economies . . . . . . . . . . . . . . . . 175
Asim K. Karmakar and Sovik Mukherjee
Assessment of Financial Stability in Emerging Economies: Evidence
from Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Abiola A. Babajide and Felicia O. Olokoyo
Emerging Market Economies and International Business Cycle
Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Serpil Kuzucu
Financial Conditions Index as a Leading Indicator of Business Cycles
in Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Umit Bulut
Feasibility of Financial Inclusion Mission in India Under Reform and
Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Ramesh Chandra Das and Kamal Ray
Renewable Energy Financing with a Sustainable Financial System
Following the 2008 Financial Crisis in Developing Countries . . . . . . . . . 259
G€
ulcan C¸a
gıl and Sibel Yilmaz Turkmen
The Impact of Russian Economy on the Trade, Foreign Direct
Investment and Economic Growth of Turkey: Pre- and Post-Global
Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Ayhan Kapusuzoglu and Nildag Basak Ceylan
Export Diversification in Emerging Economies . . . . . . . . . . . . . . . . . . . 287
Hatice Karahan
Equity and Debt Financing Strategies to Fuel Global Business
Operations During Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
Muhammad Azeem Qureshi, Tanveer Ahsan, and Toseef Azid

Contents

Part III

xvii

Market Anomalies and Price Fluctuations in Capital Markets
During Crisis

Stock Market Development and Economic Growth: The Case of
MSCI Emerging Market Index Countries . . . . . . . . . . . . . . . . . . . . . . . 323
Veli Akel and Talip Torun
Turkish Banking System: Maturing with Crises . . . . . . . . . . . . . . . . . . 337
Gonca Atici and Guner Gursoy
Investigating the Relationship Between Liquidity and Financial
Performance in Turkish Banking Sector: A Pre and Post 2008
Financial Crisis Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
Kartal Demirgunes and Gulbahar Ucler
Market Risk Instruments and Portfolio Inflows in African Frontier
Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371
Kehinde A. Adetiloye, Joseph N. Taiwo, and Moses M. Duruji
The Systemic Benefits of Islamic Banking and Finance Practices: A
Comparative Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
Mehdi Sadeghi
Determinants of the Credit Risk in Developing Countries After
Economic Crisis: A Case of Turkish Banking Sector . . . . . . . . . . . . . . . 401
Serhat Y€
uksel
Credit Risk Evaluation of Turkish Households Aftermath the 2008

Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
¨ zg€ur Arslan-Ayaydin, and Mehmet Baha Karan
Mustafa Kaya, O
International Credit Default Swaps Market During European Crisis:
A Markov Switching Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
Ayben Koy
Does Reputation still Matter to Credit Rating Agencies? . . . . . . . . . . . . 445
Serkan Cankaya
Price Fluctuations in Econophysics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459
Tolga Ulusoy
Forecasting Emerging Market Volatility in Crisis Period: Comparing
Traditional GARCH with High-Frequency Based Models . . . . . . . . . . . 475
Abdullah Yalaman and Shabir A.A. Saleem
Calendar Anomalies in Stock Markets During Financial Crisis:
The S&P 500 Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493
Evangelos Vasileiou


xviii

Contents

Day of the Week Effect in the Stock Markets of Fragile Five Countries
After 2008 Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
Murat Akbalik and Nasif Ozkan
Market Volatility, Beta, and Risks in Emerging Markets . . . . . . . . . . . . 519
La´szlo´ Nagy, Miha´ly Ormos, and Dusa´n Timotity
Part IV

Impact of Crisis, Economic Recovery and Sectoral

Developments

The Relationship Between Firm Size and Export Sales: Sector or Size,
What Matters? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539
¨ zt€urkkal
Niyazi Berk and Belma O
The Relationship Between Economic Development and Female Labor
Force Participation Rate: A Panel Data Analysis . . . . . . . . . . . . . . . . . . 555
Ozlem Tasseven
The Impact of the 2008–2009 Global Financial Crisis on Employment
Creation and Retention in the Platinum Group Metals (PGMs)
Mining Sub-sector in South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569
Mavhungu Abel Mafukata
The Effects of the Crisis on Nautical Tourism: An Analysis of the
Italian Situation Regarding Port Features, Linked Economic Activities
and Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 587
Enrico Ivaldi, Riccardo Soliani, and Gian Marco Ugolini
Shipbuilding in Italy at the End of the Crisis: Is There a Road
to Recovery? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603
Enrico Ivaldi, Riccardo Soliani, and Gian Marco Ugolini
Life Insurance Reforms and Capital Formation Development:
Lessons for Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615
Patrick O. Eke and Felicia O. Olokoyo
Innovation During and Beyond the Economic Crisis . . . . . . . . . . . . . . . 643
Ays¸e Saime D€
oner


About the Editors

¨ mit Hacıo
U
glu is an associate professor of finance at Istanbul Medipol University,
School of Business, Istanbul, Turkey. Dr. Hacıoglu has BAs in Business Administration and International Relations (2002). He received PhD in Finance and Banking for his thesis entitled “Effects of Conflict on Equity Performance.” Finance and
Banking, Strategic Management, and International Political economy are the main
pillars of his interdisciplinary studies. He is the executive editor of International
Journal of Research in Business and Social Science (IJRBS) and the founder
member of the Society for the Study of Business and Finance (SSBF).
Hasan Dinc¸er is an associate professor of finance at Istanbul Medipol University,
School of Business, Istanbul, Turkey. Dr. Dinc¸er has BAs in Financial Markets and
Investment Management from Marmara University. He received PhD in Finance
and Banking for his thesis entitled “The Effect of Changes on the Competitive
Strategies of New Service Development in the Banking Sector.” He has work
experience in Finance sector as portfolio specialist, and his major academic studies
focus on financial instruments, performance evaluation, and economics. He is the
executive editor of International Journal of Finance and Banking Studies (IJFBS)
and the founder member of the Society for the Study of Business and Finance
(SSBF).

xix


Part I

2008–2009 Financial Crisis, International
Financial Institutions and Regulation


The 2008–2009 Financial Crisis in Historical
Context

Mevl€
ut Tatlıyer

Abstract The 2008–2009 financial crisis was the largest since Great Depression of
the 1930s. Several reasons were asserted on why such a massive crisis happened in
the first place. However, most of the explanations put forth were about proximate
causes of the crisis and very little attention was given to the underlying and
fundamental causes of it. The causes of the global financial crisis were, ostensibly,
the formation of a housing bubble and ensuing subprime mortgage crisis in the US
economy. However, the true story of the crisis is much more complicated than this.
Actually, the fundamental causes, which stemmed from systemic problems in the
global economy, paved the way for economic instabilities throughout the world and
numerous financial crises occurred from 1980s on. These fundamental causes
include (a) failure of transforming economies from extensive-production to
intensive-production, (b) the rise of the neoliberalism, (c) ensuing financialization
of the world economy and (d) global instabilities witnessed in the neoliberal era.

1 Introduction
The global financial crisis began in 2008 and still lingers on in a sense. It has been
the biggest crisis since the Great Depression of 1929, which, in part, paved the way
for World War II (WWII). After the US subprime mortgage crisis burst out, it was
all clear that this crisis would be with us for a long time. Although the economic
recession that followed the financial crisis has officially ended in 2012, it has not in
a practical sense. In other words, the specter of the global economic crisis is still
haunting us.
Why did this crisis happen in the first place? There is no an easy answer to this
question. One of the proximate causes of the crisis was troubles in the US subprime
mortgage market. But this is not the whole story. Far from it. . . There are numerous

M. Tatlıyer

Department of Economics and Finance, School of Business, Istanbul Medipol University,
Kavacik Campus, Beykoz, 34810 Istanbul, Turkey
e-mail:
© Springer International Publishing AG 2017
¨ . Haciog˘lu, H. Dinc¸er (eds.), Global Financial Crisis and Its Ramifications on
U
Capital Markets, Contributions to Economics, DOI 10.1007/978-3-319-47021-4_1

3


4

M. Tatlıyer

factors underlying global financial crisis and one must look beyond the recent
history and proximate “financial” causes in order to understand why this crisis
happened in the first place and maybe more importantly, why it still persists.
In the next four sections the fundamental causes which gave way for global
financial crisis are discussed. In the second section, we discussed how the failure of
shifting from extensive-production to intensive-production resulted in the
financialization of the world economy. In the third section the rise of the neoliberalism and in the fourth section the financialization of the world are examined. The
role of the global instabilities, which are part and parcel of the neoliberal era, in the
making of the global financial crisis is discussed in the fifth section. In the last
section, proximate causes of and the global reaction to the financial crisis are
analyzed.

2 From Extensive-Production to Intensive-Production?
The world economy and particularly industrialized economies had suffered low
economic growth rates between two world wars. In that period, the average

economic growth rate was 1.19 % for the Western Europe and 0.86 for the Eastern
Europe. The US performed better in this time interval with a 2.84 % of annual
economic growth. The average economic growth rate for the whole world in this
period was only 1.82 %. After WWII things changed dramatically. Almost all of the
regions in the world saw their economic growth rates boomed. This was all the
more important for the industrialized countries and especially for the US, since US
was dominating the world economy by a large margin.
In the period of 1950–1973, Western Europe grew by 4.79 % in a year on
average and Eastern Europe fared even better with a 4.86 %. US economy also
increased its economic growth rate by some 1 % point to reach nearly 4 %. It should
be noted that this period witnessed the so-called Japanese miracle. Japanese economy grew incredibly in this period by over 9 % annually on average. Until that time,
no economy in the world could imagine such a high growth rate, let alone achieving
it. Overall, the world economy grew by some 5 % in a year on average between
1950 and 1973 (Maddison 2007).
The economic expansion experienced by industrialized countries in the three
decades after WWII was largely due to extensive production such that these
countries mobilized all their resources to rebuild their cities and infrastructures,
as well as their factories and machineries which had been devastated in WWII.
Moreover, in this period; populations boomed, higher education expanded enormously and women entered to the labor force en masse. Lastly, but absolutely not
leastly, governments of industrialized countries around the world got bigger and
bigger all the way up to the 1970s thanks to highly cherished Keynesian economic
policies and welfare-regimes. All these reasons, among others, rendered extensive
production possible. We should note that in this period, “lagged-behind” Europe
closed the gap between them and the US, partly with the help of the US itself. In


The 2008–2009 Financial Crisis in Historical Context

5

fact, France remembers this period as Les Trente Glorieuses, or The Glorious
Thirty. Technological advancement achieved between two world wars and in
WWII has also played a part in the post-war expansion and increased productivity
levels to some extent. However, the main engine of the economic growth in that
period was extensive production (Eichengreen 2008).
The fundamental causes of this economic expansion started to fade away in the
late 1960s and early 1970s. The party was coming to an end. Economic growth rates
declined steeply and industrialized countries never made up the lost ground thereafter. (Even unemployment rates rose to much higher levels permanently in Europe,
such that once having had lower unemployment rates than US, they are now
witnessing much higher rates.) Western Europe grew only 2.21 % annually on
average for the next three decades. Eastern Europe fared even worse with only
1.01 of growth rate. The decline in the US was limited compared to Europe. US
economy expanded on average by some 3 % annually. However, we should stress
that this growth was mostly achieved by the incredible expansion of the financial
industry in US. On the other hand, the economic expansion in Asia which was led
by China, India and other several East Asian countries kept on and even gathered
pace after the 1970s (Maddison 2007) (Table 1).
Once this one-time extensive-production-led economic expansion started to
wane, it was all too hard to sustain growth rates attained before, because this time
what was needed was intensive production, which can be achieved purely by
productivity rises, and this was not an easy task. Therefore, when industrialized
countries faced with the hardships of the intensive production, they tried to expand
the extensive production frontier with financialization of the world economy within
the framework of neoliberalism.

3 The Rise of Neoliberalism
In the 1970s, global economic and financial order, which was established during
WWII in 1944 and is commonly called as Bretton Woods era, collapsed dramatically. (However, this collapse was not a cause, but a result of the economic and
financial tectonic movements attained by the world in that period.) In the late 1970s
and early 1980s neoliberalism rose to the foreground and replaced shattered Bretton

Woods system. Neoliberal paradigm was much more of a political ideology than a
philosophical one and this replacement was more of a political process than an
economic one. That is, without backing of certain “powerful” political and economic actors and institutions, this process could not be experienced such that.
Indeed, neoliberalism itself was first propagated in political arenas. This paradigm, also known as Washington consensus or in a narrower sense Supply-Side
Economics, was preached by the US government itself and started to known as
Reaganomics, after the then-president Ronald Reagan. Similar things experienced
in UK and policies pursued in the name of this new ideology were named as
Thatcherism, after the “iron lady” Margaret Thatcher. The fundamental creed of


6
Table 1 Economic growth
rates of certain countries and
geographical areas

M. Tatlıyer
Country/Area
Western Europe
Eastern Europe
USSR
US
Latin America
Japan
China
India
Asia (Other)
Africa
World

1913–1950

1.19
0.86
2.15
2.84
3.42
2.21
À0.02
0.23
2.19
2.57
1.82

1950–1973
4.79
4.86
4.84
3.93
5.38
9.29
5.02
3.54
6.00
4.43
4.90

1973–2001
2.21
1.01
À0.42
2.94

2.89
2.71
6.72
5.12
4.61
2.89
3.05

Source: Maddison 2007: 640

the neoliberal paradigm was the market supremacy in which the best government
was the smallest government and the more liberalized and unconstrained an economy the better it was. This ideology has been suggested and enforced wherever
possible in the world through institutions such as IMF and World Bank, and gained
colossal prevalence. Without these efforts, financialization of the world to this
extent could not be possible at all. Hence since 1980s financial industries throughout the world were largely liberalized under the auspices of IMF and World Bank.
Deregulation process has gone the furthest in the US financial industry. Given
the magnitude of US industry and its prominence in the world, this deregulation
process would have far and wide repercussions throughout the world, and indeed
it had.
US financial industry gradually but steadily has been deregulated in 1980s and
1990s. In 1980, Depository Institutions Deregulation and Monetary Control Act
(DIDMCA) repealed so-called Regulation Q provision of Glass-Steagall Act of
1933 and abolished interest rate ceilings on deposit accounts. In 1982, Garn-St.
Germain Depository Institutions Act (GGDIA) deregulated Savings & Loans Associations (S&Ls) almost entirely and rendered them more of a traditional bank than
of a mortgage institution. In 1994, Riegle-Neal Interstate Banking and Branching
Efficiency Act abolished restrictions on interstate banking and branching. Most
importantly, in 1999, Gramm-Leach-Bliley Act repealed Glass-Steagall Act
entirely.
Glass-Steagall Act was already breached with the reinterpretations of Federal
Reserve in 1980s and 1990s under the presidency of Alan Greenspan. In the early

years of his tenure at Fed, banks were allowed to engage in certain securities with a
10 % upper limit threshold. Moreover, in 1996, bank holding companies were
allowed to make investment banking operations with an upper limit threshold of
25 % of revenues. This threshold was effectively meaningless, because almost all of
the institutions could manage to stay away from it. Finally, in 1999, Gramm-LeachBliley Act repealed all the restrictions in the financial industry. Now financial


The 2008–2009 Financial Crisis in Historical Context

7

institutions could engage in any activity—banking, securities, and insurance operations- freely (Sherman 2009).
Deregulations paved the way for big mergers in financial industry in the US. As
of 1970, the five biggest banks were holding 17 % of the assets in this industry. This
share rose to 52 % in 2012. In addition, the total assets of the five largest banks (i.e.,
Citi Group, JP Morgan, Wachovia, Wells Fargo and Bank of America) rose from
2.2 trillion dollars to 6.8 trillion dollars in just 9 years, from 1998 to 2007. Even
greater expansion experienced by investment banks. Total assets of the five largest
investment banks (namely, Merrill Lynch, Lehman Brothers, Bear Stearns, Morgan
Stanley and Goldman Sachs) nearly quadrupled in this period, from nearly 1 trillion
dollars to 4 trillion dollars (Om-Ra-Seti 2012).
In line with the rise of the neoliberal paradigm, the invention and rapid expansion of the derivatives (e.g., credit default swaps, or CDSs and collateralized debt
obligations, or CDOs) in the 1980s and 1990s further unstabilized the finance
industry. These products were largely unregulated. There were very weak efforts
to regulate these financial products, but these already timid efforts were strangled
by the mainstream policymakers, including Fed chairman Alan Greenspan and
Treasury Secretary Robert Rubin. Moreover, with the Commodity Futures Modernization Act of 2000, the derivatives were exempted from regulation. To no
surprise, the outstanding nominal value of derivatives expanded enormously since
1980s and reached 106 trillion dollars in 2001. And in the next 7 years, it expanded
much more rapidly and reached 531 trillion dollars in 2008 (Sherman 2009).

4 Financialization of the World Economy
In the 1970s, gold-backed dollar regime and fixed currency era ended and more and
more countries started to adopt floating exchange rate regimes. As of 1970, 97 % of
IMF’s member countries had fixed exchange rates. This ratio declined steeply to
39 % by 1980 and was only 11 % as of 1999 (Reinhart 2000).
Yet this was not the whole story. With the so-called deregulation process
starting from 1980s within the framework of neoliberalism further transformed
the financial sector and accordingly, economic order of the world deeply. Here we
see the interplay of economic and financial processes. The latter had a big influence
on the former, and in turn the former deeply transformed the latter. Moreover, any
story of this crisis without due regard to the roles of the governments around the
world would be deeply flawed. Financialization of the world was much less a
natural and economic process than a political and ideological one.
In the neoliberal era, developing countries were significantly incorporated into
the world economy. This was an important transformation, since in the Bretton
Woods era, developing countries had not much role in the international trade and
global economy. They had been implementing import-substitution policies and
their financial and economic openness levels were rather limited. However, numerous developing and emerging countries started to adopt export-oriented economic


8

M. Tatlıyer

policies (e.g., elimination of the barriers in front of the international trade, such as
customs and tariffs) with the advent of neoliberalism, and “advices” and “enforcements” of the WTO, IMF and World Bank.
More importantly, the restrictions on the international capital flows and interest
rates have almost totally eliminated in the neoliberal era, in both industrialized and
developing countries. This meant a much more free financial setting than that of the

Bretton Woods era in which capital movements were largely restricted and interest
rate were determined by the governments.
Incorporation of the developing countries to the world economy and
financialization of the whole world were a direct response to the structural economic crisis of the 1970s. However, there were and are numerous drawbacks of this
response of neoliberalism to the woes of the world economy. Basically, all the
transformations in the world economy and finance were almost nothing to do with
the productivity levels of the countries. Incorporating developing economies to the
world economy and expanding financial realm to the levels of not seen before were
not sufficiently influential responses to the systemic crisis. In fact, these were
superfluous and temporary responses to deeply structural and entrenched problems.
In addition, they had colossal side effects: In this era, the world has become a much
more unstable place and global imbalances deteriorated to unprecedented levels.
In addition, not only the financialization of the world reached its limits, but also a
myriad number of new financial products such as futures and swaps started to enter
the financial markets thanks to the deregulation process of the 1980s and 1990s.
These financial products became increasingly complex and hard-to-understand
even by the professionals producing and selling them such as CDOs and MBSs.
(And these very financial products became one of the proximate causes of the
2008–2009 financial crisis.)
Financialization of both developing and industrialized countries was a direct
result of the struggle to expand extensive production frontier. Financialization
process included deregulation process, invention of myriad number of financial
products, forced-elimination of the barriers to the international capital flows. This
way, finance with all of its “invented” products has become a brand new industry
for the global economy. And this industry expanded tremendously. Once again,
having hard time with intensive production, the economic system circumvented this
problem and found a way to extend horizontally the production base. However, this
“production” was not a real one and this very problem caused most of the troubles
the world economy witnesses today.
Financialization of the world economy was not the only response to declining

economic prospects of the industrialized countries. As we said before, another
avenue for extending production base was the incorporation of the developing
countries to the world-economic-system both financially and economically. Thanks
to the forced-elimination of the barriers to the international trade, just like the
international capital flows, and abandoning import-substitution economic structure
and embracing export-led growth strategy, industrialized countries happened to find
new markets for their products, hence extensive production.


The 2008–2009 Financial Crisis in Historical Context

9

In this highly financialized world economy, economic instabilities have become
all too common, as expected. Without any constraint, finance industry expanded
tremendously and permeated every aspect of the real economy and caused major
instabilities in the world economy. Numerous financial crises occurred but most of
these were brushed away as idiosyncratic phenomena and not seen as systemic
crises. For example, 1997 East Asia financial crisis was largely seen as a currentaccount-deficit crisis, though these deficits did not warrant a financial crisis at all.
Even if this was the underlying cause of the crisis, it was a proximate cause, not an
ultimate one.
IMF and World Bank were the biggest preachers and enforcers of this agenda
and ideology, which was pure neoliberalism. One-size-fit-all liberalization
preaching was the only take-home message to almost all of the countries who
experienced financial crises. However, this situation started to change with the
2008–2009 global economic crises, because not only the biggest crisis occurred
after the global depression of the 1930s, but there were now mounting evidence
against neoliberalism and it was now hard to defend this ideology without serious
reserves. Even IMF, the leading proponent and enforcer of this understanding,
abandoned preaching with great enthusiasm its benefits and started to have a

more or less balanced view.

5 Global Instabilities
The world has become a much more unstable place in the neoliberal era in which
international capital movements were almost completely freed and floating
exchange rate regimes were adopted by nearly all of the countries, in comparison
with the post-war Bretton Woods system in which international capital movements
were highly restricted and currencies were pegged to US dollar, which in turn
pegged to gold. In addition, thanks to the efforts of the GAAT and afterwards WTO,
restrictions on trade have largely been eliminated for particularly developing
countries in this era. Hence, the most salient feature of this era was liberalization.
However, this liberalization process came with its very serious side effects. In
the Bretton Woods era, there were very few financial crises. Then things changed
very badly. Since the 1980s the world experienced over a hundred and fifty financial
crises. Some countries accumulated more and more current account deficits, and
others gathered more and more reserves.
In this period, the leading deficit country in the world has been US. In almost all
of the years in the neoliberal era, current account balance of US was negative. After
1991, current account deficit of US gradually increased and came to unprecedented
levels in the 2000s up to the global financial crisis of 2007–2008. In the peak year of
2006, the US current account deficit reached almost 6 % of its GDP (Fig. 1). In the
2005–2007 period average current account deficit in the world was some 1.3 trillion
dollars and US alone accounted for 57 % of all of the current account deficit in the
world with 749 billion dollars deficit. The combined current account deficit share in