ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Understanding the Financial Crisis

This paper attempts to understand the nature of the current financial crisis by identifying the main characteristics of the system that became vulnerable to collapse due to falling asset prices. It highlights the shadow banking system, which lacked the explicit backing of a monetary authority on the one hand, and escaped largely its regulation on the other. This system fostered a circular rather than a vertical network of credit interdependence, which had its advantages but was also spectacularly vulnerable. The financial system may be stable and flush with liquidity through injection, but in the absence of sufficient demand for liquidity from the real economy, the depressive economic conditions may continue. The politics of trying to save capitalism by saving only the financial capitalists may well turn out to be the last twist of the knife from free market fundamentalism to pave the way for a deeper and lasting recession.

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