Preface

By 2010, the world has finally recuperated from a financial crisis which has been – by far – the worst economic episode to occur since the Great Depression in the 1930s. It definitely merits the label “crash” rather than “crisis,” hence the title of this book. To paraphrase the Keynesian economist Hyman Minsky, who formulated the best explanations for why financial systems have a built-in, endogenous tendency to land themselves in trouble, “it” did happen again! While the real economies in general did not crash as they did in the 1930s, the financial parts of the economy certainly did, or at least came very close to doing so. The crash in the financial system also triggered the simmering sovereign debt crisis in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain).

Hundreds of banks in the USA and Europe have been closed by their supervisory authorities, forcibly merged with stronger partners, nationalized or recapitalized with taxpayers’ money. By mid-2010, banks and insurance companies had already written off some $2,000 billion ($2 trillion) in credit write-downs on loans and securities. Several hundred billion dollars were yet to come. An estimate from the International Monetary Fund (IMF) in April 2009 threatened that the ultimate loss to the world’s banks might well exceed $4,000 billion, an indication of the perceived seriousness of the situation at that point in time, at the very height of the crisis. The forecast total losses were later scaled down to $2,800 billion in October 2009, and to $2,200 billion in October 2010. These sums may be compared with a world gross domestic product (GDP) of some $58,000 billion in 2009. Dividing one number by the other, we find that global write-downs have been almost 4 percent of world GDP. We shall find, however, that they were very unevenly spread among countries, with the USA and the UK bearing the brunt of the costs. On average, the world banking system lost almost half of the capital base it possessed at the beginning of the crash in 2007.