Vous consultezGeneral presentation: financial innovation and the 2008 financial crisis

The 2007/08 financial crisis was, doubtless, the most critical crisis that happened since the Great Depression of 1930. The real GDP growth in the advanced economies in 2008 was only 0.5% and in 2009 those economies faced a fall in the real GDP of 3.2% (IMF, 2010a, p. 45). Even the so-called western hemisphere economies – which include Brazil – faced a fall in their real GDP in 2009 of 1.8%. The outstanding exception was Asian economies – mainly China and India – whose real GDP growth in 2009 was 3.5%. Taking China and India alone, this growth was astonishing 6.6%. Although some signs of recovery can be seen in the horizon – the International Monetary Fund expects a 4.5% real growth in the world GDP in 2010 – the recovery in the vast majority of countries is still dependent on highly accommodative macroeconomic policies and, as a consequence, is still subject to downside risks, not to mention the fact that this recovery unfolds unevenly. Additionally, the crisis in Europe is far from being solved, mainly because its banking system is still at stake (Münchal, 2010), and the recovery of the US economy is still surrounded by uncertainties, since there is a great deal of probability the US economy slip back into recession in the second semester of 2010. To get things worst, households in US and Europe do not seem willing to increase their indebtness and recover consumer spending. Finally, China’s imports seem to face a (temporary) surge, helping to increase the uncertainties regarding the recovery of the world economy (The Economist, 2010).

2 The above paragraph pinpoints the effects of the crisis in the so-called real world. However, in order to discuss properly the possibilities regarding the recovery of the world economy, it is necessary to pay attention to the health and behavior of the banks in the main economies – and, in a lesser degree, in some developing economies – since their financial system was much more affected than the financial system of developing economies. In this aspect, the recovery tends to be even more slow in comparison to the one observed in the real world, since markets are less willing and able to support leverage and “the private credit demand is likely to rebound weakly as households restore their balance sheets” (IMF, 2010b, p. 3). The crisis, thus, has exposed underlying vulnerabilities in the banking system of the major economies and, in a lesser degree, in the banking system of some developing economies through spillovers. As a consequence, the recovery of the banking system of major economies has a great deal of possibility to not unfold smoothly, leaving the systems surrounded by huge uncertainties in the near future.

3 These uncertainties are even more difficult to handle as one knows that some seeds that initially caused the problems in the US financial system and, later, in the financial systems of the major economies are still there. In other words, the huge financial innovation process that took place after the liberalization of the major financial systems in the 1980s that led to high leverage and risk taking by banks as if the business cycle has over was not deeply changed (Morris, 2008). Aside from this liberalization, the prudential regulation rules (Basel I and II) implemented in end of the 1980s also helped banks to embark in a fierce financial innovation and risk taking process with the decisive help of the rating agencies (Morris, idem). The changes in these rules announced in last September, however, did not seem to improve the solidity of the banks since they raise great uncertainties regarding the ability of some country banks to raise enough capital to meet the new rules, regardless the time to adopt the new rules given by regulators (FT, 2010). Moreover, incentive-type rules such as Basle, seem do not prevent the emergence of toxic products as banks envisage great profit opportunities in booms.

4 This special issue of the Journal of Innovation Economics specifically addresses these aspects of the 2007/08 global crisis. This issue takes a look at the various dimensions possessed by this crisis. The main aspect treated here is the financial innovation dimension and its connection with this and other financial crisis, both historically and theoretically since a typical capitalist crisis evolves through financial innovations that inflates banking credit and, finally, led banks and other financial institutions to take too much risk through speculative and ponzi financial relations, as posed by Minsky (1986). Under such circumstances, financial innovation plays a key role since it helps banks and other financial institutions to not only reach new niches in the economy, but also to bypass some restrictions imposed by regulators. In this aspect, it is important to notice that the financial liberalization, in a broad sense, also plays a decisive role since it helps capital to flight from one country to another, creating difficulties for the international financial system to absorb and efficiently allocate it. These negatives effects are helped by global imbalances created by the huge international capital inflows generated by the capital account surpluses of China and other emerging countries. These are the themes treated by Pinto and Sobreira’s “Financial Innovation, Crisis and Regulation: Some Assessments.” On the other hand, Altuzarra et al., in “The Role of Global Imbalances as a Cause of the Current Crisis” deals specifically with how the imbalances referred above can help to explain the current crisis.

5 Despite the wave of financial liberalization that took place the vast majority of west countries since mid 1980s, the implementation of more restrictive prudential regulation in some countries seems helped to avoid partially some negative impacts of the crisis or, at least, helped the impacts of the crisis to last only for a short period. These are the topics treated in Ramos-Tallada’s “Financial Distress and Banking Regulation: What’s Different About Spain”, where the author shows that stricter capital adequacy ratios and the consolidation accounting rules related to off-balance sheet securitization, together with the fact that banks were required to make dynamic provisions on the basis of the business cycle average by raising the reserves cushion against loans losses during the phase of high liquidity and fast credit growth helped to explain the absence of major bailouts in Spain in the aftermath of the crisis. Sobreira and de Paula, in “The 2008 Financial Crisis and Banking Behavior in Brazil: The Role of the Prudential Regulation” also show how a stricter prudential regulation that obliges banks to follow a capital adequacy ratio of 11% instead of 8% as suggested in the original Basel Agreement, and a deep adjustment implemented in the aftermath of the real plan make the Brazilian banking system more resilient and more resistant to the negative impacts of the crisis.

6 On the other hand, when we look at Europe, it is shown that some fiscal rules implemented in order to create some degree of coordination in the European fiscal front did not help some countries to avoid the so-called second wave of impact of the crisis – that is, a confidence crisis triggered precisely by weaker fiscal outlooks (IMF, 2010b, idem, p. 7) as a consequence of increasing fiscal deficits partially used to offset the negative impacts of the crisis. Thus, Creel and Sarraceno in “European Fiscal Rules after the Crisis” question the relevance of trying to strength this fiscal framework – namely the Stability and Growth Pact (SGP) – which has been ineffective over the years. The authors argue for a reform of SGP that would lead EU countries to adopt a golden rule of public finance.

7 The final papers of this issue do not deal specifically with macroeconomic aspects of the current crisis as described above. These papers are more akin to sectoral answers to the effects of the crisis or, generally speaking, financing strategies. Thus, Ashta and Assadi’s “Should Online Micro-Lending be for Profit or for Philanthropy? DhanaX and Rang De” show the importance of develop micro-lending platforms for poor people that, typically, do not have access to credit in normal times and whose credit access is even worst in times of crisis. The authors studied the case of the two micro-lending website showing their importance as mechanisms for poverty alleviation. Matouk’s “Financing Innovation: A Historical Approach”, on the other hand, travels in the history of financing innovation, depicting two eras in the history of innovation, the era of the inventor and the era of the researcher, and shows how the financing of innovation models evolved under these eras. In this aspect, it is important to show that crises such as the 2008 crisis could blur the view of financial system and check their willingness to advance credit for innovation that is typically more risky than credit for “normal” business and, as such, requires a more long run perspective. Finally, Boya and Monino’s paper present a test model that develops the possibility to examine the whole of exogenous information on the Stock Exchange variations. The statistic performance of the model during the empiric application shows its ability to anticipate correctly the movements of prices of the underlying credit which is of great importance as a policy tool.