The Globalization Reader, 5th Edition

26 The Twin Excesses – Financialization and Globalization – Caused the Crash

Ashok Bardhan

In their effort to explain the global crisis analysts have identified lax regulation and other attributes of the financial system as the principal culprits. To grasp fully the reason it also needs to be recognized that this is the first crisis of the modern era of globalization. If the proximate cause is the “laissez faire” to “laissez financer” progression in free-market idolatry, leading to bubbles in asset prices and the subsequent crash, then the facilitating condition was yet another quasi-bubble – a bubble in globalization. It may be easier to appreciate the virulence and speed with which the crisis has spread if we recognize that in addition to over-financialization domestically, there was perhaps over-globalization internationally.

While over-globalization was evident in ever-faster trade and capital flows and increasing off-shoring of production, over-financialization could be seen in the rise in the size of financial assets relative to the real economy as indicated by gross domestic product. Globally, the holdings of financial assets, comprising equities, government and private bonds and bank deposits, ballooned way out of proportion to global GDP, the primary underlying measure of real economic activity (see Figure 26.1). Similarly, the gross market value of outstanding derivative contracts more than doubled between mid-2006 and mid-2008. The share of financial services ...