GEOG 240: Day 15

1. GEOG 240: Day 15 Chapter 9 – The Uneven Geographies of Finance

2. Housekeeping Items • A reminder about Wednesday’s film, “Green Fire” and the Urban Fest on Friday from 3 to 9:30. It’s free, but please register with pamelathejackal@gmail.com if you’re planning to come, and take posters if you can distribute them. • Today we’re going to go over Chapter 9, which Sam already gave us an introduction to, and we have a presentation from Zane. • I looked into it further and Argentina (profiled in the video) was the country that tried to go it alone under General Peron, with not very successful results. I made a limited number of copies of a chapter by an author who has definite neo-liberal tendencies, but who makes some interesting points about the divergent trajectories of the U.S. and Argentina over more than a century.

3. Chapter 9: the geographies of finance • Money and credit are a pillar of the global financial order. • They are more mobile than ever. • Nonetheless the financial system also remains as much or more unevenly developed, with much of the activity being concentrated in super-centres such as New York and London. As you may heard, Wall Street was shut down by super-storm Sandy for the first time since the 1880s. • Money and credit are ‘lubricants’ of capitalist society, without which the system would grind to a halt. • Businesses require start-up capital and, to make loans, financial institutions need money from their customers. Increasingly, consumers need credit to go on consuming and, unless you are super-wealthy, you need a mortgage to buy a house or condo. • As the book says, “money is a measure and store of value. It can be anything that is accepted as payment for goods [or services]” – cowry shells, grain, weapons, cattle, cigarettes, precious metals, paper money, IOUs in the form of cheques, and debit and credit card payments (the former being equal to cash, the latter being an IOU on which you are charged interest by the bank).

4. Chapter 9: the geographies of finance • When you have money, it’s much easier to make more of it because you can invest it or loan it out. Of course, you can also lose your shirt. One of the things that pissed off the Argentines is that the rich took their money offshore in the dead of night when the crash occurred, whereas the accounts of ordinary Argentines were frozen. • In the old days before deposit insurance, if a bank lost its money through risky investments or as a result of a depression, people could lose their life savings, and during the 2007-08 meltdown a number of pensioners lost all the money in their pension funds. • Credit and financing allows surpluses elsewhere in the financial system/ economy to be transferred to the underwriting of new projects that are capital-deficient.

5. Chapter 9: the geographies of finance • Money, in addition to being a measure and store of value (for instance, in theory my paycheque reflects the value of my labour and I can store that value for future use), and a medium of exchange and circulation (including credit), so I can spend my salary on the things I need; it also serves as a universal equivalent. Some say we increasingly live in a ‘cashless’ society. • Despite differences in currency, I can use my money to buy objects or services in any corner of the globe. For investors, financiers, and consumers, the electronic nature of transactions means that they can be instantaneous, overcoming the friction of distance and greatly intensifying time-space compression. • As we learned earlier, the role of central banks is to set interest rates to either stimulate economic activity or dampen inflation.

6. Chapter 9: the geographies of finance • For the last several years – in contrast with the mid-80s when interest rates were approaching or exceeding 20% – interest rates have been very low, which has stimulated many people to take out mortgages who might not otherwise do so. • Many of the innovations in modern finance first originated in Italy, in cities like Venice. Credit was needed for trading ventures. • Initially, credit was also made available to monarchies and smaller units like principalities. • During the Industrial Revolution, local and regional banks developed to provide capital for manufacturing firms; most people, if they had a ‘surplus,’ kept it in their mattress or other hiding place. • Finance scaled up with the development of national firms.

7. Chapter 9: the geographies of finance • As companies entered the global stage, so did banks and other financial institutions. Share capital and credit markets (including venture capital) became increasingly important. • As we also noted, in the wake of WW II, institutions like the World Bank emerged to loan money to countries. • In the last forty years, money has become increasingly fluid, and financial activity has become increasingly divorced from the ‘real’ economy, instead focusing on derivatives, futures, currency speculation, and other hocus pocus activities. • The shenanigans on Wall Street leading up to the 2007-08 meltdown cost a lot of people their jobs, homes, and pensions. However, except in Iceland, the perpetrators were actually rewarded for their malfeasance.

8. Chapter 9: the geographies of finance • Two consequences of this hyper-mobility are 1)financial institutions can dump currencies or disinvest with the touch of a keyboard. This makes countries even more reluctant to adopt policies unpopular with corporations and financial institutions (i.e. the fear of capital flight). 2)psychology comes to play an even bigger role. One investor getting spooked can trigger panic selling (the ‘domino effect’), and this can affect stocks as well. • There are instances of countries standing up – such as Malaysia in the 1990s Asian meltdown – but they are somewhat rare (see J.R. Saul, The Collapse of Globalism). • The textbook cited the example of financial crises in Mexico that led investors to avoid developing countries altogether for a while.

9. Chapter 9: the geographies of finance • In some countries, such as Germany, financial activity remains relatively decentralized whereas in the UK, it is focused mostly around London. In Canada, Toronto is the major financial centre. • Table 9.3 shows the top twenty global financial centres as of 2010. Of the top 10, two are in the U.S., 3 are in Europe, 4 are in Asia, and one is in Australia. • In daily turnover of equities, 50% occurs in the U.S., 31% in Europe (mostly in a handful of countries), 17% in the Asia/Pacific region, and a miniscule fraction of the rest in South America, Africa, and the Middle East. • Global finance has grown enormously. To take just one sector, in 1973 foreign exchange markets totaled $10-20 billion, twice the value of trade. By 2004, this had grown to $1.5 trillion, over 90 times the value of trade.

10. Chapter 9: the geographies of finance • Another trend over the last forty years is deregulation: domestic banks can go global and foreign banks can operate domestically, exchange and capital controls have largely been abolished, along with the distinctions between types of financial activities that individual institutions can conduct. • Along with this is the growth in the non-traditional financial products sector, such as futures trading, currency speculation, and derivatives. Figure 9.1 shows the growth of derivatives activity from around $80 billion a year in 1998 to a peak of close to $700 billion just before the crash. • One of the phenomena that the authors comment on is how the financiers enrich themselves (with bonuses on top of salaries, even when their companies are going south), while access of many people around the world to credit is often more marginal than ever.

11. Chapter 9: the geographies of finance • In the U.K., 1.5 million don’t even have bank accounts, and many more only have basic savings accounts. This is much more true for the majority of people in the developing world. • In Vancouver’s Downtown Eastside, most people could not get access to bank accounts. For that reason, now-deceased community activist, Jim Green, started the Four Corners Bank with the support of the then-NDP government. One of the first things the Liberals did when they came into power was abolish the bank. • Through bank mergers and to save costs, many banks have closed branches – especially in poorer neighbourhoods– though in Canada numbers continue to hover around 6000. • For over 100 years, caissepopulaireand credit unions have offered people an alternative. VanCity began in the 1940s, offering loans in neighbourhoods where the banks wouldn’t and extending loans to women without the consent of their husbands.

12. Chapter 9: the geographies of finance • One thing that has hurt a lot of neighbourhoods in North America is red-lining, something that has been going on for at least sixty-plus years. This involves marking certain areas as “no-go” for mortgages or home improvement loans. It derives its name from the practice of loans officers having areas on maps outlined in red indicating which areas would not be eligible for loans. [See Figure 9.3 for an example of redlined areas for Los Angeles.] • This practice seems to have been relaxed in recent years with the practice, closely tied to the derivatives market, of making ‘sub-prime’ or NINJA loans: No Income, No Job or Assets – and then selling them to a 3rd party who bears the risk. • Where marginalized people don’t have access to loans, they turn to ‘second-tier’ moneylenders: pawnshops, cheque-cashing companies, and even loan sharks…

13. Chapter 9: the geographies of finance • The authors argue that the global equivalent of marginal-ization and exploitation is the debt crisis in developing countries where they struggle, in some cases, just to keep up with the interest on their massive debts (see Figure 9.4 for map of the size of these debts and their percentage ratio to annual GDP). • Developing country debt is now nearly $2 trillion dollars, with Sub-saharan Africa spending four times more on interest payments than health care and education expenditures. • Between 1983 and 1994, developing countries paid between $112 billion and $165 billion more to developed countries than they received in aid. Some of this was the result of past mismanagement. • Some, such as Bob Gelfdof, Bono, Oxfam and others have called for many of these debts to be cancelled.

14. Chapter 9: the geographies of finance • I won’t go into the financial crisis of 2007-2008, except to say that the best overview is The Inside Job, a video available at VanIsleVideo. It attributes the crisis to: • progressive deregulation of the financial sector, particularly under Reagan and the Bushes, with the ideological support of Alan Greenspan of the Federal Reserve Bank, etc.; • the growth in the derivatives market (facilitated by the latter); • a ‘revolving door’ between financial sector personnel (for instance, from Goldman Sachs), the White House, academia, and the so-called ‘regulators’; • that the big financial companies were ‘too big to fail’ and also wielded enormous political clout (they were able to ram the bailout through Congress against the wishes of a majority of Americans and initially most Congressfolk).

15. Chapter 9: the geographies of finance • The post-80s neo-liberal environment has seen more risk-taking, more ‘complex and opaque’ innovations, a ‘lack of proper scrutiny and regulation,’ and the dispersal of risks through the entire global financial system, often with disastrous results. • When banks tightened up their lending in response to losses, it reverberated through the whole system, as it made normal operations much more difficult for businesses. • Other factors include the increasing indebtedness of even major nations such as the U.S., and record high levels of consumer debt. • Table 9.4 shows downturns in GDP by country as a result of the crisis, and Figure 9.6 shows the extent of foreclosures in the U.S. as of 2009. [See also Figure 9.5 on the increase in unemployment rates in various parts of Britain.]