The Pandemic Crisis Shows that the World Remains Trapped in a 'Global Doom Loop' of Financial Instability, Rising Debt Levels, and Escalating Bailouts

40 Banking & Financial Services Policy Report No. 8 (August 2021), at 1-26

GWU Law School Public Law Research Paper No. 2021-34

GWU Legal Studies Research Paper No. 2021-34

28 Pages Posted: 12 Aug 2021 Last revised: 27 Oct 2021

See all articles by Arthur E. Wilmarth

Arthur E. Wilmarth

George Washington University Law School

Date Written: August 6, 2021


In January 2020, I completed a book (Taming the Megabanks: Why We Need a New Glass-Steagall Act) analyzing the financial crises that precipitated the Great Depression of the 1930s and the recent Great Recession. My book argued that the world’s financial system was caught in a “global doom loop” at the beginning of 2020. Bailouts and economic stimulus programs during and after the global financial crisis of 2007-09 (GFC) imposed heavy debt burdens on most governments, and leading central banks were carrying bloated balance sheets. The rescues arranged by governments and central banks during the GFC created a widely-shared expectation that they would continue to intervene to ensure the stability of major financial institutions and important financial markets. That expectation encouraged speculative risk-taking by financial institutions and investors as well as dangerous growth in private and public debts. I warned that the global doom loop was planting the seeds for the “next” financial crisis, which could overwhelm the already strained resources of governments and central banks.

The “next” global crisis began only two months later, in March 2020. The rapid spread of the Covid-19 pandemic caused governments in most developed countries to shut down large sectors of their economies and impose social distancing mandates. Many thousands of businesses closed, setting off a downward spiral in economic activity that paralyzed global financial markets. Investors, businesses, and financial institutions “scrambled for cash” and engaged in panicked “fire sales” of financial assets. Governments and central banks in the U.S. and other advanced economies adopted fiscal stimulus measures and financial rescue programs with a size, speed, and scope that far surpassed the emergency actions taken during the GFC.

The pandemic financial crisis and the extraordinary responses of governments and central banks demonstrate that policymakers have not addressed the root causes of the GFC. Major financial institutions and financial markets remain highly unstable. They continue to underwrite rapidly rising levels of private and public debts based on their shared expectation of future government bailouts. Governments and central banks have expanded their “safety nets” far beyond banks and now protect the entire financial system, including short-term wholesale credit markets, systemically important nonbanks, and the corporate bond market. As a practical matter, governments and central banks have “bankified” the financial system, thereby undermining market discipline, stimulating dangerous asset bubbles, and increasing social inequality.

Our financial system must be reformed so that it no longer promotes unsustainable booms, fueled by reckless growth in private debts, followed by destructive busts that require massive bailouts and huge increases in government debts. My recent book provides a blueprint for needed reforms, including a new Glass-Steagall Act. A new Glass-Steagall Act would break up financial giants by separating banks from the capital markets and by prohibiting nonbanks from financing their operations with functional substitutes for bank deposits. A new Glass-Steagall Act would establish a financial system that is more stable, more competitive, and more responsive to the needs of consumers, communities, and business firms. Properly implemented, a new Glass-Steagall Act would provide the most direct and practical way to break the global doom loop and end the toxic boom-and-bust cycles of the past quarter century.

Keywords: Bailouts, Financial Conglomerates, Glass-Steagall Act, Pandemic Crisis, Shadow Banks, Universal Banks

JEL Classification: E44, E53, E58, F30, G18, G20, G21, G24, G28, K20, K23, N20

Suggested Citation

Wilmarth, Arthur E., The Pandemic Crisis Shows that the World Remains Trapped in a 'Global Doom Loop' of Financial Instability, Rising Debt Levels, and Escalating Bailouts (August 6, 2021). 40 Banking & Financial Services Policy Report No. 8 (August 2021), at 1-26, GWU Law School Public Law Research Paper No. 2021-34, GWU Legal Studies Research Paper No. 2021-34, Available at SSRN: or

Arthur E. Wilmarth (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States

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