The Shifts and The Shocks: What We Have Learned – and Have Still to Learn – from The Financial Crisis |

The Shifts and The Shocks: What We Have Learned - and Have Still to Learn - from The Financial Crisis


The global financial crisis that started in 2008 had its roots in the Asian financial crisis a decade earlier. After the 1997 Asian crisis, countries in the region took steps to protect themselves from a recurrence of the financial disaster. These led to macroeconomic shifts across the globe, creating the conditions for the later crisis, according to Mr Martin Wolf, chief economics commentator of the London-based Financial Times. Mr Wolf drew on his new book, The Shifts and the Shocks, to speak about the lessons of the global financial crisis in a talk chaired by Professor Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy.

The shifts

After the Asian financial crisis, countries in the region such as China decided to shore up their defences by accumulating large amounts of foreign reserves, said Mr Wolf. They did this by printing more money to buy foreign assets – especially American ones – which made their currencies weaker. As a result, their exports became cheaper, so Western consumers bought more Asian products instead of goods produced locally. This led to a drag on production and employment In Western economies.

In response, authorities in the West lowered interest rates to encourage consumers to spend more. “Before the Asian financial crisis, the real interest rate in the UK was 4 per cent,” said Mr Wolf. “Then there was the crisis, and the real interest rate halved from nearly 4 per cent to 2 per cent. It is perfectly coincident, and I can’t think of any other reason for it.”

The shocks

The lower interest rates led to a higher demand for property, which in turn resulted in house prices increasing. As property values rose, more people crowded into the market in anticipation of future profits, creating a self-reinforcing cycle. “Spain and the United States, for example, responded to the massive rise in the price of real assets… by building immensely more houses,” said Mr Wolf.

After the Asian financial crisis, the large amounts of money flowing from emerging economies like China to developed countries like the US also created an easy line of credit that helped sustain the Western property market booms. The capital stock in the US and euro zone soared, but capital wasn’t being used efficiently, noted Mr Wolf. “It was invested or wasted largely in consumption and housing bubbles – the construction of useless houses, as it turned out – in these economies driven by the credit boom.” The financial sector also contributed to the crisis by mispricing the risks of housing assets, leading to massive over-leverage.

Eventually, however, the property and financial bubbles burst, causing a wave of crises that engulfed the Western countries in the late 2000s. “This was a massive crisis and it’s not over yet. It has a huge shadow and echo… and the environment of crisis is still with us.”

The aftermath

Mr Wolf said the US government’s quick action in stemming the crisis and cleaning up the financial sector prevented the situation from worsening. “The US allowed a lot of defaults and lots of people were put into bankruptcy. It was a terribly brutal process, but they did have a debt reduction that hasn’t happened in Europe.”

In the aftermath of the crisis, there was also a massive series of interventions to save weak financial institutions all across the West, and interest rates were further slashed to near zero to try and stimulate economies. But for all the attempts to repair and strengthen the financial system, it remains in essence the same system, he said. “The new orthodoxy is an improvement of the old orthodoxy, but it is likely to fail because it neither provides a route for demand that doesn’t involve more credit, nor does it create a really robust financial sector.”

Instead, governments should increase their public spending, since the world has not figured out how to generate adequate demand without creating more destabilising credit markets, said Mr Wolf. “The public sector is able to borrow in many countries at exceptionally low rates. We also need faster debt restructuring, but more public investment would be the best response.” He also thinks banks should also be forced to reserve more capital in future.

Historical macroeconomic patterns, such as capital flowing from the emerging economies to the developed ones, should also be reversed, said Mr Wolf. “We need to make the macro-economy… much more balanced and the finance sector much less credit-fragile, and figure out how to deal with global credit bubbles,” he said. “That’s the challenge. Until we do, we will have more of such crises.”

On 11 November 2014, Mr Martin Wolf, associate editor and chief economics commentator of the London-based newspaper The Financial Times, gave an evening talk titled “The Shifts and The Shocks: What We Have Learned – and Have Still To Learn – from The Financial Crisis”. The talk was chaired by Professor Kishore Mahbubani, Dean of the LKY School. A much-decorated journalist and author, Mr Wolf was awarded the Commander of the British Empire in 2000 for services to financial journalism. He also won the Overseas Press Club of America’s prize for best commentary in 2014, and was named the Commentariat of the Year in 2009 at the Comment Awards sponsored by Editorial Intelligence. A member of the British government’s Independent Commission on Banking between June 2010 and September 2011, he has also been included multiple times in the Foreign Policy magazine’s annual list of Top 100 Global Thinkers. He is the author of four books and an honorary fellow at Oxford University.


The severe financial crisis that hit high-income countries after 2007 was an event of immense economic and political importance. It undermined both the influence of the West in the global order and the credibility of the western financial system. Why did the crisis happen? Have we learned the right lessons from it? What are its implications for the future? Th­ese are the questions Martin Wolf will address in his lecture, which is based on his new book, ­The Shifts and the Shocks.


Mr Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times

Tuesday, 11 November 2014
5:15 p.m. - 6:30 p.m.

Lobby, Oei Tiong Ham Building
469C Bukit Timah Road
Singapore 259772

Seats are limited and will be available on a first-come, first-served basis. Kindly register your interest in attending online.

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