Transcript Slide 1

THE FINANCIAL CRISIS OF
2007-8:
WHY AND WHAT NEXT?
COSTAS LAPAVITSAS
OCTOBER 2008
• A crisis of financialisation
• Financialisation is, in the first instance, a
process internal to developed countries
a)Corporations become distant from banks
Gearing (D/E %)
2001 2002 2003 2004
USA 51.9 50.9 48.8 45.8
UK
61 86.6 80.5 80.2
Ger 106.5 153.6 131.6 121.8
Jap 155 174.4 107.4 97.1
2005 2006 2007
43.7 42.8 42.9
79.7 82 82.2
111.6 103.2 96.5
59.6 56.3 76.8
• b)Banks turn to individuals.
• Both financial assets and debts rise relative to gdp
Individual indebtedness as % of disposable income
2001 2002 2003 2004 2005 2006 2007
USA 96.4 102.6 110.2 115.9 123.5 127.5 128.8
UK 104.7 114.8 125.5 138.8 143.5 151.5 161.2
Ger 109.5 109.7 108.5 107.1 105 102.8 100
Jap
86.3 84.9 84.7 82.6 81.2 79.8
• c)Banks also turn to financial market
mediation
Commissions, fees, proprietary trading
• Financialisation is sustained by withdrawal
of public provision from housing, pensions,
health education.
• Finance has become the mechanism for
satisfying basic welfare needs.
• But real incomes have not risen
systematically.
• Bubbles inevitable, particularly in housing
US Mortgages
2001
2002
2003
2004
2005
2006
Origination %Subpr %SubSec
$2.2tr
8.6
50.4
$2.9tr
8.0
52.3
$3.9tr
8.5
60.5
$2.9tr
18.5
74.3
$3.1tr
20.0
81.2
$3.0tr
20.1
80.5
• Financialisation is also a global process
involving developing countries
• Liberalisation of K account and capital
flows as FDI and portfolio
• Inflation targeting to secure the process
Key flows
• Excess of S over I as % of GDP
2002 2003 2004 2005 2006 2007
USA -4.2 -5.1 -5.5 -6.0 -5.9 -5.1
UK
-1.6 -1.3 -1.6 -2.5 -3.9 -4.9
Ger
2.0 1.9
4.3
4.6 5.0 5.6
Jap
2.9 3.2
3.7 3.6 3.9 4.8
Asia
2.4 2.8
2.6
4.1
5.9 6.8
• Net capital flows have been negative, due to
reserve accumulation
2002 2003 2004 2005
China 292 409 615.5 822.5
Russia 44.6 73.8 121.5 156.5
Mid.
East 163.9 198.3 246.7 351.6
Africa
36
39.9 62.3 83
2006 2007
1069.5 1531.4
296.2 445.3
477.1
115.9
638.1
144.9
• Two reasons for reserve accumulation:
a)Sterilisation to defend the peg
b)Building up defences against outflow
Implications for developing
countries
Increased short-term borrowing abroad at
great cost
Increased domestic indebtedness and
financial deepening
Foreign banks promoting individual
borrowing domestically
The crisis has become global as short-term
borrowing has dried up
A regime break?
• The crisis has some to go and its effects
will become more general
• It could lead to generalised stagnation for
years to come
• It also represents a decisive blow for neoliberalism
What to do?
• Reform in developed countries: private
finance to be detached from provision of
basic needs; regulation of prices and
quantities
• Reform globally: Capital account controls,
centralised support for exchange rates, a
new means of payment. Finance for
development.