1 Politics and financial markets

• Main Author: Gerald F. Davis
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Published: 2011
• Subjects: Canada; Norway; Iceland
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.644.3811; http://webuser.bus.umich.edu/gfdavis/Papers/Davis_11_Handbook_of_finance.pdf

2 Over the past generation, financial markets conquered the world. The number of countries with a local stock market doubled after 1985, and the market capitalization in emerging markets (formerly known as the “Third World”) topped $5 trillion by 2006. The fall of the Berlin Wall was followed by the creation of thousands of new public corporations in Eastern Europe. Hundreds of millions of new investors began buying and selling company shares from Chile to China to the US, and financial news became pervasive. The range of things traded on financial markets also expanded from stocks and bonds to mortgage-backed securities, collateralized debt obligations, and life insurance contracts for the terminally ill. Households found themselves participating in global financial markets as buyers (through pension plans and mutual funds) and sellers (through securitized mortgages, credit card debt, auto loans, college loans, and insurance). Homeowners in Poland took out mortgages denominated in Euros to take advantage of lower interest rates, and car buyers in Hungary took on loans in Swiss Francs to buy Italian cars, giving them an immediate financial interest in central bank policies. The surprising interconnections created by global finance became evident during the financial crisis that began in 2008, when pensioners in Australia and Norway learned that their financial security depended on the mortgage payments of delinquent property speculators in Florida, and taxpayers in the UK learned that the banks they had bailed out might be responsible for repaying defrauded investors in the US. Finance was at the center of the global economic crisis. Yet the impacts of the crisis were distributed in peculiar ways. Why was the US devastated and not Canada? Why Iceland