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Geoforum 41 (2010) 837840

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Geoforum
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Editorial

Confronting the quadruple global crisis

1. Introduction out of recession, partly by squeezing concessions from its workers.


France and the southern nations of the Eurozone tried to ride the
The crisis of global political economy that arrived in September crisis out, demanding concessions from workers while maintaining
2007 has had four distinct phases, none of them yet resolved. Now safety-net expenditures. These measures increased scal decits in
the Eurozone hangs in the balance, and ever more nations are the EU to 6.8% of GDP for 2009, well above the Unions constitu-
caught up in this slow-motion global tsunami, whose root causes tional 3% limit. Germany emphasized the need for renewed scal
must be understood before it can be tamed. The crisis has pro- discipline, but this call was resisted by Southern European nations
foundly affected economics. The tyranny of polite public disagree- especially the PIGS nations of Portugal, Italy, Greece, and Spain.
ment that characterized economics in the neoliberal era has ended: Meanwhile, the European Central Bank was reluctant to cut inter-
Nobel-Prize winners are advocating Keynesian policies and issuing est rates or to provide liquidity. This atmosphere of EU rule-viola-
challenges to empowered nance. tion and policy confusion led foreign exchange markets to short
More than this is needed. Geographers have unique insights the Euro.
that can help address this quadruple crisis. For what is sorely In October 2009, days after George Papandreou was sworn in as
needed now and what economics is poorly suited to develop Greeces Prime Minister, it became clear that Greeces national def-
is spatially-aware, multi-level, structural analysis, with special icit was far larger than projected. This marked the beginning of the
attention to the socially excluded and with a creative air. This de- third crisis phase, the Eurozone meltdown. While Greece reduced
scribes rather precisely the perspective embodied in the everyday public benets and wages, it also had to borrow more heavily.
practice of much of contemporary geography. A brief comparison The nancial markets reacted and sent Greek bond rates into the
of the structural xes of California and Greece in the global crisis stratosphere. Prime Minister Papandreous appeals to the European
illustrates the potential gains from multi-level analysis of different Community for aid yielded only some temporary loan guarantees.
spaces. Fiscal-balance problems soon spread to other PIGS. Spain and Por-
tugal have been forced into tax increases and scal austerity mea-
2. The four stages of the global crisis sures, thus reducing demand and increasing unemployment. This
evidence of the EUs fragility has led to renewed speculative at-
The global economic crisis has gone through four distinct, inter- tacks on the Euro. Efforts to rein in and re-regulate banks have
locking phases, none of which are yet resolved. The crisis began been hampered by the unresolved competition of Eurozone-mem-
with the subprime crisis, which was triggered by the September ber nancial centers with the City of London and Wall Street.
2007 run on Northern Rock bank in the UK. This led to the melt- Megabanks and mega-traders have thus far successfully blocked
down of the asset-backed commercial paper market, which had - efforts to rein in their highly-leveraged speculation strategies.
nanced the booming market for mortgage-backed securities and This brings us full circle back to Wall Street and the fourth
other collateralized debt obligations. After this spasm of fear para- phase of the crisis the crisis of dysfunctional, powerful nance.
lyzed investors, megabanks were no longer able to obtain nancing The megabanks that survived 2008 near-death experiences have
in the open market for the securities they had been creating from by 2010 recovered their poise and reversed a large portion of their
risky loans. So megabanks had to take this paper back onto their equity-price reversals. The primary battleground has been a reform
balance-sheets, leading to large losses. effort in the US Congress. A combination of huge political contribu-
The steady slide to non-performance by subprime and other tions and the hiring of ex-Congress ofcials as lobbyists has helped
loans led to phase two: an unprecedented crisis of megabank insol- the megabanks to fend off the most potent of the reforms. By April
vency in the US and Europe. Desperate efforts to use private equity 2010, zero-sum speculation against weak market participants re-
and sovereign-wealth fund assets to recombine and recapitalize sumed with a vengeance: megabanks and funds began betting sys-
weak megabanks came to an end in September 2008, when an at- tematically against the currencies and assets of nation-states
tempted rescue of Lehman Brothers failed and American Insurance whose governments they suspected could not meet their scal
Groups insolvency was suddenly exposed. The Federal Reserve and obligations. That these same funds reluctance to subscribe these
the Bank of England improvised to keep the nancial system liquid, same governments debt issues led to a self-fullling prophecy
and massive government outlays were approved in the US and the did not exercise anyones conscience too strongly.
UK to overcome looming decits of bank capital. This behavior is cutting off the last remaining free source of
These rst two shocks pushed most economies around the demand in crisis-affected parts of the world economy. Businesses
world into recession; job losses were especially massive in the in the US, UK, and Europe are in no position to invest robustly;
US and UK. European Union (EU) nations reacted in very different and consumption expenditures remain anemic. Megabanks gains
ways to this spreading calamity. Germany tried to export its way today are zero-sum captures in a world whose coordination

0016-7185/$ - see front matter 2010 Elsevier Ltd. All rights reserved.
doi:10.1016/j.geoforum.2010.08.005
838 Editorial / Geoforum 41 (2010) 837840

mechanisms were created for the beggar-thy-neighbor neoliberal nomics, Akerlof and Shiller (2009) argue that perceptual errors in
era. The world desperately needs to move into a new Keynesian markets are inescapable, and can cause inefciencies or even col-
era; but the coordination robots left over from the neoliberal lapses in free-standing markets; so systematic government inter-
period, their mechanisms tweaked for prot by global megabanks, vention including proactive scal policy is needed for a
are blocking a forceful new governmental assault on a renewed sustainable capitalism. For these authors, the dynamic-equilibrium
looming period of global stagnation. models that dened macroeconomics in the neoliberal era should
be relegated to intellectual curiosa.
3. Economists and geographers confront the crisis These positive developments are, however, subject to real lim-
its. For one thing, changes in economic orthodoxy will require
This quadruple crisis has profound implications for economic years, if not decades; and the quadruple crisis is moving quickly.
geography, especially the geography of nance, and for several For another, the interventions of the policy-entrepreneur econo-
elds in economics: nancial economics, monetary theory, macro- mists mentioned here (and others) operate in relatively narrow
economics, and open-economy macroeconomics. But thus far its terrains of social action either nancial-market behavior and reg-
impacts on economists and on geographers have been very ulation or macroeconomic policy, but not both. For example, Gean-
different. akoplos and Brunnemeier are focused on xing nancial-market
Let us rst consider economics. These events have generated a mechanisms, but do not touch macroeconomic policy; the opposite
crisis in the very premises not to mention conclusions of con- is true for Akerlof and Shiller.
temporary research on macroeconomics, money and nance. After Further, much has gone wrong at multiple levels of social, polit-
the defeat of the Keynesian synthesis model by the rational-expec- ical, and economic action as the relentless logics of the quadruple
tations revolution at the end of the 1970s, economists in the crisis have played out. These levels interact, and they range from
mainstream accepted the premise that models should henceforth the global to the local, via various intermediate points of authority
be based on rational agent behavior and equilibrium. This went and social/political organization. And at any given level, a dening
doubly in the realm of nance; it explains why Hyman Minsky characteristic of the quadruple crisis is that very different impacts
was seen until recently as an iconoclast, not a prophet. As Fox are felt in different places. Examples are foreclosure rates, scal cri-
(2009) and Johnson and Kwak (2010) have shown, the efcient- ses, house-price collapses, joblessness problems. Economists mod-
market hypothesis not only triumphed in theory; it was used to els are unsuited for the analysis of interacting, disparate levels of
guide monetary policy, nancial regulations, and the creation of social interaction. Even rebels against market orthodoxy are almost
new nancial instruments and funds. invariably interested in establishing how one or another deviation
The many debt crises outside of the US and Europe in the 1980s from perfect markets limits to liquidity and leverage, for Brun-
and 1990s were treated as simple cases of realized moral hazard, nemeier and Geanakoplos, and perceptual biases and errors, for
remediable by sound regulation and sober macroeconomic poli- Akerlof and Shiller leads to distortions in market outcomes. Using
cies. Now the chickens have come home to roost. And it is clearer market equilibrium as a conceptual reference point does not allow
to ever more economists that the Frankenstein monster con- investigations of how multiple factors with different operating prin-
cocted from efcient-market premises that assumed a world of ciples may be simultaneously eroding output and unemployment.
innite liquidity has not only broken its chains, but may soon But the challenge posed by the quadruple crisis is precisely the
be unstoppable. simultaneous breakdown of macroeconomic policies and nancial
Several prominent dissenting voices have emerged from within systems and the interactions between these breakdowns.
the economics mainstream. Joseph Stiglitz, serving as World Bank This is where geography can step in. One of the admirable fea-
chief economist while the 1997 crisis dismantled the Asian mod- tures of contemporary geography is the speed with which its prac-
el, was the rst to become publicly disaffected. Paul Krugmans titioners introduce, critique, and adapt new events, ideas, and
New York Times op-ed articles have witnessed his journey from methodologies. This has been especially true of the geography of
skeptical iconoclast to Keynesian. These two economists shifts nance. There is a plasticity in the core concepts and ideas with
are noteworthy not only as both have won the Nobel Prize, but be- which people work; the eld moves as social science moves, as
cause Stiglitz once attributed nancial crises to insufcient punish- the real world throws up new challenges.
ments for non-payment, and Krugman to crony capitalism in Asia. Consequently, the huge outpouring of geographic work on
Simon Johnson, once IMF chief economist and now MIT professor, nancial aspects of the crisis comes as no surprise. Thus far, geog-
has joined their ranks; his new book with James Kwak warns of the raphers work on the 20072010 crisis has largely focused on anal-
rise of a new American nancial oligarchy. yses of the diverse impacts and levels of this crisis; see, in
These shifts represent acts of rebellion from the equilibrium- particular, Aalbers (2009), Hart (2009), Lee et al. (2009), and French
market consensus. For the past three decades, economists have et al. (2009). These authors discussions range from media repre-
been expected to accept self-coordinating markets as a desidera- sentations of nance, to national cross-border imbalances, to
tum; and economists in policy-making positions have closed ranks evolving nancial practices in global cities, to the immensely dif-
around the importance of a sensible consensus on issues of conse- ferent subprime and foreclosure experiences of different localities.
quence. So these three economists call to break up the megabank The very scope of this work suggests not only an appetite for
complex nds them operating outside the orbit of economics. describing interrelated, complexly-structured events, but for mak-
The economics discipline, which has internalized the myth of ing sense of them. As Engelen and Faulconbridge (2009) put it:
the rational market (Fox) and the general equilibrium ideal, views
real-world events at a distance; no consistent theoretical blueprint The nancial crisis . . . provides an opportunity to enhance
exists any longer for sorting out Keynesian demand management nancial geographys . . . wider relevance within the social sci-
or controlling power in nance. ence community. Most simply, then, we need a critical mass
Things are changing. In the realm of nancial economics, new of researchers engaged in analysis of the post-industrial service
work by Yales John Geanakoplos (2009) and Princetons Markus economy which has nance at its heart (5889).
Brunnemeier (Brunnemeier and Pederson, 2009), among others,
challenges previously sacrosanct assumptions (such as rational While this is readily agreed, more than this is needed if eco-
expectations) and shows how speculation on nancial markets nomic geographers are to confront the quadruple crisis directly.
can worsen, not eliminate, asset bubbles. In the realm of macroeco- For one thing, it encompasses both breakdowns in both nancial
Editorial / Geoforum 41 (2010) 837840 839

systems and macroeconomic policies. And economic geography of the Euro and the EU is caught up in a catch-22. The resolution of
lacks its own macroeconomics and specically, it lacks an explicit the EU problem of economic stagnation depends on a macroeco-
Keynesian aggregate-demand perspective. Analytical approaches nomic stimulus that European surplus nations (especially Ger-
such as central-place theory and industrial-agglomeration theory many) is unwilling to provide. The resolution of the EU banking
are built on supply-side assumptions which preclude demand problem, in the face of speculative pressure from empowered
inadequacy. The one economic-geographic model that incorpo- (too-big-to-fail) nancial markets, depends precisely on maintain-
rates independent demand, the base-multiplier model, pays no ing scal discipline. A new way forward is needed: what that is can
attention to nancial structure. be seen by considering the case of California.
This said, we must remember that economic geographers have As a state within the United States, California has its own bud-
been very good at inventing new approaches and concepts when get, which it is legally mandated to balance annually. The combina-
these are needed. Entire research elds nancial exclusion, local tion of the subprime crisis, the subsequent macroeconomic
currencies, the spatial structure of the global nance industry, to downturn, and the foreclosure crisis have squeezed tax revenues
name several exist only because of geographers creativity in con- and increased spending pressures. So the state has had a revenue
necting previously unrelated concepts and practices. The quadru- decit equalling approximately 20% of its baseline budget of
ple crisis, in effect, throws up a rich terrain of possibility for $100 billion (and about 5% of state GDP) since scal year 2007
making new connections and for seeing previously-unnoticed par- 2008. The state has borrowed to stave off its day of scal reckoning,
allels. It provides an unprecedented opportunity for taking on, in but has reached its debt limit.
the words of Lee et al. (2009, p. 736): So Californias bad scal record resembles that of Greece. But it
has not led to a run on the US dollar, and there is no California dol-
The next challenge and echoing wider debates in economic
lar. In any case, the federal government accounts for 55% of all tax
geography and cultural political economy . . . [which] is
revenue collected within the US; it channels about 20% to state and
to . . . produce rich, contextualized research on what processes
local governments, and spends the remainder directly. Much of the
of nancialisation mean in broader regional contexts, beyond
federal governments expenditures support social safety-net and
the usual nancial industries, occupations and places.
public health-insurance programs. Higher-income states such as
California receive less in federal revenue than their residents and
4. Greece and California: scal and banking crises differently businesses contribute; lower-income states receive more. Califor-
intertwined nia gets back about 78% of its pay-in. This tax on California essen-
tially assures more evenly-distributed prosperity throughout the
To illustrate the challenge of thinking about regional contexts United States. And California is protected by its membership in a
of the quadruple crisis beyond the usual nancial industries, 50-state dollar zone. The federal government is able to print
occupations, and places, we briey compare the circumstances money as necessary, so individual state decits never trigger cur-
of Greece and California. While these two places populations, in- rency-market reactions. Questions about Californias continued
comes, and global economic linkages are vastly different, what membership in the Union, and about the Union itself, do not arise.
makes a comparison potentially useful are structural parallels Californias recovery is now, like that of Greece, doubly hobbled
and contrasts. But both are simultaneously caught in profound s- by banking problems. For one thing, non-bank lenders and mega-
cal and banking crises while locked inside larger political entities banks combined to make California the US capital of subprime
that have other agendas. Both are locked in dilemmas described lending and now of foreclosures and the housing-market bust.
in the 1976 Eagles song Hotel California: You can check-out Federal law prohibited California (and other states) from imposing
any time you like, but you can never leave. its own restrictions on exploitative credit-market practices. For an-
Greeces problems are rooted in scal and trade decits that other, lending and investment will be renewed in California only
widened precipitously in the 20072010 period. Greece has made when national banking-law reform is passed; and that reform pro-
large sacrices to get its budget decit under control, but it has not cess is hostage to a Wall Street megabank complex whose primary
been able to prevent a run on its debt-issue; and without its own directive is to protect its freedom to generate cash-ow by any
currency, it cannot devalue in hope of balancing its trade balance means it deems necessary.
and reviving macroeconomic growth.
Greeces scal and trade decits are not surprising when we 5. Economic geography: a call to arms?
consider the overall Eurozone pattern of production and trade.
High-productivity production and export capacity is monopolized The point of the Greece/California comparison is that structural
by Germany and France, with lower-wage production elsewhere. comparisons of the situation of these (or any other) political econ-
If the balance-sheet of Europe were drawn up, the national decits omies in the context of the forces driving the quadruple crisis pro-
of Greece and the other PIGS would disappear within an integrated vides opportunities for nding ways out of it. Vis--vis the
whole. Greece also is in the midst of a three-way banking problem. situation of Greece, the comparison with California makes clear
First, crisis-induced capital ight has hit its domestic banks with a that in a scal union with safety-net protections, lower-income
liquidity crisis. Second, its debt position and the price of its bonds subunits will receive net revenue transfusions from higher-income
appear to have been manipulated by market manipulation orches- subunits. Despite intra-national rivalries and distrust, unied mac-
trated by US megabanks (Homan, 2010). Third, extensive Greek roeconomic, scal, and monetary policies tie all Americans to-
borrowing from German and French banks since Greece can no gether, and soften the hard edges of intra-national differences.
longer borrow on open markets has led speculators to drive The EU needs stronger ties of this sort as well. If not, it is hard to
down both the Euro and European banks equity prices. Under Eur- see how the EU can survive: one member state after another will
opes two-tier nancial governance structure, resolution of this be exposed to the centrifugal forces created by reestablishing scal
looming European banking crisis depends on untested interactions balance amidst macroeconomic deceleration and political stress.
between the European Central Bank and each nations own banking Our example provides no neat way out of the problems of dys-
authorities. functional and uncontrolled nance that both Greece and Califor-
The problem for Greece is that its own good-faith actions can- nia face. But this is precisely where a new surge of comparative
not save it, because the viability of the larger entity of which it is geographic work can make a difference. The quadruple crisis
a part (the European Union) is now under question. And the future throws up a hundred urgent questions: how do regulatory prac-
840 Editorial / Geoforum 41 (2010) 837840

tices differ in the City of London, Wall Street, and Frankfurt and Acknowledgement
for that matter, which are more effective in controlling speculation,
and why? What are the everyday practices and structures of orga- The author thanks Silvana De Paula for her insights on an earlier
nization and control in hedge funds? How exactly is the break- version of this paper.
down of nancial systems and the rescue of the megabanks
affecting credit ows and economic activity in different local areas References
within the EU and elsewhere? What are we to make of the shift of
Wall Street and City of London megabanks into emerging mar- Aalbers M., 2009. Geographies of the nancial crisis. Area 41 (1) 3442.
Akerlof, G., Shiller, R.J., 2009. Animal Spirits: How Human Psychology Drives the
kets is it parallel to or different from earlier decades cross- Economy, and Why it Matters for Global Capitalism. Princeton University Press,
border incursions? Princeton.
This list merely scratches the surface of possibility, illustrating Brunnermeier, M.K., Pedersen, L.H., 2009. Market liquidity and funding liquidity.
Review of Financial Studies 22 (6), 22012238.
another point made by Lee et al.: the ongoing nance-led reces- Christophers, B., 2009. Complexity, nance, and progress in human geography.
sion provides an opportunity for those of us who have long argued Progress in Human Geography 33 (6), 807824.
that nancial institutions, markets and intermediaries are integral Engelen, E., Faulconbridge, J., 2009. Introduction: nancial geographiesthe credit
crisis as an opportunity to catch economic geographys next boat? Journal of
to the entangled geographies of contemporary economic, cultural
Economic Geography 9, 587595.
and political life (2009, p. 734). To engage in these questions will Fox, J., 2009. The Myth of the Rational Market. HarperBusiness, New York.
require the willingness to unmask the perceived complexity of French, S., Leyshon, A., Thrift, N., 2009. A very geographical crisis: the making and
modern nance, as Christophers (2009, p. 807) puts it; the daring breaking of the 20072008 nancial crisis. Cambridge Journal of Regions,
Economy and Society 2, 287302.
to take on problems that combine microeconomic dynamics, mac- Geanakoplos, J., 2009. The Leverage Cycle. Cowles Foundation Discussion Paper No.
roeconomic forces, and nancial practices in unresolved and per- 1715. Cowles Foundation for Research in Economics, Yale University.
haps previously-unstudied tangles; the courage to work with an Hart, G., 2009. D/developments after the Meltdown. Antipode 41 (1), 117141.
Homan, T.R., 2010. Greece Considering Legal Action Against US Banks for Crisis.
incomplete tool-kit on evolving issues in which unaccountable Bloomberg Businessweek online, May 16. Accessed at: <http://www.
players have accumulated secret knowledge. businessweek.com/news/2010-05-16/greece-considering-legal-action-against-
In effect, I am arguing that if nancial geography is to demon- u-s-banks-for-crisis.html>.
Johnson, S., Kwak, J., 2010. 13 Bankers. Pantheon, New York.
strate what Engelen and Faulconbridge term its wider relevance, Lee, R., Clark, G.L., Pollard, J., Leyshon, A., 2009. The remit of nancial geography
it must engage the quadruple crisis. And in so doing, nancial before and after the crisis. Journal of Economic Geography 9, 723747.
geographers should not pause too long at the thought that their
explorations are no longer the passive analyses of distanced Gary A. Dymski 1
observers, but active diagnostics with policy relevance. Economists Rua Barata Ribeiro, 587 Apto 202, Copacabana,
have not hesitated in crossing this line; and the global crisis pro- Rio de Janeiro, RJ 22051-000, Brazil
vides a record of the often disastrous consequences. It is not an E-mail address: gary.dymski@ucr.edu
exaggeration to say that the resolution of the policy challenges
embedded in the quadruple crisis will determine crucial aspects
of the world in which we live whether the EU can survive,
whether power in nance can be reined in, whether social
safety-nets can be preserved. If the times sometime demand a call
to academic arms, perhaps this is one such.

1
Present address: Department of Economics, University of California, Riverside,
Riverside CA 92521-0427, USA. Tel.: +1 916 838 9781.

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