A Theory of Fragile Finance

Abstract

The number of large-scale financial crises the world has witnessed since the early 1970s is daunting: beginning with the Southern Cone financial crisis of the late 1970s; followed closely by the so-called Third World debt crisis of the early 1980s; the savings and loan debacle in the US in the late 1980s; the near-defaults of many ‘second-world’ states in the late 1980s-early 1990s, the Exchange Rate Mechanism (ERM) crisis in 1992, the Mexican ‘Tequila’ crisis of 1994–1995; the East Asian crisis of 1997; the Russian meltdown of 1998; the collapse of the Brazilian Real in 1999, the Turkish crisis of 2000–2001; corporate bankruptcies in the US in 1999–2002, the Argentine default of 2001–2002… (Bello et al. 2000: 10). Not to speak of an ongoing financial crisis of many so-called ‘collapsed states’, which is not the subject of this investigation. In light of such a long and disturbing list, the question must be asked: Why have financial crises become so prevalent today? Can it be the case, as Drucker (1986) intuited, that an overblown financial sector is finally ‘colliding’ with the real economy, provoking crises of peripheral and semi-peripheral economies? Or is it the case that crises affect only poorly governed nations, incompetent or otherwise unwilling to handle the rational principles of economic organisation and the requirements of the changing market conditions?