Transcript Diapositiva 1

ISS Special Seminar Series:
Beyond Financialisation
Money and Finance: The
'Real' Determinants of
Economic Development
Jan Kregel,
Levy Economics Institute
Text
Text
Text
Text
Text
Two Hand Luke
• No One-handed Economists
• Everything is dual
– Nominal - Real: Money is a veil
– Productive - Unproductive: Professors are a waste
– Finance - Production: Financialisation
– Labour - Capital: Source of Profit
– Micro - Macro: Individuals v. Aggregates
– Firm - Market (Industry)
– Planning - Market: Coase on non-market organisation
– National - International: GNP-GDP
2
Inherent {Classical} Bias
•
•
•
•
•
Real is Real
Productive supports growth
Individual is better
Market is better
Micro is Foundation
3
Keynes’ Paradox
•
•
•
•
Money is “Real”
Maximise Money Profit - Share price
Marx M-C-M’
Business does not maximise
–
–
–
–
Real Output
Employment
Sustainable environment
Gender equality
• Everything is “Finance”
4
False Divisions
– Finance - Production
• Money- Real
• Firms Earn Profits from Finance and Production
– General Electric
– General Motors
– National - International
• Tradeable -- non-Tradeable
• Trade is “Real”
• Impact of Capital Flows
– interest arbitrage
– direct investment
5
Integration of Production and Finance
• Obvious:
• Decline in 1970s Profitability - exchange rate
• Change in Technology Paradigm
– Perez: from Mass Production to ICT
– Economies of Scale to Economies of Scope
• Not So Obvious: Impact of Finance on Industry
• Lazonick: Influence of the Stock Market
– No Finance from Equity Issues
• “Impatient Capital” -- short term return
• Change in the Financial Structure
– The decline (death?) of commercial banks
• Deregulation (Finance and Utilities)
• Rise of “Managerial Capitalism” - Short-termism
6
Share of Corporate Profits in GNP
•
8
Impact of Stock Market
•Lazonick: Old to New Economy Business Model
•OEBM: What is good for General Motors is Good for America
• Objective: Long-term growth and survival of firm
• Career employment with one company
• Stock market: separation of ownership and managerial control
• Government investment in infrastructure; knowledge
•NEBM: What is good for Silicon Valley
•Objective: Profitability, Shareholder value
•Stock market for corporate control:
• Shares as takeover/buyout moneyCorporate Raiders, Private Equity
•
FundsIncentive Compensation: Stock OptionsNASDAQ IPO
support for venture-capital investment
Outsourcing, globalisation of Value Chain
Five functions of the stock market
in the industrial corporation
IPO: induces financial commitment to new firm formation by
enabling private equity holders to monetize their stakes
Market for Corporate Governance: enables separation of share
ownership from managerial control
Shares as Money: Equity provides a currency for mergers and
acquisitions, thus permitting the extension of strategic control
Compensation: the stock market provides a currency for
recruiting, retaining, and possibly motivating personnel, thus
facilitating their organizational integration
Finance: the stock market serves as a source of financial
commitment, providing a company with funds without the
guarantee of a return
Source of Finance? NO!
Industrial corporations
provide cash to the stock
market, not vice versa
Source: Federal Reserve Board Flow of Fund Accounts
Components of income of top 0.1%, 1916-2008
Dominance of property income
Dominance of financial market income
spike in salaries
from stock option
gains
Source: Saez 2010 http://elsa.berkeley.edu/~saez/
http://www.aflcio.org/corporatewatch/paywatch/
Rise in CEO pay depends on gains from stock options: see Lazonick,
“The Explosion Executive Pay and the Erosion of American
Prosperity,” Entreprises et Histoire, 57, 2010.
Financial System Deregulation
• Glass-Steagall: Monopoly straightjacket
–
–
–
–
Protected deposit business
evaporated with financial innovation
innovations used securities markets
Commercial banks could not deal in securities
• Banks lobbied to lift their “protected” monopoly to
allow them to compete for business with investment
banks
• And to compete with Japanese and European Banks
not limited by G-S Regulation
14
Commercial Banks in Trouble
•
15
Example: Regulation Q
• zero rate on deposits - cheap funding
• Business depositors moved their funds into
Treasury bills
• Commercial Banks (City) offered
negotiable certificates of deposits
– primary dealers provided market making
– Provided an interest earning alternative to offer
to corporate clients
16
Money Market Mutual Funds
• Corporate commercial paper cheaper than short-term
bank borrowing
• Mutual Funds bought short CP
• Issued Constant $1 NPV “shares”
• Offered an interest earning equivalent to a
commercial bank deposit
• Offered lower borrowing rates to corporate clients
• Commercial banks lost both corporate loan and retail
deposit business
17
Banks fight Back
• Section 20 Exemptions
– Allowed limited securities dealing
• 1999 Gramm-Leach-Bliley
– Commercial banks become Financial Holding
Companies
– “Relationship (Tying) Loans”
– IPOs and Stock Analysts
– Merger Financial & Consulting Business
• The New Debt Pushers
18
Deregulation of Utilities Industry
• Transportation
– Airlines, Road transport
• Energy
– Electric public utilities
– Natural Gas
– Petroleum
• Telecommunications
– Break up of ATT long-distance fix line
– introduction of wireless
19
Impact on “Productive” Sector
• Commodity Futures Modernisation Act
– Exempts Derivatives from reg
– Enron loophole
• SPVs, electronic energy supply market trading
• Telecom Act 1996
– long-term capacity swaps
– Global Crossing, World Com
• IPO Spinning
• Concentration from Deregulation for Competition
• Use of Stock Options for Compensation
20
Contractual Saving
• Health and Pension Benefits
• Public Incentives to Save
– 401Ks
– IRAs
– Private Pension Provisions
• Created the Asset Management Industry
• Long Term Obligations
• But Short Term Performance Benchmarks
21
Rise of Alternative Investment Vehicles
• Michael Milken -- Junk Bonds
• Hedge Funds
– Interest Arbitrage, Risk Arbitrage
•
•
•
•
KKR - type Corporate Raiders
Private Equity Funds
Venture Capital Funds
Vulture Capital Funds
22
Short-termism
•
•
•
•
•
Value Extraction -- Private Equity
Shareholder Value
Money Manager (Shareholder) Activism
Option-based compensation
Meeting Profit targets
– Earnings Smoothing
• Emphasis on Quarterly Performance
• Incentive to
– Outsourcing of production
– Global Diversified Production - low costs
• Recovery of Corporate Profits
• Global Diversification of Portfolios
23
National v. International
• Impact of international finance on productive
structure is not new!!
– Keynes: The City hurt British Industry
– Vargas: LatAm financed US!
– Mira Wilkins: “Free Standing Companies
• British Companies List in London to Raise Capital but to
Exploit opportunities in Colonies
• RTZ, BP are examples
• The Recovery in International Finance comes in
the late 1990s !
24
25
26
Global Finance and International Accounts
• International accounts track exchange of final goods
• Ignore the dominant role of interindustry trade and the
increasing importance of trade in semifinished
intermediate goods
• importance of private autonomous capital flows and their
impact on factor service payments
• International accounts do not reflect change in the
productive structure of the U.S. economy
– geographical dispersion of production process
– geographically integrated production and supply
chains.
27
NEBM International Division of Labour
•
Restructuring of U.S. manufacturing after the profits crisis of
the 1970s
– increased role of capital flows in the global economy after the
financial deregulation and collapse of Bretton Woods
– Exploited opening of developing economies to trade after the tariff
reductions of Uruguay round
• Most important components of trade are no longer final goods,
but trade in semifinished intermediate inputs
– research and development for design-marketing of internationally
traded goods remains in the developed country headquarters of the
multinational corporations
– stages of the actual production process are spread across low- wage
developing economies
28
False Division: National:Global
•
Geographical dispersion of production distorts reported trade balances.
•
If a U.S. transnational company undertakes foreign direct investment through the
creation of a foreign subsidiary to produce goods it had formerly produced in the
United States, the payments balance shows a capital outflow from the United
States to establish the foreign subsidiary and records the imports of the goods or
services produced by the foreign subsidiary.
•
If the increased profits that result from the lower production costs in the foreign
subsidiary of the U.S. corporation are not repatriated, they are recorded as a
credit in the factor services balance with an offset entry under foreign direct
investment in the capital account.
•
Rather than appearing as the export of the design technology for the production
of the good by the foreign subsidiary, what appears instead is the profit of the
foreign affiliate of the U.S. company in the factor services account.
29
Misrepresentation of Tech Trade
•
•
•
•
•
•
•
U.S. corporation innovates with new production design
Transmits it via internet to a foreign-owned production facility
Imports the output produced with the new design to US
Accounts record import incorporating the design representing only the foreign
value-added—i.e low wage costs and the return to the foreign producer.
The export of technology appears as the increased domestic profit reported by
the U.S. company represented as difference between the foreign cost and the
domestic selling price
The external accounts record a deterioration and would not reflect the
nonrecorded increase in the export of technology that only appears in improved
earnings of the U.S. company and the increase in wealth to its shareholders.
A deterioration of U.S. trade balance could reflect increased profitability observed
for U.S. companies operating in the global market.
30
31
International Imbalances and Crisis
• A Major Cause of Credit (mispricing) Crisis
• Surplus represents excess saving in Asia
• Net capital flows led to low interest rates, search
for yield and higher risk investments
• Funded excessive consumer borrowing and
consumption in US
• Shifts in Net flows generates instability in money
and exchange markets
• Reducing Asian Saving creates stability
32
Imbalances:Money or Real?
•
Current Account represents net transfer of real resources: Real Saving
– Impact on (real) interest rates:
– S>I reduces interest rates : Classical Loanable Funds
•
Keynes: Financial Balances:
•
Govt balance (T-G) + Private Balance (S-I) = Foreign Balance (X-M)
–
–
–
–
•
•
•
An individual decides to consume or save, saving is financial or real assets.
In aggregate the portfolio decision is net zero:
increase in financial assets of savers = issue of liabilities by dissavers.
This is also true across countries: net saving has no impact on global net financial
assets.
An increase in net financial assets requires liquidity creation
US consumers were financed by liquidity created by US and European banks.
Their imports produced net surpluses which were allocated to US financial
assets.
Financial conditions determined by liquidity creation: Gross Flows
33
Who Funded US Consumer Spending?
Lending to US Residents by Non-US Banks By Residence
trillions of $US
34
Who Funded US Consumer Spending? Where is Asia?
Lending to US Residents by Non-US Banks by Bank Nationality
trillions of $US
35
Gross Global Flows and Developing
Countries
• Impact of FDI on production
• Impact of Gross Flows on domestic
monetary conditions; Exchange Rates
– Increased Reserves due to Sterilisation,
control of exchange rate
• New Kind of Dutch Disease
• QE does not fund flows, portfolio
reallocation does
36
Conclusions
• Money rate rules the roost
• Money determines real
• Money determines real production
structure of the economy
• National Accounts are misleading
• Global Accounting needs new approach
• Lack of Liquidity Control not Imbalances
proximate cause of crisis
37
Thank You
www.levyinstitute.org
38