Understanding the 2007–2008 Global Financial Crisis ...

1 PL14CH04- helleiner ARI 14 April 2011 16:32. ANNUAL. REVIEWS Further Understanding the 2007 2008. Click here for quick links to Annual Reviews content online, including: Global Financial Crisis : t Other articles in this volume t Top cited articles t Top downloaded articles Lessons for Scholars of t 0VS DPNQSFIFOTJWF TFBSDI . International Political Annu. Rev. Polit. Sci. :67-87. Downloaded from by University of California - Berkeley on 01/04/12. For personal use only. Economy Eric helleiner Department of Political Science, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada; email: Annu. Rev. Polit. Sci. 2011 . 14:67 87 Keywords First published online as a Review in Advance on securitization, Financial regulation, Global imbalances, capital mobility January 20, 2011 .

2 The Annual Review of Political Science is online at Abstract Economists have explained the 2007 2008 Global Financial Crisis with This article's doi: reference to various market and regulatory failures as well as a macro- economic environment of cheap credit during the precrisis period. Copyright ! c 2011 by Annual Reviews. These developments had important political causes that scholars of in- All rights reserved ternational political economy (IPE) should have been well positioned to 1094-2939/11/0615-0067$ study before the Crisis . How well did they anticipate the Crisis ? Although none foresaw all the causes, a number of IPE scholars correctly identified many of the dangers associated with new models of securitization as well as accompanying regulatory failures and the politics underlying them.

3 IPE scholars were less successful in identifying the macroeconomic roots of the Crisis , particularly the role of international capital flows in fueling the Financial bubble, but some scholars did usefully explore the politics that contributed to the latter phenomenon. The study of IPE scholarship in this episode contains useful lessons for the field's future. 67. PL14CH04- helleiner ARI 14 April 2011 16:32. INTRODUCTION and often maddeningly imprecise. Few analysts foresaw the specific sequence of events that The Global Financial Crisis of 2007 2008 was unfolded; many were downright wrong about IPE: international political economy the most severe since the Great Depression the details; certainly none got the timing right.

4 Of the 1930s. Some of the world's best-known This collective failure, in Cohen's view, should Financial institutions collapsed or were nation- provoke a wide-ranging discussion about the alized, while many others survived only with lessons to be learned and the field's future massive state support. More than any other direction. Financial meltdown in the postwar period, the Mosley & Singer (2009, p. 420) question Crisis affected major Financial centers across whether Cohen's judgment of scholarly fail- the entire world (Reinhart & Rogoff 2009). It ure is too harsh, since IPE scholars are gen- also generated a collapse of international trade erally not in the business of predicting finan- more severe than any since the 1930s, and a cial crises or recessions.

5 This may be true, broader economic downturn that involved all but as Rajan (2010, p. 7) notes, almost ev- Annu. Rev. Polit. Sci. :67-87. Downloaded from regions of the globe. ery Financial Crisis has political roots. In ex- by University of California - Berkeley on 01/04/12. For personal use only. After listening to economists discuss the plaining this latest Crisis , he and many other Crisis during a tour of the London School of prominent economists call attention to the Economics in November 2008, Queen political dimensions of many of the causes, Elizabeth II famously asked (Sunday Times showing a renewed appreciation for the study 2008): If these things were so large, how come of political economy (Sheng 2009, Johnson everyone missed them?)

6 Her question crys- & Kwak 2010, Roubini & Mihm 2010). Al- talized a widespread view that the economics though political scientists working in the field profession largely failed to predict the massive of IPE may not be in the business of pre- event and had much to learn from its failure. dicting Financial crises, they should have been The sentiment has provoked a wide-ranging well positioned to identify some of these causes debate among economists about what specific in ways that anticipated what was to come. lessons can be learned from the Crisis that is, Cohen is right to ask whether they in fact were how Understanding the Crisis ought to shape so positioned and what can be learned from the the future direction of their discipline.

7 Experience. A similar debate has begun among po- In this essay, I explore these questions. litical scientists working within the field Although Cohen is correct that IPE scholars of international political economy (IPE). failed to anticipate the causes of the Crisis in a Echoing the Queen, Cohen (2009, pp. 437, comprehensive manner, I argue that the field's 436, 440 41, 438) argues that IPE scholars record was not quite as dismal as he initially had a dismal record in anticipating the suggested. Just as the economics discipline Crisis , and he compares their myopia to the contained some individuals with unusual fore- failure of international relations scholars to sight, there were a number of IPE thinkers who predict the collapse of the Soviet Union two identified many of the key sources of the Crisis .

8 Decades earlier. He is particularly critical of the After briefly outlining the chronology of the American school of IPE, whose mid-level Crisis , I highlight two complementary sets of ex- theory building and reductionist style planations put forward in postcrisis economics of method precluded a focus on structural literature. The first focuses on various market instability and systemic change. Although some and regulatory failures, whereas the second working within the British school were more explores the significance of a macroeconomic focused on the growing instability of Global environment of cheap credit during the years finance, Cohen argues they too have little to leading up to the Crisis .

9 Both of these develop- celebrate: Predictions were loosely framed ments had important causes that IPE scholars 68 helleiner PL14CH04- helleiner ARI 14 April 2011 16:32. identified before the Their analyses, as Brothers was forced into bankruptcy. Shortly well as some of the oversights in precrisis IPE thereafter, the world's largest insurance com- literature, provide important lessons for the pany, American International Group (AIG), AIG: American field, which I summarize in the conclusion. was rescued and nationalized by the International Group government. It was at this point that the severity of the THE POLITICS OF MARKET Crisis began to be felt much more strongly AND REGULATORY FAILURES beyond the North Atlantic region.

10 Because The Crisis of 2007 2008 unfolded in several of their difficulties, and European banks stages (Roubini & Mihm 2010). It began in pulled back their international loans, triggering the United States with the bursting of a hous- severe Financial problems and debt crises in ing bubble and the growth of mortgage de- countries that had been borrowing heavily from faults, particularly those involving subprime abroad. International trade credits also dried mortgages that had been extended in grow- up, bringing exports and imports to a standstill Annu. Rev. Polit. Sci. :67-87. Downloaded from ing numbers at the height of the bubble to in many sectors and countries.