“A New Approach for Global Economic and Social Growth” Challenges to International Cooperation in the Wake of the Global Crisis

Whether the global crisis that has hit the world economy so severely since August 2007 was rooted in macroeconomic causes is an open question. To be sure, the trigger and proximate causes of the crisis were essentially financial, originating in a specific segment of the US financial system, i.e. the subprime mortgage market. Nevertheless, I believe that financial excesses could not have developed to the extent they did if the macroeconomic environment had not been characterised by large saving-investment imbalances, very low interest rates and asset price misalignments. These factors helped create the conditions in which financial innovations and regulatory failures caused serious dysfunctions in the US and global financial system. The general climate of excessive optimism that those macroeconomic conditions supported certainly contributed, with risk managers and supervisors allowing financial vulnerabilities to grow basically unchecked. Signals of macroeconomic stress, which interacted with financial system flaws to create very serious fragilities, had been manifest at least since the late 1990s. The most evident were the dramatic fall in the saving rate of American households, from around 7 per cent in the early 1990s to near zero in 2005-2007, and the persistence and significant widening of the US external deficit (from 1.6 per cent of GDP in 1997 to 6 per cent in 2006), against growing surpluses in a number of emerging economies, in particular China (from 1.3 to 11 per cent o