How Should the Financial Markets Be Structured? Securities Trading, Corporate Scandals, Laws (2004)

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Following the market turbulence of the 1990s financial crises and September 11 attacks on the U.S. in 2001, financial integration intensified among the developed nations and emerging markets, with substantial growth in capital flows among banks and in the trading of financial derivatives and structured finance products. Worldwide international capital flows grew from $3 trillion to $11 trillion U.S. dollars from 2002 to 2007, primarily in the form of short-term money market instruments with maturities of less than one year. The United States experienced growth in the size and complexity of financial institutions engaged in a broad range of financial services across borders in the wake of the Gramm--Leach--Bliley Act of 1999 which repealed the Glass--Stegall Act of 1933, ending limitations on commercial banks' investment banking activity. Industrialized nations increasingly began relying on foreign capital to finance domestic investment opportunities, resulting in unprecedented capital flows to advanced economies from developing countries, as reflected by global imbalances which grew to 6% of gross world product in 2007 from 3% in 2001.[24]:129-130[18]:19 The global financial crisis that precipitated in 2007 and 2008 shared some of the key features exhibited by the wave of international financial crises in the 1990s, including accelerated capital influxes, weak regulatory frameworks, relaxed monetary policies, herd behavior during investment bubbles, collapsing asset prices, and massive deleveraging. The systemic problems originated from within the United States and other advanced nations.[24]:133-134 Similarly to the 1997 Asian crisis, the global financial crisis entailed broad lending by banks undertaking unproductive real estate investments as well as poor standards of corporate governance within financial intermediaries. Particularly in the United States, the crisis was characterized by growing securitization of non-performing assets, large fiscal deficits, and excessive financing in the housing sector.[33]:21-22[18]:18-20 While the real estate bubble in the U.S. triggered the financial crisis, the bubble was financed by foreign capital flowing from many different countries across the world. As its contageous effects began to infect other nations, the crisis became a precursor for the global economic downturn now referred to as the Great Recession. In the wake of the crisis, the total volume of world trade in goods and services fell 10% from 2008 to 2009 and did not recover until 2011, with an increased concentration in emerging market countries. The global financial crisis demonstrated the negative effects of worldwide financial integration, sparking discourse on how and whether some countries should decouple themselves from the global financial system altogether. In 2009, a newly elected government in Greece revealed that the previous government had been falsifying its national budget data, and that its fiscal deficit for the year was 12.7% of its GDP as opposed to the 3.7% espoused by the former government. This news alerted financial markets to the fact that Greece's deficit exceeded the eurozone's maximum of 3% as outlined in the Economic and Monetary Union's Stability and Growth Pact (SGP). Investors concerned by the possibility of a sovereign default began rapidly selling Greek bonds. Given Greece's prior decision to embrace the euro as its currency, it no longer held monetary policy autonomy and could not intervene to depreciate a national currency for the purposes of absorbing this shock and boosting competitiveness, as was the traditional solution to sudden capital flights. The crisis proved contagious when it spread to Portugal, Italy, and Spain (together with Greece these are collectively referred to as the PIGS. Ratings agencies downgraded these countries' government debt instruments in 2010 which further increased the costliness of refinancing or repaying their national debts. The contagion continued to spread and soon grew into a European sovereign debt crisis which threatened economic recovery in the wake of the Great Recession. In tandem with the IMF, the European Union members assembled a €750 billion bailout for Greece and other afflicted nations. Additionally, the ECB pledged to purchase bonds from troubled eurozone nations in an effort to mitigate the risk of a banking system panic. http://en.wikipedia.org/wiki/Global_financial_system