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Chapter 8 asks whether the financial crisis will happen again. Economist Hyman Minsky observed a cyclical pattern. Stability in financial markets breeds instability as lenders and borrowers keep pushing the limits. The years 2005–2007 saw a remarkable expansion of risk-taking at major firms just before the market collapsed in 2008, providing a demonstration of the Minsky cycles at work in the financial crisis. Minsky saw in the financial system the dynamic of “normalization of deviance” that sociologist Diane Vaughan saw in the Challenger space shuttle disaster. If that seems to result in success, then they lower their standards yet further. Minsky saw the cycle emerge regularly in credit standards, when lenders would respond to the lure of profits by taking increasing risks, while Vaughan studied a production-driven government agency, NASA, whose leaders yielded to pressure from the political process to perform without interrupting a flight to take account of growing risks.

Chapter 5 deals with the domestic and external causes of the debt crisis of the 1980s and the consequent “lost decade” of Latin American development. It then analyzes the shift toward and diversity of market reforms, including their recent rejection by some countries. The outcomes were a stronger integration into world trade and investment flows, as well as greater fiscal discipline and low inflation but, a few countries aside, slower economic and productivity growth and stronger business cycles. The steady rise in public social spending and expanded coverage of basic social services, which can be seen as “democratic dividends”, were accompanied by a deterioration in employment and income distribution from the 1980s to the early 2000s and a lost quarter century in poverty reduction, followed by a significant improvements in all of these variables during the economic boom that took place in the early XXI century.

This chapter discusses the old style of the financial cycle and its eventual demise. The work of Keynes was a turning-point between one epoch of economic thinking and another. That it was also associated with another turning-point, in what economists call the ‘real world’, has not been given sufficient attention. Keynes was writing during and just after the world economic crisis of 1929–34; this is background to what he writes about. At that time it was obvious to his readers that there was this association; not only his occasional pieces, to be collected as Essays in Persuasion, but also his major works, had a topical side to them. They reflected his perception of what was going on around him — the passage from one way of organizing economic affairs to what would have to be another. Other economists did not see it like that. They had their own idea of what was happening; they looked upon it as an example of a familiar type of disturbance which was called the trade cycle or business cycle. It was already many years since that had first been recognized.

This chapter considers the phenomenon of financial globalization. This type of globalization is organized within the role of financial intermediaries, especially banks, in the proliferation of financial cycles. Firstly, this chapter reviews the merits of financial globalization with particular attention to the effects of unhindered capital flows. Secondly, it analyzes these effects against the financial system as a whole of the balance sheet management done by the financial intermediaries, after which the next section applies these insights to four certain episodes; namely, the 2008 liquidity crisis in Korea, Japans experience in the 1980s, US financial crisis of 2007–2009, and the European crisis that began in 2010. The chapter concludes with an emphasis on the importance of macro-prudential policies.

This chapter summarises the main ideas from the book. One of these being that emerging economies are now becoming a more normalized asset class, as the frontier between OECD and emerging markets erodes. A paradox highlighted in this concluding chapter is the partial decoupling between financial and political cycles in emerging economies in comparison to an increased financial sensitivity to politics in developed economies.

This chapter explains the nature of endogenous financial crises by drawing on an alternative approach offered by Hyman Minsky, with particular emphasis on his understanding of the incentives of speculators and of financial cycles in relation to Frank Knight and John Maynard Keynes's stress on uncertainty. It discusses the main assumptions of Minsky's financial instability thesis, including the view that fragility grows over the extended period of prosperity as risk is rewarded, leading to the taking of greater risk. It also considers the “Minsky Moment,” when an overleveraged system encounters financial difficulties, along with the high cost of free financial markets. It suggests that debt-driven fiscal policy was not effective in rectifying the distortion to the economy caused by finance when the long-running accumulation by financialization faltered.

The intricate links between elections and financial markets are analysed in this chapter, focusing on the Brazilian presidential elections of 2002, 2006, and 2010 to assess the reaction of investors to elections covering a decade. While OECD countries, including Greece and Hungary, faced major financial disruption in the aftermath of presidential elections and government changes in 2010, nations including Brazil had smooth election processes in the same year and experienced more muted and less disruptive reactions from the financial markets. To analyse the factors influencing this, the chapter explains how aspects of the confidence game have changed, and how as the case of Brazil shows, political and financial cycles can decouple.

The chapter looks at how recurrent events might be dated by using a number of series rather than a single one. There is no one method to do this, but in many cases, the procedures come up with rather similar results. Much depends on how one wants to use the dating information. If it is for judging models or evaluating some macroeconomic propositions, then the ability to automate the selection process easily would be a paramount consideration. Alternatively, if it was desired to establish a definitive dating of cycles in activity or financial series, then it is probably the case that a variety of methods would be used with some judgment applied when determining the weight given to each. Further work is needed on how the methods perform when faced with simulations from estimated models rather than using actual data, as their effectiveness is unclear in such a changed environment.

This chapter revisits the system of flexible exchange rates that emerged following Bretton Woods. The very success of floating rates in promoting real and financial integration is now spurring efforts to reintroduce elements of market segmentation. Flexible exchange rates does not fully insulate domestic financial sectors from the global financial cycle and policy spillovers. In this context, capital controls can be considered a second-best option; macroprudential policies would be preferable but it is unclear whether they can be deployed effectively.