Transcript Case Study: Globalization of Finance and current

Globalization and inequality
Globalization review from Thursday
• What is it?
• Why has it happened?
• Is globalization something new or part of a longer
trend?
• Why is there a backlash?
• How and why does globalization undermine local
culture
• Does it increase or decrease poverty?
• Does it increase or decrease inequality?
• What are the “dark sides” of globalization?
– Case study of the rise of global finance and its volitility
Today’s argument
• The Liberal is concerned with global growth
• The Econ. Nationalist is concerned with
American power (relative power)
• The socialist/ social democrat/ Marxist is
concerned with income distribution in the U.S.
• How does globalization impact growth, power,
and income distribution In the U.S.?
American workers are the most
productive in the world…..
Did Globalization make Americans
better off?
• Women’s earning power increased
• Minorities saw incomes rise and poverty rates
drop
• 1965-75 African American earnings rose…
• Came to a halt
• And no substantial increase since….
The Trickle down effect is working….
All groups saw their incomes rise…
But Globalization may undermine the
American Dream
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Tech. progress
Globalized trade
Competition of low-wage workers overseas
Growing immigration into the US
Decline of manufacturing
Weakening of the labor movement
Weakened leverage against employers…
And numbers don’t tell the whole story: Income
Distribution has favored people at the top
• Like a rowboat chasing
a speedboat
• Rise in average incomes
skewed by inequality
Decline in real wages
Rise of Temporary workers and
“portfolio employment”
Last hired
First fired…
Growth of a low wage work force
• Between 1975 and 1990, the percentage of
low wage employees in the total work force
grew by 142 per cent, from 17 per cent to 40
per cent
Rising inequality in the U.S.
• Since 2001…
– Decline in household income
– Stagnating wages
– Any rise in wages results from putting in more
hours
– Rising poverty in single-parent families
Distribution of wealth in the U.S.
The Escalators
A Distributive Justice perspective….
• It is the nature of capitalism to push labor
costs (wages) down as far as possible
• But this contradicts the necessity for
capitalism to sell goods and services
• Low wages constrict consumption and
eventually…..
• Produce crisis
A Class economy, not a national
economy
• American industries no longer compete
against other “national” industries
• The stateless corporation?
What has held the U.S. together?
• It all starts with finance……
CGlobalization of Finance and current
financial crisis
The globalization of Finance
• Cross-border lending has exploded in the last 20 years
• High tech and global
• growth of securitization, non-banks, and alternative markets as well as
mutual funds phenomenal –
• A firm that wants to borrow money has broad range of
choices
• Investors can buy re-packaged pieces of risk
• spread their holdings across different countries,
• different industries,
• different time periods.
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The Globalization of finance is scary
• Financial markets are subject to volitility
• And crises are increasingly damaging
• Even if there are no changes in underlying
economic conditions!
• Creditors have all the power
• And sometimes that power is psychological
The current crisis started in the U.S.
• Declining dollar value  willingness of other
nations to buy U.S. debt + economic
inequality in the U.S. + Iraq war = perfect
storm
• Fed keeps interest rates low easy money 
rise in the national debt - continued
willingness of others to finance U.S. debt 
heightened optimism + deregulation
US Structural Deficits and declining
dollar value
Decline in real wages
$3 Trillion War…..Hidden cause of
Financial Crisis?
In response……The Fed Cuts interest
Rates…..
And That led to…
National Debt Clock
Lots of credit heightened optimism
Around the same time, finance was deregulated resulting in
“irrational exuberance” unbridled greed, and corruption
Growth of finance industry
Follow the crisis….
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1. Housing values remain stable for 100 years to 1995
1995-2005 Housing prices double
+
2. Wage stagnation and income inequality
+
3. Deregulation of financial markets
4. Easy money  easy mortgages as bets on  in housing prices + Run of CDOs
and derivatives + borrowing to buy them (betting on  in value) + rating fraud +
easy insurance (AIG)  highly leveraged banks
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Housing supply overwhelms demand  housing prices fall + mortgage defaults 
CDOs lose value + Bank stock prices fall  credit drys up
How can we understand the “bailout?”
• Should we protest it?
• Should we support it?
• Will it make any
difference?
• Answers depend on
which theoretical
perspective we
embrace
(extreme) Liberal view: Let the market
solve the problem
Privileged position of private
businesses?
• If private finance and easy credit lead to
growth, governments have little choice--- they
support
• business enjoys a “privileged position” under
capitalism “because public functions in the
market system rest in the hands of
businessmen.”
• So governments have to offer them benefits
to stimulate the required performance
Primary stock holders in the Federal
Reserve
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Primary stock holders of the US Federal Reserve
* BNP Paribas Securities Corp.
* Bank of America Securities LLC
* Barclays Capital Inc.
* Cantor Fitzgerald & Co.
* Citigroup Global Markets Inc.
* Credit Suisse Securities (USA) LLC
* Daiwa Securities America Inc.
* Deutsche Bank Securities Inc.
* Dresdner Kleinwort Securities LLC.
* Goldman, Sachs & Co.
* Greenwich Capital Markets Inc.
* HSBC Securities (USA) Inc.
* J. P. Morgan Securities Inc.
* Merrill Lynch Government Securities Inc.
* Mizuho Securities USA Inc.
* Morgan Stanley & Co. Incorporated
* UBS Securities LLC.
Government manages the affairs of
the ruling class---capitalists
Or is the Bailout an economic
nationalist policy?
Or will it “save” (repair) liberalism?
• Credit is crucial to
success of a liberal
capitalist economy
• Market failures are
inevitable
• Governments must
intervene to prevent or
soften market failures
for growth to progress.
Governemnt De-regulation
Government Bailouts
The Global Fallout
Global Trade decline 1929 and 2009
Global stock market fall 1929 and 2009
Must the Bailout, stimulus, and reregulation be international?
Will the US come to the rescue and again take
on the role of global hegemon
Everyone Chill Out!
II Got this!
Who is the Lender of last resort?
• The IMF?
• Resources increased by $500 billion $40 billion
from China (loan) (not confirmed)
– $100 billion from Japan and EU (promised before G20)
– Still need $260 billion…..
• $10 billion promise from Canada
• $4.5 billion promise from Norway
• $100 billion promise from U.S.
• Mexico has already requested $47 billion line of
credit
• Will the IMF become a global Central Bank?
IMF voting power: US can still veto
Lender of Last Resort? The Fed and
Central Bank coordination
Counter-cyclical lending?
Dollar strengthened as world’s reserve
currency?
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Taking in the world’s distressed goods?
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Now it’s toxic assets
U.S.Promise not to close its market
Other G20 countries promised too
Are bail-outs of domestic industries acts of
protectionism?
Is the US is an unconscious Hegemon?
• Was the US always an unconscious hegemon?
• Does the world really need a hegemon in
Kindelberger’s sense?
• Will international institutions do the trick?
• Or will everyone keep their markets open
because they have learned that it is the best
thing to do?