A decade ago, between mid-March and mid-September 2008, the investment bank Bear Stearns, which had played with asset backed securities, imploded and had to be taken over by J P Morgan. Soon thereafter, government sponsored mortgage backers Fannie Mae and Freddie Mac had to be bailed out and then the investment bank Lehmann Brothers filed for bankruptcy. That heralded a crisis which has had massive external effects and is in various forms still with us.

While analyses of the fundamental factors that led to the crisis vary, there is consensus that a combination of an excessive overhang of debt in corporate and household balance sheets and unsustainable asset price inflation in equity and housing and real estate markets were proximate determinants of both the intensity of the crisis and the manner in which it unfolded. In fact, many observers initially interpreted what was really a system-wide crisis as a more limited phenomenon that primarily afflicted the sub-prime mortgage market and the asset backed securities that were built on it.

A decade after the financial crisis in the US and other advanced nations tipped the world into the Great Recession, developing countries are poised to pay the price for the interventions adopted by developed country governments and central banks to save the international financial oligarchy from its self-made crisis. The cheap money and quantitative easing policies adopted flooded developing countries with cheap liquidity which fuelled debt-financed expansion and asset price inflation. Unlike in the period before the financial crisis much of this debt was incurred by the private, especially corporate, sector or in poorer countries by governments that had earlier been saved from a debt crisis by low interest rates and debt write offs. The result is the global debt levels (relative to GDP) are now at levels higher than before the 2008 crisis. In addition, there has been a huge accumulation of foreign portfolio investments in equity and property markets in many emerging economies, with growth tending to be extremely inequalising.
The institutional lectures will trace how, on the one hand, while the initial use of the fiscal lever did lead to a V-shaped recovery, the subsequent exclusive reliance on monetary policy saw the growth rate fall and settle at a new normal that bordered on stagnation. On the other hand, the availability of cheap liquidity allowed finance to expand credit and invest in asset markets in developed and developing countries, resulting in the resumption of unsustainable debt accumulation and asset market price inflation. Since depressed demand kept the prices of goods and services under control, monetary policy remained loose, despite its role in fuelling asset market speculation. In the event, the global economy finds itself overcome by vulnerabilities of the kind that prevailed prior to the financial crisis of a decade back.
It is in this context that developed country central banks, realising that easy money policies have generated a bubble that is poised to burst, are deciding to unwind the extremely unconventional monetary policies they have adopted. The resulting liquidity squeeze and rise in interest rates has already triggered capital flight from the developing countries and set off a sharp depreciation of their currencies. Besides threatening to precipitate financial and currency crises, this is restricting demand as well as forcing firms indebted in foreign currencies into bankruptcy.
This developing country impact of developed country policies, poses new challenges for social, economic and political development in the former countries. This has triggered major political changes in countries as far apart as Argentina, Turkey, India and South Korea. But as of now the danger of a deep crisis, with the developing world as the focus this time, is great. These economic and social developments are posing new challenges to the process of development itself. The Institutional lecture series (three) will identify and seek ways to address these challenges.