Transcript PPT

A UNION PERSPECTIVE ON
THE GLOBAL FINANCIAL
CRISIS
Peter Conway
Secretary
N Z Council of Trade Unions
International crisis
Began as financial crash in the US
 Spread to Europe and rest of world
 Very quickly because of integration, lack
of regulation of international capital
 US$30 trillion loss in sharemarkets to
March 2009 – largest ever
 US$1.9 trillion internationally to bail out
banks

2
Causes?
Leverage – from 8 or 12:1 to 30:1 or
even higher
 Collaterised debt obligations, credit
default swaps, derivatives –
pooling/securitisation
 Mexican strawberry picker in the US
earning an average of $14,000 a year
and granted a 100% mortgage to buy a
house for $750,000

More on causes….
Deregulation - repeal of the GlassSteagall Act in 1999
 Derivatives excluded from Commodity
Futures Modernization Act in 2000.
 Bush's policy of "voluntary" regulation of
investment banks at the SEC
 Global imbalances
 Financialisation, hollowing out, and
growth of private equity/hedge funds

Finance Sector Growth

From 1973 to 1985, the financial sector never
earned more than 16 percent of domestic
corporate profits.
 This decade, it reached 41 percent.
 From 1948 to 1982, average compensation in
the financial sector ranged between 99
percent and 108 percent of the average for all
domestic private industries. From 1983, it
shot upward, reaching 181 percent in 2007.
Finance Sector Growth
Alternative Views
Greenspan held interest rates too low
for too long, thus distorting the prices to
which the market responded.
 US Government was actually
encouraging banks to lend to sub-prime
borrowers.
 Government spending far more than it
raised in taxes and thus running
protracted budget deficits.

Alternative Views
Community Reinvestment Act, which
prevents banks from "redlining" minority
neighbourhoods as not creditworthy.
 Fannie Mae and Freddie Mac for
causing the trouble by subsidising and
securitising mortgages with an implicit
government guarantee.
 Mark to market accounting.

Decline in Bank Market Value
2007 to 2009
Global Imbalances
Bollard to Jobs Summit
 Western countries need to save more,
export more and adjust to lower
currencies
 Eastern countries have to consume
more, run down Reserves and adjust to
higher exchange rates

The real economy
Spread to real economy:
Rapidly falling house prices
 Companies unable to expand or renew
debt
 People and firms cut spending
 Particularly affected trade …

11
World trade
New York Times, 11 April 2009
12
… and manufacturing:
Industrial Production
Effects of crisis so far

“73 to 103 million more people will remain
poor or fall into poverty” as a result – mainly
in East and South Asia (UN)

4.1% contraction expected in the OECD in
2009, 8.3% unemployment in 2009, 9.8% in
2010
14
Huge loss in output
US$8 trillion loss so far –almost two months
output of the world economy
 US$5.5 trillion stimulus so far in the US,
Europe and Asia
 OECD expects to contract by 4.1% in 2009
 Unemployment:

– OECD forecast 8.3% in 2009, 9.8% in 2010
– Currently 10.2 % in US (26 year high)
15
World Outlook (according to IMF)
Annual change in GDP %
(Forecasts from Sept 2009 to 2010)
10
8
6
Emerging
4
World
Advanced
2
0
-2
-4
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-6
16
IMF now says!

IMF blames policymakers for "a general
belief in light-touch regulation based on
the assumption that financial market
discipline would root out reckless
behaviour and that financial innovation
was spreading risk, not concentrating it.
Both these assumptions proved wrong,
and the result was a massive asset
price bubble ...".
Bank of England says..

Andrew Haldane, the Bank of England’s
executive director for financial stability, says
failures due to “disaster myopia” (the
tendency to underestimate risks), a lack of
awareness of “network externalities” (spillovers from one institution to the others) and
“misaligned incentives” (the upside to
employees and the downside to shareholders
and taxpayers).
Australia and New Zealand
 New Zealand and Australia not as hard
hit
– Sounder banking system – less
competition? Less savings? Banks would
have if they could have? (Former Governor
of the Reserve Bank of Australia, Ian
Macfarlane)

Australia hit less
– Partly due to China; partly government
response
– Did not go into recession, unemployment
at 5.7% - less than New Zealand
19
New Zealand
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
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
Trade falls, commodities hit less
Economy appears to have stopped contracting
Unemployment at 6.5%, still rising – consensus
forecasts for over 7% in 2010 and 2011 (but
Reserve Bank forecasts 6.9% peak in March
2010)
Manufacturing and construction particularly hard
hit
Exchange rate over US$0.70 – hurting exporters
But cautious optimism
20
Recession + Familiar
Problems
Current account deficit
 Low productivity levels and growth
 GDP per capita trends
 Low savings
 Small export sector
 High dollar/monetary policy

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99
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00
20
01
20
02
20
03
20
04
20
05
Real GDP per capita as ratio of
OECD average
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
Australia
Denmark
New Zealand
United Kingdom
United States
Household Debt 1995 to 2009
Source:
Treasury
Monthly
Economic
Indicators,
October
2009
House prices: no longer falling
September 2009
(Quotable Value)
Despite
predictions
Treasury Budget
forecast:
House prices to
decline nearly
• 8% in the year to
March 2010
• 4% in the year to
March 2011.
In fact – values are
now only 1.1%
below the same
time last year,
but 7.1% below
2007 peak
House prices: no longer falling
Source:
Treasury
Monthly
Economic
Indicators,
October
2009
Interest rates compared - Oct 07 to Sep 09
Source: Reserve Bank of New Zealand
14
Business base lending rate
Interest Rate (%)
12
10
Floating first mortgage new
customer housing rate
8
2-year fixed rate
6
6 month term deposit rate
4
OCR
2
0
The Current Account Deficit
(CAD) 1999 to 2013
0
0.0%
-1.0%
-2
-2.0%
-4
-6
-4.0%
-8
-5.0%
-6.0%
-10
-7.0%
-12
-8.0%
-14
-9.0%
-16
-10.0%
1999
2000
2001
2002
2003
CAD ($b)
% GDP (RHS)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
CAD forecast ($b)
Forecast %GDP (RHS)
% of GDP
$ Billion
-3.0%
Annual Change in GDP (%) 1999 to 2013
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-1.0%
-2.0%
-3.0%
Actual
Forecast (Treasury)
Projection (RBNZ)
2011
2012
2013
Quarterly changes in GDP by broad sector,
September 07 to June 09
4.0
Quarterly change (%)
3.0
2.0
1.0
Primary industries
Goods-producing industries
Service industries
Total GDP
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Quarter
Annual Unemployment Rate
March 1999 to March 2009
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1999
2000
2001
2002
2003
2004
2005
Unemployment Rate (%)
2006
2007
2008
2009
Projected Unemployment 2010-2012
(Forecasts: Reserve Bank, Sept 09)
8%
180,000
Percentage unemployed
6.5%
6%
6.0%
6.5%
6.8%
6.9%
6.8%
6.7%
6.4%
Numbers unemployed
160,000
7%
140,000
6.5%
5.9% 120,000
5%
5.0%
100,000
4%
80,000
3%
60,000
2%
40,000
1%
20,000
0%
0
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Unemployment rate (LHS)
Forecast Unemployment Rate (LHS)
31
Numbers of working aged people receiving main
benefits 1999 - 2009
400,000
350,000
300,000
250,000
200,000
150,000
100,000
Domestic Purposes Benefits
Sickness Benefits
Invalid's Benefits
Other main benefits
All main benefits
Unemployment Benefits
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
0
Mar-99
50,000
Budget 2009
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Increased expenditure $3 billion this Budget
Of which “operating allowance” for new spending $1.45 billion
(down from $1.75 b)
But only $1.1 billion in future years (growing at 2% per year).
Health usually takes $750 m!
Capital allowance $1.45 billion for Budgets 2009 to 2012
Cuts in spending to pay for new priorities
– Superannuation fund
– Adult and Community Education
– Pay and Employment Equity Unit
– Public service redundancies and continuing reviews…

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33
Greatly increased debt
Did they do enough?
New Zealand Government Operating Balance Before
Investment Gains and Losses (NZ$ billion) 1999 - 2013
8
6
4
2
$ billion
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-2
-4
-6
-8
-10
-12
Actual
Forecast
2009
2010
2011
2012
2013
Ratio of Government Debt to GDP (%)
1999-2013
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
-5%
-10%
Gross (Actual)
Net including NZS (Actual)
Net excluding NZS (Actual)
Gross (Forecast)
Net including NZS (Forecast)
Net excluding NZS (Forecast)
Public Debt (Percent of GDP)
New Zealand
Source: IMF World Economic, Sept 2009
36
More on Debt
September net debt 11.8% of GDP
 UK net debt 59.2% of GDP
 NZ Gross debt 26.9% of GDP
 Was 35.7% in 1999

Government Spending
(OECD average 2009= 41.5% of GDP)
60
Jun-91
50.2
50
Jun-96
41.1
40
Jun-00
39.2
30
Jun-07
40.3
20
Jun-08
41.1
Jun-09
45.3
10
Jan-07
Jan-08
Jan-09
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-91
Jan-92
Jan-93
0
Annual Change in Average Ordinary-Time Hourly
Earnings (%), 1999 to 2013
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1999
2000
2001
2002
2003
2004
2005
Actual
2006
2007
2008
Forecast
2009
2010
2011
2012
201
Annual Change in Average Ordinary-Time Hourly
Earnings compared with CPI 1999-2013
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-1.0%
Actual Earnings
Forecast Earnings
CPI %
Reserve Bank CPI Forecast
2012
2013
The Wages Question


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Share the pain…
weren’t so keen on
sharing the gain
Still shortages in
many areas
Pressures – CPI,
affordability, line-byline reviews, tax cuts,
jobs focus
Catch up with
Australia – ever?
Real wages vs labour productivity
gains
1980-2008
$40.00
Wage in June 2009 dollars

2200
$35.00
2000
$30.00
1800
$25.00
1600
$20.00
1400
$15.00
1200
Productivity wage,
1980 base (Left
axis)
Productivity wage,
1989 base (Left
axis)
Real average
ordinary time wage,
June 2009 dollars
(Left axis)
Labour Cost Index
of real ordinary time
hourly wage or
salary (Right axis)
Is it over?
New Zealand

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Unemployment will continue to rise – but not
as much as originally feared
Banks safe – but finance sector still shaky
Exports down, exchange rate a barrier, but
commodity prices holding
Manufacturing and construction seem to have
bottomed out
But big risk of housing price bubble reigniting
Risk of jobless growth
Constraints on government spending – some
real, some political
Is it over? - Overseas
UK still in recession, US coming out – due to govt
 Still very high unemployment, low trade
 Still concerns about the financial sector…

– CIT Group, 100-year-old lender, filed for bankruptcy yesterday,
will probably cost US taxpayers around US$2.3 billion. “Stocks
tumbled around the world amid renewed fears about the state of
the U.S. financial sector.”

…and back to their old ways
– The biggest US banks (e.g. Goldman Sachs, JPMorgan Chase)
which have grown even bigger due to takeovers and have received
tens of billions of US government money “are once more betting
big on bonds, commodities and exotic financial products, trading
that nearly stopped during the financial crisis”
– “the five biggest banks’ average potential losses from a single day
of trading topped $1 billion, up 76 percent from two years ago”
– Bailouts came quickly, but new financial regulation has been slow,
in large part because of resistance from the financial sector.
Now on the agenda…

A lot of rethinking of old assumptions –
– More, not less government
– Stabilisation approach
– Address underlying causes of domestic recession
and economic vulnerability
– Green New Deal?
– Case for nationalisation
– Regulation and global supervision of local and
international finance
– Changing power relationships – e.g. G20
– Greater development focus internationally
44
Principles to stand by





Fairness
– Greater equality, equity and valuing diversity
Participation
– Te Tiriti, and greater voice in workplaces and society
Security
– Security of employment and income, role of the state
Improving living standards
– Wages, social wage, leisure, our environment
Sustainability
– Economic, social, cultural, environmental
A framework for change



Sustainable economic development
– A strong economy which takes account of its side effects
on the environment, society and cultures
Decent work and a good life
– Good and fair wages, rewarding jobs, effective unions,
secure employment, social protections , low inequality,
social equity
Voice: real participation in workplace, economic and
community decision-making
Economic Development

Government support of firms, with conditions
i.e. employment creation / export or import substitution
potential / industry standard employment agreements /
commitment to skills development / fair remuneration /
progress to pay equity
Buy back Telecom’s physical network and begin
to buy back the electricity system
 Support Māori economic development
 Encourage worker cooperatives and other
alternative investment

47
Financial and Monetary Policy
 Closer
oversight over financial institutions
 Stabilise exchange rate
– Management of international capital flows / currency
controls / cooperation with other nations
 Reserve Bank to:
– Take action on exchange rate and international
capital flows
– Have broader monetary policy including employment,
living standards, etc.
 Finance for investment in NZ (Kiwi bonds, NZ Super Fund)
48
International Economic
Relationships



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Support better international financial regulation
and supervision
Support a cross-border financial transactions
(Tobin) tax
Manage international capital movements to and
from NZ
New internationalism: need for cooperation rather
than market approach (e.g. trade agreements)
Controls on foreign direct investment
49
Taxation





Introduce a 45% tax rate for incomes $150,000+
End deductibility of losses in investment property
against personal income
Capital gains tax exempting primary homes
Land tax exempting most primary homes
Research and development funding for firms
50
Environment
Green New Deal
– Tax breaks for investment in environmentally
beneficial technology or services
 Investment in skills for a low carbon economy
 Just transition for workers and communities
affected by climate change policies
 Alternatives to gross domestic product (GDP) to
measure progress

51
Productivity
Establish Productivity Commission which includes
support for workplace initiatives
 Address poor returns to workers from productivity
gains
– Living Standards Review Authority with tripartite
involvement

52
Employment
Skills Investment Fund Booster package (after 13 weeks
unemployment)
 Flexisecurity
– 90% income replacement on job loss
– Active labour market policies
– Support for up-skilling
– Tripartite design and governance
 Increase minimum wage: $16.87 (66% of average wage)
 Good employer criteria for those seeking permanent skilled
migrants
 Pay and Employment Equity workplace assessments

53
Housing

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Low interest funding for new housing through Reserve Bank
Assessment of housing need to create a National Housing Strategy
More low cost housing
– Expand NZ’s housing stock by 20%
– Local council/developers to meet quota of affordable housing
– Increase tenant security by reforming tenancy laws
– Sponsor designs of low cost, green, healthy housing
Increase affordability by
– Subsidised lending for low income/disadvantaged groups
– Expand shared equity and Kiwisaver house purchase schemes
54
Retirement



Enhanced Kiwisaver scheme:
– 6% compulsory employer contributions (phased in
over 4 years)
– 2% compulsory employee contribution
– 2% government top-up
Allow beneficiaries and non-working parents to receive
government contributions equivalent to 6% of average
wage
Inquiry into equity issues for those on low pay rates
and women
55
Participation



Improve worker participation through:
– Representative structures in workplaces
– Industry sector councils (productivity/ skills/ industry
development / firm networking)
– Mechanisms for workers voice
Enterprises (20+ workers) to provide access for community
organisations /local govt to consult workers
Increase depth and diversity of NZ media
– Trust-owned ‘public service’ newspapers and other
media
– Funding for investigative print journalism
56
Conclusion

Workers did not create this economic crisis
 Worst financial crisis in 70 years
 Opportunity to rethink unfair and
unsuccessful economic and social policies