The Global Financial Crisis [...]... economies, in the postwar period until the 1980s In China and other smaller Asian Tigers, both exports and foreign investments fuelled economic miracle since the late 1980s S Nayak, The Global Financial Crisis: Genesis, Policy Response and Road Ahead, DOI 10.1007/97 8-8 1-3 2 2-0 79 8-6 _1, © Springer India 2013 3 4 1 Pathology of the Crisis The classical economics that dominated the economic policy for centuries... life The laissez-faire economic policy, gold standard discipline, and weak Federal Reserve Bank could neither rescue the banking system nor reflate the declining economy It was not until 1933 with the New Deal, which abandoned obsolete economics of laissez-faire and gold standard and strengthened the Federal Reserve Bank, that the economy took a U-turn and resumed its course of recovery After the roaring... boom, and cheap money raised demand for home loans further The issue of these securities by the leading investment and commercial banks and rising real estate prices strengthened the ratings of these securities and promoted their secondary market trading Everyone in the chain was a gainer, and the economy sustained higher growth rate Global economy raced ahead without any interruption Housing and Real... attack marked the worst disaster that struck the US economy in the heart of the USA and global capital market and the citadel of American capitalism and the ideals it upholds The economic scenario and investment climate was so badly damaged by these two events that Fed and the government had to resort to extraordinary measures to restore investment confidence and momentum of the economy to the levels experienced... investment also characterized the phase of globalization The change in the economic policy responses led by the USA and UK were followed by Europe as well as the emerging market economies The resurgence of unprecedented growth in trade and cross-border investments galvanized the global economy with the highest ever economic growth for more than two and half decades driven primarily by the buoyant US economy... securities The year 2008 marked the onset of the century’s sixth but major and the worst economic crisis which erupted from the subprime lending spree having much deeper and wider implications on the degree and coverage of its impact in the USA and the global economy US Economy Revives and Skips Depression: Thanks to Keynesian Wisdom The mighty, the invincible, the heartland of capitalism had finally fallen... halted by the hiccup of Y2K dot-com bust, the US economy seemed fatigued and showed the signs of slowdown Unprecedented and historically long phase of growth had no parallel in the US economic history In the wake of slowdown caused by the weak consumer spending and lackluster investment demand, the low interest rate policy of the Fed since 2000 stimulated growth on the steam of the housing and real... resulted in the Fed funds rate going up and rising to 6% by mid-1995 from a low 3% in 1993 It declined to 5.5% in the beginning of 1996 and remained in the range of 5–5.5% until the end of 1998 and reached a high of 6.5% in mid-2000 The dot-com bust in April 2000 created the panic in the stock market, but the Fed reacted only when the signs of a slowdown of the economy became visible on the macroeconomic... path is clearly dominated by supply-side factors like the increase of the labor force, the accumulation of physical and human capital, and advance of technology.… The observed growth paths are not smooth They are punctuated by recessions, large and small, and by periods of excess demand” [2, p 184] The labor and capital, and the technology embedded in them determine the growth potential of an economy... itself in deep crisis and due to its sheer size engulfing also the global economy 1 The first one was the Great Crash of 1929 which later culminated into the Great Depression of the 1930s The depression was cured over a prolonged period of a decade through the Keynesian prescription of abandoning laissez-faire economics, adopting deficit financing, and jettisoning the gold standard The old-fashioned capitalism . Global Financial Crisis: Genesis, Policy Response and Road Ahead, DOI 10.1007/97 8-8 1-3 2 2-0 79 8-6 _1, © Springer India 2013 And there is the potential of a U.S. Crash, less likely because monetary and. larger and more fundamental issues of the struc- ture and dynamics of the US economy, American capitalism, backlash of globaliza- tion, and the need for the further reform of the global economy and. The Global Financial Crisis