Financial (or Capital) Globalisation

This would be useful information and analysis for the GCE Cambridge A Level History and General Papers; and would more be useful for the GCE Cambridge O Level Social Studies paper (Syllabus 2267 rather than Syllabus 2204).

It is a summary/review of Chapter 2 in Part Two of <The End of Finance>. The term ‘capital’ refers to financial capital. The book describes one subset as ‘portfolio investment’. This has traits similar to subprime mortgages – which were sold and purchased on secondary markets; such capital can be recalled and disbursed quickly. One can consider the ‘capital flight’ during the 1997 Asian Financial Crisis as an example. The authors argue that such volatile inflows and outflows form the crux of crises from Mexico (1995), Southeast Asia (as written above), Russia and Brazil (1998), Turkey and Argentina (2001). Hence, history continually repeats itself. Why does this happen? Arguably changes in market confidence, which ironically can be a self-fulfilling prophecy… [Foreign Direct Investment were deemed less responsible for fluctuations of international capital availability and transfers].

This globalisation was underpinned by 3 things: international freedom of capital flows; ostensibly unrestricted enlargement of money supply; and central banks acting as a lender of last resort to prevent collapse (for most of the years after 1945, this was the US Federal Reserve; and perhaps of greater prominence in recent decades, its Governor Alan Greenspan). The trend began in the mid 1970s. [Technology was also pinpointed as a catalyst by Walter B. Wriston (August 3, 1919 – January 19, 2005), a banker and former chairman of Citicorp, in 1988. It should be surmised though that technology’s role should be considered contributory, in my opinion.]

Relating the recent subprime crisis (2007), it had been the ‘international capital market’ who targeted the credit shaky borrowers in the US with ‘predatory practices’, and ‘often underhand and occasionally fraudulent’ methods. This has some parallels to the 1970s ‘oil shocks’ and resultant ‘petrodollars’ which flooded Latin America, providing the structural foundations for the Debt Crisis of the 1980s. The negative repercussions from the subprime collapse amounted to an estimated net loss of homeownership for approximately 1 million American families (quoting from Subprime Lending: A Net Drain on Homeownership, 27 Mar 2007, Center for Responsible Lending – headquarters in Durham, North Carolina, US)


According to Investopedia article <Subprime Loan>: Subprime borrowers ‘have a reasonable chance of defaulting’ i.e. have a higher risk of being unable to repay their debt.

For the US city of Cleveland, Deutsche Bank Trust (agent for bondholders) became the biggest property owner in late 2007 by virtue of retaking homes when people failed to pay. Mortgage brokers, for the majority, did not inform the borrowers adequately that these “new sub-prime mortgages would “reset” after 2 years at double the interest rate.” See <The downturn in facts and figures> British Broadcasting Corporation. (21 Nov 2007).

Wriston’s works can found at his Tufts University archives.

More on the Debt Crisis from <10. Debt Crisis of the 1980s> by Japan’s National Graduate Institute for Policy Studies (GRIPS). [Do note that their analysis for the causes of the crises may differ.]


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