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BPEA | Fall 2008

Financial Crash, Commodity Prices, and Global Imbalances

Emmanuel Farhi,
Emmanuel Farhi Professor of Economics - Harvard University
Pierre-Olivier Gourinchas, and
PG
Pierre-Olivier Gourinchas University of California, Berkeley
Ricardo J. Caballero
RJC
Ricardo J. Caballero Massachusetts Institute of Technology
discussants: Carmen M. Reinhart and
Carmen Reinhart
Carmen M. Reinhart Minos A. Zombanakis Professor of the International Financial System - Harvard Kennedy School
Kathryn M. Dominguez
headshot of Kathryn Dominguez
Kathryn M. Dominguez Professor of Economics and Public Policy - University of Michigan

Fall 2008


The current financial crisis has its origins in global asset
scarcity, which led to large capital flows toward the United States and to the
creation of asset bubbles that eventually burst. In its first phase the crash exacerbated
the shortage of assets in the world economy, which triggered a partial
re-creation of the bubble in commodities markets, and oil markets in particular.
This bubble in turn led to an increase in petrodollars seeking financial
assets in the United States, which became a source of stability for the U.S.
external balance. The second phase of the crisis is more conventional and
began to emerge in the summer of 2008, when it became apparent that the financial
crisis would permeate the real economy and sharply slow global growth.
This slowdown worked to reverse the tight commodity market conditions
required for a bubble to develop, ultimately destroying the commodity bubble.