In this essay, the author shows that the current global financial crisis sheds more light on macroeconomics as a subject than the other way around.

By Neha Bandi, 16th September 2012

The 2008 global financial crisis was an outcome of certain major aspects of macroeconomics. Low interest rates prevailed for almost a decade and spawned a huge surge in mortgage lending, led by a long record of growth with lower inflation in the pre-crisis period. These conditions led financial institutions to expand the realm of structured financing and securitisation to boost revenue sources, resulting in huge growth in the alternative instruments functioning outside the rigour of formal regulation. Extremely easy monetary policy led to the global macroeconomic imbalances with developed markets facing deficits and emerging markets accumulating huge forex resources. Deregulation of financial markets reduced the distance between commercial and investment banking, sizeably relaxing norms for leverage quality applicable to financial institutions and intermediaries. Relaxed leverage ratios expanded the risk exposure of institutions.

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