The classic explanation of financial crises, going back hundreds of years, is that they are caused by excesses, frequently monetary excesses, which lead to a boom and an inevitable bust. In the recent crisis we had a housing boom and bust which in turn led to financial turmoil in the United States and other countries. The global financial crisis (the Crisis) that unfolded in 2008 has lowered incomes and has led to changes in consumption patterns that are placing at risk those gains in financial development. The Crisis originated in the US, and its impact has been felt globally. In 2009 global output dropped 2.2 percent and the global unemployment rate increased to close to 7 percent, the equivalent to having 35 million more people out of work.
The Great Depression and financial crisis experiences in emerging markets provided
lessons that have guided world policymakers in addressing the Crisis. The ultimate goal of this
paper is to discuss the Crisis from the perspective of human development, to consider the lessons
learned, and to assess the current policy challenges. The term financial crisis has been broadly used to describe situations in which financial institutions or assets suddenly lose their value and national output drops significantly. A characteristic of financial crises is a sudden change of investor sentiment with regard to the riskiness of investments, which leads to a sudden withdrawal of funds from financial institutions. This phenomenon, known as a “bank run” or “bank panic,” in turn leads to a drop in loaned funds and credit to the private sector. Consequently, output collapses and private and public incomes also drop, leading to changes in spending and consumption patterns. Poverty increased in past crises. The direct impact on other aspects of human development is less clear. Financial crisis can be particularly harmful to those least equipped to manage it, i.e., the poor. In terms of distributional outcomes, the evidence on a...