Global financial architecture, global imbalances and the future of the dollar in a post‐crisis world
| Published date | 22 February 2011 |
| Pages | 18-32 |
| Date | 22 February 2011 |
| DOI | https://doi.org/10.1108/13581981111106149 |
| Author | Karim Pakravan |
| Subject Matter | Accounting & finance |
Global financial architecture,
global imbalances and the future
of the dollar in a post-crisis world
Karim Pakravan
Department of Finance, DePaul University, Chicago, Illinois, USA
Abstract
Purpose – Financial globalization and global imbalances are two facets of the same phenomenon,
which has resulted in the worst global economic and financial crisis since the Great Depression.
The purpose of this paper is to analyze the complex interaction of several mutually reinforcing trends
and factors – the global monetary easing of 2001-2004, financial innovation, regulatory failure,
in particular in the USA and the UK, US fiscal indiscipline and Chinese currency manipulation – that
contributed to the global financial crisis. The key to a return to global financial buoyancy will be the
coordinated resolution of the global imbalances over the medium term, as well as the establishment of
a strong global financial regulatory framework focusing on both macro- and micro-financial risks.
Design/methodology/approach – In the paper, the author analyzes the role of the interaction of
financial innovation, regulatory and global imbalances in the creation of the real estate bubble, shadow
banking and the eventual collpase of what the author dubbed the Banking 2.0 structure (1980s).
Findings – The main findings are that these factors contributed to a flattening of the yield curve in
2004-2006 despite the tightening of monetary policy and growing US fiscal deficits. Moreover, while
the US dollar is on a long-term weakening trend, the lack of alternatives means that it will maintain its
role as a reserve currency.
Originality/value – This paper focuses on the role of the global imbalances in triggering the
financial crisis and shaping the role of the dollar in the post-crisis world.
Keywords United States of America,US dollar, World economy, Banking, Monetarypolicy
Paper type Research paper
The global financial crisis is rooted in the complex interaction of several mutually
reinforcingtrends and factors. Each of thesefactors taken in isolationhad the potential to
negatively impact the global economy and financial markets. The convergence of these
trends and factors created a financial crisis of epic proportions that has devastated the
global economyand severely weakenedits longer term prospects. Globalmacro-economic
imbalances have played a central role in the on-going financial crisis that has yet to be
resolved.Understanding these factorsand their interaction is essentialfor the elaboration
of long-term policies to prevent the repetition of the current disaster. Furthermore,
resolving the global imbalance equation will be central to returning the global financial
markets to buoyancy and preven ting a dollar crisis.
The purpose of this paper is threefold. First, to analyze the factors thathave caused
these risingimbalances. Second, to demonstrate how other majorfactors such as financial
innovation, the regulatoryfailure in the US and other G-7 countries, US fiscal indiscipline
and Chinesecurrency undervaluation combined to facilitate the financial crisis. Finally,to
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The author would like to thank his colleague, Professor Elijah Brewer for his valuable comments
on this draft.
JFRC
19,1
18
Journal of Financial Regulation and
Compliance
Vol. 19 No. 1, 2011
pp. 18-32
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981111106149
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