This is the final installment of a four-part series excerpted from the Political Economy Research Institute (University of Massachusetts-Amherst) working paper “The Endogenous Finance of Global Dollar-Based Financial Fragility in the 2000s: A Minskian Approach,” by Junji Tokunaga and Gerald Epstein. Tokunaga is an Associate Professor in the Department of Economics and Management, Wako University, Tokyo. Gerald Epstein is a Professor in the Department of Economics, University of Massachusetts-Amherst, and Co-Director of the Political Economy Research Institute (PERI). See Part 1, Part 2, Part 3, and the full paper.
Junji Tokunaga and Gerald Epstein
The Nature of the Global Financial Crisis
The Endogenously Dynamic Process of Balance Sheet Expansion at LCFSs
In this section, we show how our approach is much better for understanding the nature of the global financial crisis than the arguments of the global imbalance view that many mainstream economists, policymakers, and even heterodox economists advocate.
Firstly, we argue that the global financial crisis was inherently caused by the dynamic process of balance sheet expansion at large complex financial institutions (LCFIs), driven by the elastic growth of global dollar in the global shadow banking system. … The global imbalances view attributes the emergence of global financial crisis to an excess of saving over investment in emerging market countries. According to that view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which were the epicenter of the financial crisis. In this view, LCFIs have a negligible role in the global financial crisis in the 2000s.
Recall our discussion of the endogenously dynamic process of balance sheet expansion, which, driven by the endogenously elastic finance of global dollar supplies in the global shadow banking system, contributed to the buildup of global financial fragility that led to the global financial crisis. Accordingly, it is clear that the global financial crisis is strongly affected by the endogenous dynamics of balance sheet in the global shadow banking system, rather than the emergence of excess savings in emerging market countries, as the global imbalances view stresses.
The Dominant Role of the U.S. Dollar as Debt-Financing Currency
Secondly, the supreme position of U.S. dollar as debt-financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, was a driving force toward the buildup of global financial fragility that led to the global financial crisis.
As the global imbalances view points out, central banks in emerging Asian countries have resisted currency appreciation pressures through dollar-denominated foreign exchange reserve accumulation. Most of dollar reserve accumulation, which mirrors excess domestic savings in the region, was steered toward U.S. Treasuries and Agencies in the 2000s. This clearly reflects the strong demand for the dollar-denominated assets as a good store of value, that is, reserve currency, for central banks in emerging market countries. In this story, it has been recognized that the dominant role of the U.S. dollar as reserve currency, a function of international currency in official use, was the driving force in the global financial crisis.
What needs to be emphasized in our discussion is that the U.S. dollar recovered its dominant position as a debt-financing currency in the 2000s, despite the persistent decline in currency asymmetry since the second half of the 1980s. Most of both long-term and short-term debt instruments, which were underpinned by the development of new financial innovations and instruments in the shadow banking system, were denominated in the U.S. dollar, and contributed to the revival of the dollar as debt-financing currency. The revival of the dollar as debt-financing currency enabled LCFIs to accelerate the endogenous finance of global dollar to become highly elastic in the 2000s, in the sense that it eased the financial constraints of balance sheet in LCFIs. This easing led to the dynamic process of balance sheet expansion, contributing to the buildup of global financial fragility that led to the global financial crisis.
Therefore, it can be concluded that the dominant role of the dollar as a debt-financing currency, underpinned by the development of new financial innovations and instruments in the global shadow banking system, was also a driving force for the global financial crisis.
 As Nesvetailova  points out, mainstream economists tend not only to diagnose the root cause of the crisis as a behavioral problem of the market, fundamentally, human failure, but also to view the global financial crisis as an extraordinary moment in the smoothly functioning financial capitalism. Thus, financial instability hits the markets as an extraordinary, exogenous shock, according to mainstream economics. (pp.95-96).
 China used its current account surpluses almost entirely for acquiring assets in the U.S., more than 80 percent of which consisted of U.S. Treasuries and Agencies from 2003 to 2007. (Bernanke et al , p.6).