Transcript After the Meltdown

After the Meltdown
Danish Institute of International Studies
9 November 2010
Three views of structural changes
due to financial crises
1. Collapse of capitalism
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Financial crisis represents systemic crisis
Parallel to Great Depression: movement towards
command economies
2. Reversal of globalisation
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Increasing protectionist pressures in US
Capital flows are unstable and create financial crises
Historical parallels: reversal in 1914 and Great
Depression
3. More state, less market
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Crisis shows failure of Anglo-Saxon capitalism (or
liberal-market variety of capitalism)
State-led capitalism in emerging economies success
State has come to play decisive role in financial sector:
Nationalisation of financial institutions, stricter financial
regulation and tighter financial supervision
• Speech by M. Nicolas Sarkozy, President of the French Republic –
40th World Economic Forum – Davos – Wednesday, Januar 27, 2010:
“without intervention of the state, everything would have collapsed”
“From the moment we accepted the idea that the market was always
right, unconditionally, without reservation and without limits, and that
no other opposing factors need to be taken into account, globalisation
skidded out of control”
Demise of capitalism?
1. Recent financial crisis not unique
•
resembles financial crises in Nordic countries and in
Japan in the 1980s and the 1990s and previous financial
historic crises
2. No belief in superiority of command
economies after collapse of communism
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different situation prior to Great Depression when many
advocated superiority of command economy (socialists,
fascists)
3. Capitalism has brought huge advantages over
recent decades
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prosperity to emerging and developing economies, etc.
different situation prior to Great Depression when
capitalism was blamed for World War I and hyper-inflation
caused big losses for savers in Germany
Reversal of globalisation in product
markets?
1. Main argument against: successful performance of world economy over recent three
decades
2. Instrument to reduce unemployment
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Households will over prolonged period concentrate on
debt reduction, can no longer function as engine for
growth
Uncertainty about situation of financial institutions will
over prolonged period cause credit restraint
Unemployment may come to play larger political role:
Debt burden of households makes unemployment a
heavier burden, expectations to governments have
risen
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Attempts to stimulate economies through expansive
fiscal and monetary policies in 2009 have failed
No support in US for policy of large-scale
investment projects
Requilibration of demand at world level: Countries
with current account surpluses resist pressures to
conduct more expansive economic policies and
currency appreciations
3. US political interest in open markets is
reduced
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After fall of communism, open product markets no
longer necessary as means to exercise political
pressure on Third World Countries
4. Importance of nationalism has increased
(China, India, US, Russia, etc.)
Reversal of globalisation in
financial markets?
1. Several emerging economies have
introduced restrictions on ingoing capital
flows to counter new speculative bubbles
2. Academic support of free capital flows has
weakened:
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Belief in efficiency of financial markets shattered after
Asian crisis in 1997-98 and after recent crisis
3. Are capital flows behind financial
crises?
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Ingoing capital flows have increased scale of house
price bubbles but not cause of financial crisis
Spread of investments and foreign banking reduced
adverse effects of financial crisis: foreign banks in
Eastern and Central Europe played stabilising role, US
mortgage-backed securities held by banks in Europe
Alternative policy instrument to counter financial crises:
restrictions on lending, (possibly) better governance
4. Trend towards countries reneging on debt
obligations? Shut out from capital flows
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Until now, governments in debtor countries have largely
guaranteed loans in domestic financial institutions and
have not reneged on government debt obligations.
Persuaded by loans from IMF and EU. Pressures from
rising government debt and tighter conditions for loans
from EU may change this policy
Cases: Iceland (ruling by Supreme Court), Hungary, Irish
Republic (no government support for junior debtholders in
Anglo Irish Bank)
More state intervention?
1. Development in 2010 has been towards
moving back state:
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Emphasis is on reduction of budget deficits: drastic budget
cuts in several countries, sovereign debt crises in PIGS
countries
No strong political reactions against budget cuts: no
violent protests, recent failure of industrial action in France
Political development shows support of budget cuts:
Conservative-Liberal government in UK, Republican
victory in mid-term elections in US
2. Does intervention in financial sector mark
new trend towards state intervention?
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Nationalisations occurred more by chance and not as
deliberate attempt to increase role of the state
Nationalisations also during previous financial crises
Nationalised firms probably to be privatised again
Tighter rules in financial sector represent ”more of the
same”, not change in design
3. Has state intervention been sucessful in
state-led capitalist countries?
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Sovereign wealth funds suffered huge losses during
financial crisis
State intervention in China used to maintain inefficient
industries
4. Belief in superiority of state intervention
shattered with failure of communism