The 1451 Review (Volume 1) 2021

The sentiment in the wake of the 2007/8 Crisis was markedly different from the
1930s. In a decisive move, the G7 expanded to form the G20. Although the initial
Financial Crisis Meeting offered little policy, it was clear that leaders appreciated the
globality of the crisis (Pilkington 2008). Barack Obama, then President-elect,
announced that ‘global economic crisis requires a coordinated global response’; and
Gordon Brown and George Bush urged all countries to coordinate fiscal stimulus to
mitigate the recession (Pilkington and Tran 2008).
By forming the G20, leading nations recognised that a global response was
required. This had profound moral and material significance, making the process more
legitimate and helping to create worldwide support. Equally, the G20 increased the
reach of the G7 nations, with G20 encompassing 85% of the world’s economy (Schenk
2011: 185).
G20 leaders met again on 2nd April 2009, reaffirming the importance of
multilateral cooperation, declaring: ‘we face the greatest challenge to the world
economy in modern times … [and therefore] all countries must join together to resolve
it’ (G20 2008). This time, however, policies were created: the IMF’s resources were
increased threefold to 750 billion dollars, and The Financial Stability Board’s (FSB)
mandate was increased (G20 2008).
Given the economic instability to come, increasing the IMF’s resources was
wise. Most notably, the IMF used these resources to mitigate the effects of the Euro-
Zone Crisis. However, Bernanke, Geithner and Paulson argue that the IMF’s flexible
credit lines and standby arrangements helped to lower the chance of a series of
sovereign debt crisis (Bernanke, Geithner and Paulson 2019: 198). The Fund and the
multilateral effort that supported it therefore reduced economic anarchy by acting as
an international crisis manager.
While the expansion of the IMF’s resources was important, the creation of the
FSB was likely the most salient feature of the meeting. The FSB helped to develop an
international regulatory regime by working with governments and corporations to
develop Basel III. The 2018 G20 Financial Regulatory Reforms Report shows that
Basel III regulations have been successful because, since 2009, large banks have ‘more
than doubled their risk-based capital ratios, while their leverage has dropped by half’.
Meanwhile the capital conservation buffer has been increased to 10.5% (Financial
Stability Board 2019). The G20 report notes that the process will not be complete until
2022. However, the regulations have made a difference, with the Bank of International
Settlements’ Annual Report contending that Basel III has made the financial system
substantially more durable (Financial Stability Board 2019).
As such, instead of undermining one another, leaders used multilateral
organisations after the 2007/8 financial crisis to form a decisive response, and in
doing so limited economic anarchy.
Rather than resorting to isolationism as it did in the interwar years, the U.S led the
immediate response to the Great Recession. This was critical because the interwar
period highlights how detrimental a lack of international leadership can be (Nye 2019).
America’s main contribution was through the Fed’s efforts to increase liquidity to
markets after the banks struggled to find short-term finance to service their debt
(Wheelock 2010; Tooze 2018: 3).
By mid-2007 the Fed’s response had begun as over-leveraged private banks
looked to central banks after sources of short-term finance collapsed (Ben Bernanke,
Timothy Geithner, Henry Paulson, Firefighting 2019: 32). Bernanke (2009) was aware
of the danger illiquidity posed, noting: ‘in the current environment, the Federal
Reserve must focus its policies on . . . improving the functioning of private credit’.
Financial Market Liquidity
Figure 1.
Astley, M et al., (2009). Global Imbalances and the Financial Crisis. Bank of England
Quarterly Bulletin Q3, p. 184.
‘The liquidity index shows the number of standard deviations from the mean. It is a simple
unweighted average of nine liquidity measures, normalised on the period 1999-2004’.
52 53