Capitalism's global financial crisis: The role of the state

Abstract

The bankruptcy and merger of three major American investment banks: Bear Stearns, Lehmann Brothers and Merrill Lynch in 2008 have shocked the United States government to undertake dramatic market intervention by the state, and a $700 billion U.S. dollar bailout, that resembles “industrial policy” in many other countries. Critics of market intervention, often called industrial policy in many countries, point out to two potential weaknesses: governments may have less knowledge than markets on how to pick winners and industrial policy creates possibilities of corruption and rent seeking. This research note's contribution analyzes the global financial crisis of 2008 and 2009, through the importance of, institutional infrastructures, and how industrial policy can help create the institutional infrastructures that can expand economic wealth and stability for all countries in the 21st century.