Transcript Document

Canadian Council of Churches
Forum on Faith and a Sustainable
Economy: The Financial Crisis
John Dillon
KAIROS: Canadian Ecumenical
Justice Initiatives
May 12, 2009
Orphans and Widows
• Number chronically hungry will increase by
75 to 100 million this year
• 50 million may lose their jobs in 2009
• 700,000 children may die over the next few
years
• up to 200 million climate refugees unless
we reduce greenhouse gas emissions
Need to change structures as well
as provide immediate relief
“The world needs alternatives, and not merely
regulation. It is not enough to rearrange the
system; we need to transform it. This is a moral
duty. In order to understand why, we must adopt
the point of view of the victims of this system.
Adopting this point of view will allow us to
confront reality and to express the conviction that
we can change the course of history.”
Rev. François Houtart at Oct. UN panel on the crisis
Root Causes of the Current
Financial Crisis
While the current financial crisis can be
traced to a multitude of factors,
two inter-related causes stand out:
1) globalized markets and
2) speculative bubbles made possible by
financial innovation.
Neither of these is new
• This crisis follows the pattern described in
Charles Kindleberger’s historical study on
Manias, Panics and Crashes
Mania stage –
$8 trillion housing bubble
Subprime Mortgages
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US housing overpriced by 50%
Up to 100% in some places e.g. Miami
Buyers enticed with low interest “teaser loans”
Disproportionately from black and Latino
communities
• Not always informed of the fine print in contracts
regarding future interest rate increases
This crisis also has unique roots
• Financial innovations involving little-understood
derivatives played a crucial role.
• Lenders repackaged loans for sale to outside
investors - banks, hedge funds or pension funds
located anywhere in the world.
• Bundled consumer loans and home mortgages
became the biggest US export business of the 21st
century. More than $27 trillion of these securities
were sold between 2001 and October 2008.
Credit Default Swaps (CDSs)
• CDSs were invented to spread the risks inherent in
ownership of packages of loans.
• CDSs are akin to insurance policies.
• Creditors purchase CDSs to protect themselves
against the risk of default.
• Issuers of CDSs collect fees for taking over from
creditors the risk that a loan will not be repaid.
• There can be multiple CDS contracts on a single
package of loans without any requirement to have
a direct interest in the loans.
Nominal value of CDSs grew to
US$62 trillion by end of 2007
• more than the Gross Domestic Product of
the entire world.
• But the maximum amount of debt that
might conceivably be insured through these
derivatives was US$5 trillion.
• When the US housing market collapsed the
market for CDSs was thrown into turmoil.
Financial markets seized up
• CDS issuers had insufficient capital to cover their
losses
• Banks and insurance companies like American
International Group (AIG) had to be rescued
• Investors stopped buying financial products whose
actual risk was undisclosed.
• Derivatives like CDSs proved to be what Warren
Buffett aptly called “weapons of mass financial
destruction.”
Crisis spread to global South
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Falling commodity prices
Dwindling remittances from migrant workers
Export markets contracted by 30%
Harder to access credit
Failure of small, private banks (not “systemically
important” for G7)
• Capital repatriated to North
• Speculation against Southern currencies
Regulators Failed to Restrain
Risky Financial Practices
Financial Deregulation
allowed the unrestrained use of innovative
instruments that became avenues for
speculation detached from the real economy
where actual goods and services are
produced.
US Regulators were warned
• Brooksley Born, head of the US Commodity
Futures Trading Commission, proposed tighter
regulation of financial derivatives in 1998.
• Opposed by Federal Reserve Chair Allan
Greenspan, Treasury Secretary Robert Rubin and
his deputy Lawrence Summers.
• Wall Street executives lobbied furiously against
new regulations.
Collapse of LTCM unheeded
• After Long Term Capital Management
collapsed in later in 1998, Ms Born said it
was a wake-up call.
• LTCM invested borrowed funds that were
many times larger than their own capital.
• LTCM had accumulated $1.2 trillion in
speculative investments on equity of $5
billion.
Congress proceeded with more
deregulation
• repealed the Depression-era Glass-Steagall Act
which had separated commercial banks where
deposits are government insured from more lightly
regulated investment banks.
• US Commodity Futures Modernization Act of
2000 removed derivatives such as CDSs from
regulation.
• Commercial banks took advantage of these
opportunities by expanding their off balance sheet
operations that are not accountable to regulators.
Speculation overtook investment
in real goods and services
• Value of speculative trade in 2002 was 35
times bigger than the real economy.
John Maynard Keynes
• “Speculators may do
no harm as bubbles on
a steady stream of
enterprise. But the
position is serious
when enterprise
becomes the bubble on
a whirlpool of
speculation.”
A Failure of Moral Conduct
Archbishop Migliore
“At its root, the financial crisis is not a
failure of human ingenuity but rather of
moral conduct. Unbridled human ingenuity
crafted the systems and means for providing
highly leveraged and unsustainable credit
limits which allowed people and companies
alike to pursue material excess at the
expense of long-term sustainability.”
Global Imbalances
Developing economies, especially in Asia,
emerging from financial crises since the
mid-1990s tried to shelter against the cold
winds of global capital markets and IMF
conditions by accumulating large amounts
of foreign exchange reserves.
Developing Countries Immense
Reserves Outweigh Debts
billions of US dollars
Reserves and External Debt 2007
4000
2000
0
USA
Developing Countries
Reserves
71
3,778
Debt 2007
2,442
2,558
10 Emerging Countries vs G7
Reserves - Sept. 2008
US$ billions
2972
3000
2500
2000
1906
1516
1500
1000
500
295 243 207
79
73
57
47
34
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Developing countries finance US
• Low-income countries are lending trillions
of dollars to the US, at very low interest
rates;
• while there are so many urgent needs on
which the money could be spent.
US interest rates & the housing bubble
(US interest rates 1990 – 2009)
What enabled the US Federal Reserve Board to
cut interest rates without fear of sparking inflation
was the ability of the United States to borrow vast
sums at very low rates from Asian countries,
particularly China, to finance is trade and fiscal
deficits.
Niall Ferguson The Ascent of Money
“Chinese imports kept down US inflation. Chinese
savings kept down US interest rates. Chinese
labour kept down US wage costs. As a result it
was remarkably cheap to borrow money … .
[G]lobal real interest rates – the cost of borrowing
after inflation – sank by more than a third below
their average over the past fifteen years … . The
Asian ‘savings glut’ … was the underlying reason
why the US mortgage market was so awash in
cash in 2006 that you could get a 100 percent
mortgage with no income, no job or assets.”
UNCTAD Task Force
“the absence of a cooperative financial and
monetary system created an illusion of riskfree profits and licensed profligacy through
speculative finance.”
Breakdown of Bretton Woods
System
• based on fixed, but adjustable exchange rates and
the US dollar as the central reserve currency gave
relative stability to the world financial system
until the late 1960s
• After 1971 a new era - removal of capital controls,
deregulation of domestic banking and massive
increases in private international capital flows.
• After 1971 “credit creation spiralled completely
out of control.” Gillian Tett Financial Times
Keynes Plan for
“financial disarmament”
would allow national governments to pursue
such goals as full employment without
worrying about disruptive capital flight.
International Clearing Union
• A type of world central bank
• With its own currency - the Bancor
• As assets would equal liabilities, the clearings
union itself would always remain solvent
• Countries in deficit would have automatic and
unconditional access to credit. They would not
have to fear running out of foreign currency.
Differences from IMF
conditionality
• Under IMF austerity conditions, indebted
countries are forced to cut back spending,
increase taxes, devalue their currencies and
raise interest rates.
• With access to bancor -- they could spend
on domestic priorities.
Opposition from Wall Street
In 1944, just as today,
the Wall Street
bankers did not want a
truly international
monetary system that
would cost them all
the lucrative fees they
earn from managing
transactions.
An “exorbitant privilege”
• US Treasury was then, and is now still, unwilling
to give up what Charles de Gaulle called the
“exorbitant privilege” that accrues to the nation
that issues the world’s reserve currency.
• enables it to print money at will and pay for
imports or overseas assets with dollars whose
future value may well deteriorate.
• Euro zone enjoys similar privileges.
Joseph Stiglitz
“The existing system, with the US dollar as
reserve currency, is fraying. The dollar has
been volatile. There are increasing worries
about future inflationary risks. At the same
time, putting so much money aside every
year to protect countries against the risks of
global instability creates a downward bias
in – aggregate demand – weakening the
global economy.”
A New Global Reserve System
• Viable alternatives to continued reliance on
the US dollar as the central reserve currency
already exists.
• Starting in 1969 the IMF began to create
Special Drawing Rights (SDRs) as a type of
international reserve asset that can be held
by central banks.
Advantages of an SDR-based
reserve system
• It can be internationally managed
• initial acquisition of SDRs does not entail a
real cost in the way acquiring a reserve
currency does
• a bias in favour of poor and vulnerable
economies can be built into SDR allocation
• Sustainable – not dependent on mining gold
or a national currency.
G20 approved SDRs worth
US$250 billion
SDRs allocated according to IMF voting
rights:
60% will go to developed countries
Only US$19 billion could go to poorest
countries because of their low IMF quotas.
(But some cannot take advantage due to
IMF/World Bank Debt Sustainability
Framework)
UN Commission of Experts
• appointed by Rev. Miguel d’Escoto, the President
of the General Assembly
• chaired by Joseph Stiglitz
• A New Global Reserve System based on an asset
like the SDR is “"feasible, non-inflationary, and
could be easily implemented".
• Within 6 months - Pedro Páez Pérez, Ecuador’s
former Minister of Economic Policy Coordination.
Advantages of a new system
• Developing countries would no longer lend
their large amounts of foreign exchange
reserves to developed countries at low
interest rates but instead invest in
sustainable development.
• The instability caused by over dependence
on the US dollar whose future value is
likely to deteriorate would be eliminated.
Necessity of a New System
“The world economy cannot go back to
where it was before the crisis, because that
was demonstrably unsustainable.”
Martin Wolf –
Financial Times
April 21, 2009
Rev. Sam Kobia
WCC General Secretary
“What we need are brave and new measures to correct this
unjust and unethical system in order to prevent such a
crisis from occurring once again...”
“It is possible today to push for radical changes because
international opinion and the commitment to cooperation
are favourable. … However, for such a transformation to
be successful and sustainable, this debate should become
part of the agenda of the United Nations where all
countries are participants. …fighting global poverty, the
food crisis and climate change should be given the same
attention as salvaging the financial meltdown.”
Primary Proposal
New Global Reserve System based on an
SDR-like asset distributed to low-income
countries as proposed by UN Panel;
June 1-3 UN Conference on the World
Financial and Economic crisis and its
Impact on development;
What will Canada do?
Bank bailouts exceed Aid
US and European bank bailouts - $9 trillion
75 times larger than all Official
Development Assistance;
Immediate need for measures that may not
in themselves constitute a paradigm shift
but are feasible steps forward.
Currency Transaction Tax
A tax of just 0.005% on foreign exchange
transactions can raise US$33 billion of
independent, global and stable revenue each
year.
(Rodney Schmidt – North-South Institute)
Global carbon tax
• A global carbon tax on all CO2 emissions
could raise from US$130 billion to US$750
billion per annum and at the same time
deter greenhouse gas emissions.
• One feasible immediate step – levy on air
tickets already implemented by 13
developed and developing countries raising
about US$200 million a year.
Rev. Sam Kobia
World Council of Churches
“… this crisis is not merely a financial and economic
one…. [It] has moral and ethical dimensions …
We are witnessing an era when greed has become
the basis for economic growth. It is therefore
necessary, in the understanding of the churches, to
go beyond short term financial bail out actions and
to seek long term transformation based on sound
ethical and moral principles which will govern a
new financial architecture…”