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Origins: Global Financial Crisis
Historical Phases of Global Financial Regulation
Bretton Woods Institutions: IMF, World Bank, WTO
1944-71: National Fordism & Keynesian Regulation
Breakdown of Fordism, Keynesianism Globalization
1980-Globalization & Neo-Liberal (Market) Regulation
2001-Fed.Chair Greenspan: Post “9-11” Credit Bubble
Crisis of Keynesian Regulation
1967-71  Stagnation decline in labor productivity
End of Rising Real Wages/security “Zero-Sum game”
US Firms “outsource” LO production/ Mexico & Asia (taxes)
Downsizing of Manufacturing Firms/LO social opportunity
Decline of Organized Trade Unions LO WC Class Power
Decline of “New Deal” Political Coalition Identity Politics
Why did Keynesianism Decline?
Keynesianism subsidies political influence
Price Supports Rigidities & inflexible markets
RigiditiesBarriers to Innovation &Reinvestment
Difficult to “clear” weak firms or bad products
‘Rational Expectation’ Rising Prices Inflation
Review: Globalization Processes
Increasing FLOWS across borders of nation-states.
Flows=s people, capital, media, ideas, goods, data, disease
Increasing INTERCONNECTEDNESS X borders
Increasing Speed/velocity of Flows across State borders
HI Significance Location on Global NETWORKS
Information Revolution 1971??
Shift: Industrial to Informational Society/economy
1971: Invention of microprocessor/micro computing
Compression of “Time-Space” relations/boundaries
Rise of cheap GLOBAL “real time” communication
Rise of Knowledge-Innovation competition @ Silicon
Global Information Industry (1)
Digitalization: global conversionall info =s O, 1
*convergence: all human information/knowledge
Hardware: chips, servers, HDD computers, INTEL
Software: programming, codes, logical instructions
Algorithms: instructions to complete TASKs (service
?)
Example: The Internet, OS systems, Open source, MS
Global Information Industry (2)
Networking: Routers, satellites, fiber-optic Cisco
Content: Media, webcasting, films, TV, news FOX
Google & MS
VS. Open Source Movement
New Global Organizational Structure Web of Digital
Networks driving global interconnectedness
ICT Networks Financialization
Rise of ICT/Computer enabled Financial Services 24/7
24/7 i.e. Global Financial Networks- GE-Ford $$$
Denationalized currency: floating rates, xeno $, “stateless”
Inventions: junk bonds, derivatives, , 24/7
SW->Computer program trades, satellite, instant real time
NO Global Regulation & LO Institutional Mediation
Global Financial Integration/Risks
De-territorialization of Finance no state regulation/oversight
Barings>British Bank (Jefferson 1815) Singapore branch
trading futures based on Japanese Nikkei index
Asian Financial Crisis (1997) Japanese capital Thai real estate
Long Term Capital Management (1998) FED $3.625 bailout
ICT Networks Compress time/space 24/7 trading, computer
programs, hedge funds, derivatives, “subprime CDOs” CDFs
Solutions: Global Central Bank: Keynes, Soros, Stiglitz Nov 15th
Greenspan: Origins of Credit Bubble
A “true believer” in individual rationality & Ayn Rand
Believed Market’s would Price Risk & Self-Regulate
Opposed Increased or more aggressive REGULATION
Lowered Interest Rates & Deregulated Financial markets
Clinton & Greenspan Repealed Glass-Steagle Act (1999)
Global Sub-Prime Financial Crisis
What is happening? Panic, Banks collapsing, NO Credit,
Nationalization of Banks, IMF SAPs, HI Pain/poverty
What are the causes? Credit bubble, Housing inflation
Deregulation, No oversight, New financial instruments
Why USA first, then Global? Bush II & Neoliberalism
How did the Panic become Global? Networks, 24/7
Cause: Credit Bubble & Sub Prime
2001. Fed Chair Greenspan Cheap Credit/LO rates
Objective: Revitalize Growth after recession & “9-11”
HI USA housing price inflation @ LO rents or income
Deregulation: No down payment, Interest only, ReSets
Change: Agent making M-Loan did not hold Loan/30y
Financial Alchemy: Securitization
Original Mortgages sold to Firms: Bear Stearns, Lehman
Assumption: Value of USA houses: No decline/ 1960
Model assumes Rising H prices, Continual ReFinancing
Outcome: Rapid expansion of housing/Re financing
Mortgages Securitized  Collatoral Debt Obligations
Securitization: CDOs
Assumption: Rising Housing Prices raise value/CDOs
CDOs bundle representative Sample of mortgages from
different locations, quality, interest, principle, etc.
CDOs are then Rated by Private Bond Agencies:
Standard & Poor, Moodys, Plus new Derivatives
Deregulation: Bond Agencies Also Advise promote Sale
of Bonds Clear conflict of Interest
(Fox/chickens)
CDOs & Global Financial Networks
CDOs: Sold as HI income/HI Rated Investments
Banks, Pension Funds, Mutual Funds Own CDOs
Problem: CDOs difficult to Price: Complexity Panic
Insurance: (AIG) Credit Default Swaps/bet both ways
CDS: contract to insure value of CDOs/Also sold
Neoliberalism & Deregulation
Assumption: Self correcting Markets will price Risk
GSA outlaws commercial banks from Brokerage Business\
e.g. underwriting Stocks & securities (Goldman Sachs, Merrill )
Objective: Protect depositors & citizens from Speculation
Greenspan’s FED allows Banks 25 % of activity for brokerage
Clinton: (1999) Repeal of Glass Steagall Act (GSA) (1933)
$300 M lobbying, Treas. Sec. Rubin moves to Citigroup
Origins of the Crash & Panic
Fed (6/04) raises Interest rates to control inflation
HI Interest Rates END housing price increases
Adjustable rates & “Re-set” payments HI foreclosures
Housing Prices Decline & Mortgage defaults Rise
(2/08) Investment Bank Bear Stearns collapses
“The problem is we don’t know who’s holding it.”
Banking & Credit Crisis
Many Investment Banks, Merrill Lynch Fail or Merge
Uncertainty: Banks refuse to LEND to Banks & Clients
Because no one knows if Assets are CDOs, Derivatives
Failure of Paulson to recognize Banks Insolvency
outrage: 3 page TARP Plan, no oversight buy Mortg’s
Britain: G. Brown. Partial Nationalization of Banks
Financializtion & Global Networks
Uncertainty & Risk Spread via CDOs & Derivatives
Fear: USA is Bankrupt Deficits: trade, savings, budget
$100s of Billions lost, Crash of Housing Recession
World Economy: No credit/exports to USA Recession
Panic: Flight to Quality, Hedge Funds, Buy dollar/yen
Weak States currencies collapse IMF SAPs Riots