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Financial Markets Crisis and Development. Berlin 17. November 2008. Peter Wahl World Economy, Ecology & Development Association Berlin. WEED PeWa. On the character of the crisis. The biggest financial crisis since the Great Depression It is not over

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Financial MarketsCrisis and Development

Berlin 17. November 2008

Peter Wahl

World Economy, Ecology & Development AssociationBerlin

WEED PeWa


On the character of the crisis
On the character of the crisis

  • The biggest financial crisis since the Great Depression

  • It is not over

  • Its epicentre is the US, the still biggest economy in the world

  • It heavily affects real economy

  • Industrial countries in recession

  • Whole world will be affected

  • Systemic crisis of finance

  • The bankrupcy of the economic paradigmof self-regulating markets, laissez-faire

  • Collapse of the finance based growth model

WEED PeWa


A systemic crisis which system
A systemic crisis – which system?

Financialisation

Asset driveneconomy

Shareholdercapitalism

Predatorcapitalism

Turbo capitalism

Financecapitalism

WEED PeWa


Some current explanations
Some current explanations

Greed

Easy money

Subprime crisis

Lack of supervision

WEED PeWa


Basic characteristics of the finance based model
Basic characteristics ofthe finance based model

  • Dominance of finance over real economy

  • Speculation

  • New instruments

  • New actors

WEED PeWa


Traditional role of international financial markets
Traditional role of international financial markets

  • providing efficient services payment system for households and real economy

  • providing money for public and private investment - lending

Real Economy

Subordination

Financial markets

Service function of financial markets

WEED PeWa


A new system has emerged

Financial markets

Dominance quantitaively &qualitatively

Real Economy

  • Wealth, asset driven

  • Centred around the shareholder value

WEED PeWa


New economic environment after bretton woods
New economic environmentafter Bretton Woods

Transnational Markets

Floating exchange rates

Big bang of financialisation

profit

New

sources

LiberalisationDeregulation


Foreign Exchange Reserves and Foreign Exchange Turnover

WEED PeWa


Extreme expansion of markets

2 trillion $

per workday

Volume of trade and FDI Iess than 3%

20% hedging („hot potatoe trade“)

The rest is arbitrage and speculationOverliquidity - Instability

WEED PeWa


Speculation on global level is now possible

Interest rates

Speculation

Speculation

Exchange rate

Speculation

Equity,shares etc.

WEED PeWa



New Instruments

Certification, derivatives


Certification derivatives i
Certification/Derivatives I

Transformation of debt

into

tradeable asset


Certification ii
Certification II

Switch of company financing

from bank

to financial markets


Traditional Credit Cycle

Bank

Gives Credit

Interests Principal repayments

WEED PeWa


Certification
Certification

Credit

Certification

Fghhg678hjltr676

Fghhg678hjltr676

Fghhg678hjltr676

Fghhg678hjltr676

Fghhg678hjltr676

etc.

WEED PeWa


The vicious cycle
The vicious cycle

Debt is permanently growing faster than real economy

Servicing the debt through new debt

Further Increase of debt

WEED PeWa


Hli highly leveraged inst
HLI (highly leveraged inst.)

Up to 30 times of own capital as credit

WEED PeWa



New Actors

The institutional investor


The institutional investor
The institutional investor

Banks

Pension Funds

Investment Funds

PISS

Professionalisation

Institutionalisation

Sophistication

Specialisation

=

of the property function

WEED PeWa


Shareholder orientation
Shareholder Orientation

Traditional use of shares:

Dividend

Share

Shareholder Value:

Sale

Buying

Sale

etc.

buying

Share

Share

Share

WEED PeWa


The locusts hedgefunds private equity
The locustsHedgefunds &Private Equity

  • Minimum investment (1 mio. onwards)- Based in OFCs- Institutional Investors & HNWIs- leverage

WEED PeWa


Consequences of finance based accumulation
Consequences of finance based accumulation

  • Instability of financial system

  • Unequal distribution

  • Reducing policy space

WEED PeWa


Consequences on financial stability
Consequences on financial stability

Contagion: Market integration creates linkages which increase speed and magnitude of spillovers

Momentumtrading

Short term investment

Herdingbehaviour

Risks of risk-managemnent

Procyclical Rating

WEED PeWa


Increasing frequency of crashes
Increasing frequency of crashes

1984 Debt Crisis

1997Asia

1994 Mexico

1998 Russia

1998 Brazil

2000 Turkey

2000 New Economy

2001Argentina

WEED PeWa


Consequences on real economy
Consequences on real economy

Speculation, arbitrage, certifiation

Investment goes into portfolio investment

Structural underinvestment in real economy

WEED PeWa


Decreasing investment in real economy increasing profits
Decreasing investment in real economyincreasing profits

WEED PeWa


Since the nineties real wages in most countries are stagnating or decreasing
Since the nineties, real wages in most countries are stagnating or decreasing

WEED PeWa


Between 1996 and 2005 the liquid assets of HNWIs have more than doubled: from 16 trillion to 33 trillion US

WEED PeWa


WEED PeWa than doubled:


”As a result of the extended exit option which capital is enjoying, the policies of governments have become hostage of the financial markets.”

Yilmaz Akyüz, former chief economist UNCTAD

„Today, investors have not any longer to follow governments, but goverments have to follow investors“

Rolf E. Breuer, former boss of Deutsche Bank

„ We cannot make political decisions against the financial markets“

Joschka Fischer, former German foreign minister


Peter Wahl enjoying, the policies of governments have become hostage of the financial markets.”

[email protected]

Thank you

For your attention

WEED PeWa


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