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What caused the crisis? Market failure? Policy failure?. Policy failure • US and EU government “populism” over-indebts lower-income groups • US and EU fiscal low-interest policies fuelled asset bubble (including commodities)

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What caused the crisis? Market failure? Policy failure?

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What caused the crisis market failure policy failure

  • What caused the crisis?

    • Market failure?

    • Policy failure?


What caused the crisis market failure policy failure

Policy failure

• US and EU government “populism” over-indebts lower-income groups

• US and EU fiscal low-interest policies fuelled asset bubble (including commodities)

• Global imbalances generated growing and unsustainable debts of US, EU, and Japan (G3)


Origins of current financial crisis

Origins of current financial crisis

  • Since 1990s deregulation of financial markets: risk pricing replaces prudential supervision. Rise of derivative “assets” with opaque markets and few players. Bank loans replaced by bonds, etc.

  • Huge US fiscal deficit, monetary expansion (“Greenspan put”), low savings led to a US mortgage boom/bust (non traded sector) and a huge current account deficit (traded sector).

  • Mortgage bubbles (e.g. 1992 in UK) are familiar with obvious political costs; join recurrent bubbles in past decade (dotcoms, Tequila etc);

  • But 2008 crisis is by far the most serious systemically because it threatens the global banking system itself as creditor, and whole US electorate as debtor.


What caused the crisis market failure policy failure

Financial Times, 20 Sept 2008

  • “…bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.”

  • “…a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products….”

  • “Almost as absurd has been the degree of leverage racked up by investment banks.”


What caused the crisis market failure policy failure

Rapid (and massive) US & EU government response

•Monetary expansion by the country’s central bank , e.g. Fed Reserve in the US

• Fiscal expansion (Tax cuts, govt. spending, rebates)

• Bank bailouts (Govt. infusion of taxpayers’ money into banks that fail)


What caused the crisis market failure policy failure

Topic 1: Global Impact of the 2008 Financial Crisis (FC): Comparing Canada and the Third World Countries.


What caused the crisis market failure policy failure

  • Thesis based on WST:

  • The endless accumulation of capitalis the cause for financial crises in the global economy.

  • Economic development through globalization is guided by the Washington Consensus: “privatization of state productive enterprises, reduction of state expenditures, opening of the frontiers to uncontrolled entry of commodities and capital, and the orientation to production for export (Wallerstein, 2011: 4)”.

  • However, since 1970s, the capitalists’ shifted from production to financial speculation for their continued accumulation of capital As a result, the world-system went through a series of speculative bubbles of which the FC of 2008 is one, that has lead to serious global rise in indebtednesses.


What caused the crisis market failure policy failure

  • Comparing AICs with DW:

  • While the 2008 financial crisis that originated in the US, had severe economic and financial repercussions on the core countries (the US and the European), the regulatory regimes of the Canadian financial institutions limited Canada’s exposure to the crisis and minimized its adverse impact on the economy and employment.

  • In contrast, the Third world countries where most people are already poor, faced worsening of poverty due to their declining GDP, loss of export trade and growing unemployment that led to greater poverty.


What caused the crisis market failure policy failure

TheWorld Bank Global Monitoring Report 2010: The Millennium Development Goals (MDGs) after the Crisis (April 2010)

• WB projects the poverty impact of the crisis

through the effect on growth; also for MDG targets

• “The crisis left an estimated 50 million more

people in extreme poverty in 2009, and some

64 million more will fall into that category by

the end of 2010 relative to a pre-crisis trend”

(p. 102)

• That is 2% of the world population...

http://www.imf.org/external/pubs/ft/gmr/2010/eng/gmr.pdf


What caused the crisis market failure policy failure

  • Impact of the 2008 Financial Crisis (FC): Canada

  • Economy and Finance

  • Employment and Economic security

  • Human Development and Poverty


What caused the crisis market failure policy failure

  • Canada: Financial Crisis of 2008 (FC)

  • Economy and Finance

  • 1. FC: less impact than in other AICs. Credit  has solid growth as

  • Canada’s financial institutions are better capitalized and less

  • leveraged than their international counterparts. Canadian financial

  • institutions continue to be the healthiest in the world. World Economic

  • Forum has ranked Canada’s banking system as the soundest

  • in the world for 3 consecutive years.

  • 2. Strong growth in world prices of most commodities produced in

  • Canada since mid-2010

  • 3. Canada’s sound fundamentals have made Canadian financial assets

  • attractive to international investors


What caused the crisis market failure policy failure

http://www.bankofcanada.ca/2011/03/speeches/great-recession-canada-perception-reality/


What caused the crisis market failure policy failure

2012:

http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html


What caused the crisis market failure policy failure

http://www.budget.gc.ca/2011/plan/chap2-eng.html


What caused the crisis market failure policy failure

  • The six largest domestic banks hold > 90% of banking industry assets. This adds to the banking industry’s stability

  • In 2006, sub-prime loans accounted for less than 5% of new mortgages in Canada, compared to 22% in the United States.

  • While >50% of all mortgage debts outstanding in the US were sold to investors through securitization, >75% of Canadian mortgages were held by financial institutions on their balance sheet as traditional mortgages


What caused the crisis market failure policy failure

Understanding the financial crisis of 2008

http://www.youtube.com/watch?v=qqUGoVez8xg 11 min


What caused the crisis market failure policy failure

  • However, the downside: (Canada)

  • Stock markets registered their greatest drops in more than 75 years.

  • As the contagion spreads, it directly affected our exports to the US. Three-quarters of our exports go to US markets. Sharp decline in exports - decrease by >16 % in 2010.

  • Capital investments declined due to uncertainty in a weakening financial markets with shaken consumer and business confidence: 22 % downturn in business investments in 2010


What caused the crisis market failure policy failure

http://www.bankofcanada.ca/2011/03/speeches/great-recession-canada-perception-reality/


What caused the crisis market failure policy failure

www.bankofcanada.ca/wp.../2013/01/mpr-summary-2013-01-23.pdf


What caused the crisis market failure policy failure

http://www.bankofcanada.ca/2011/03/speeches/great-recession-canada-perception-reality/


What caused the crisis market failure policy failure

  • Impact of the 2008 Financial Crisis (FC): Canada

  • Economy and Finance

  • Employment and Economic security

  • Human Development and Poverty


What caused the crisis market failure policy failure

Canada:

Employment losses were much less serious than during earlier recessions - jobs regained sooner

But, only partial recovery of business investment (45%) and exports (67%) from the losses due to the recession. Jobs linked to these sectors have not come back .


What caused the crisis market failure policy failure

2012:

http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html


What caused the crisis market failure policy failure

http://www.bankofcanada.ca/2011/03/speeches/great-recession-canada-perception-reality/


What caused the crisis market failure policy failure

2012

http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html


What caused the crisis market failure policy failure

  • Impact of the 2008 Financial Crisis (FC): Canada

  • Economy and Finance

  • Employment and Economic security

  • Human Development and Poverty


What caused the crisis market failure policy failure

  • III. Human Development and Poverty (Canada)

  • In US, 2 of the Detroit-based auto companies received

  • loan guarantees of $17 billion and $4 billion from the

  • Canadian Federal and Ontario provincial governments.

  • Ford received a line of credit. Without them, millions of

  • workers would have lost their jobs in Canada.

  • Feminized sectors & women workers were left out in job creation policies: Investment in ‘infrastructure’ for repairing and constructing roads, bridges and buildings, and bailing out the Detroit Three is job creation that amounts to ‘jobs for boys,’ as far fewer women work in such industries.


What caused the crisis market failure policy failure

  • Human Development and Poverty: Canada (cont’d)

  • Public Spending on the poorer families and children:

    • Instead of assisting the unemployed, the poor on welfare and income supplement by not cutting them back in the govt budgets:

  • Canadian government helped Canada’s banks. – swapped hundreds of billions of dollars for questionable assets held by banks

  • $85-billion cumulative deficit over five years for the bail out - “Insured Mortgage Purchase Program” lists the $75-billion CMHC buyout

  • $ 45-billion is being provided to further backstop mortgage lending by banks


What caused the crisis market failure policy failure

  • Impact of the 2008 Financial Crisis (FC): Developing World

    • Economy and Finance

    • Employment and Economic security

    • Human Development and Poverty


What caused the crisis market failure policy failure

Developing Countries pursued autonomous policies - not dependent on those based on IMF strictures:

• Reserve accumulation to insure themselves after learning form 1990s crises

• Counter-cyclical macro-policies (fiscal, monetary and exch-rate) to stabilize their output

• More extensive safety nets (universal rather than targeted) to sustain demand


What caused the crisis market failure policy failure

Financial stability in DW:

The region’s financial sector had no complex new financial instruments (such as in US: Collateralized Debt Obligation (CDO) Credit Default Swap (CDS))

Effective financial supervision and prudent risk management

Foreign exchange reserves have been built up in Asia based on export surpluses (e.g. China), and on capital inflows or remittances (e.g. in the cases of Bangladesh, India, Indonesia, and Viet Nam).

However:

FDI fell significantly.  Banking stresses in low income countries e.g., non-performing loans (NPLs) to total assets ratio doubled in Zambia (7% to 13% during 2009.


What caused the crisis market failure policy failure

Economy: (OXFAM study)

Asia and the Pacific, especially in Central and South-East Asia GDP growth dropped in 2008 and 2009. India, Indonesia, Thailand, Viet Nam, the Philippines, Pakistan, and Sri Lanka where the poor populations predominate.

China:state control and high foreign exchange reserves have given greater flexibility to control the crisis.

Newly industrialized countries: South Korea, Malaysia, Singapore, Taiwan, Hong Kong and Macau: high per capita incomes, high degrees of trade and investment integration with the world, highly export dependent. But, they have fiscal and social policies to deal with declining exports & increasing unemployment.

Less developed countries :Bangladesh, Cambodia, Bhutan, Lao PDR, Mongolia, and Nepal: increasingly integrated with the global

and regional economy through trade. Worsening economies

2010 GDP in sub-Saharan Africa : Fell 7% ($84 billion).

(International Monetary Fund (IMF) data and forecasts, 2011 http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm)


What caused the crisis market failure policy failure

  • e.g., India in 2009 http://www.youtube.com/watch?v=W5xMujBRvmU

  • DW:

  • However, income distribution has worsened and poverty risen in the DW

  • • Managed exchange rates maintain output/employment rather than wages/incomes in the formal sector.

  • • The burden falls on the informal sector – lower wages and spending by the poor.

  • Remittances from abroad declined.

  • • World Bank estimates poverty rising due to deceleration in

  • growth

  • Decline in job creation while labour force continues to grow


What caused the crisis market failure policy failure

  • Impact of the 2008 Financial Crisis (FC): DW

  • Economy and Finance

  • Employment and Economic security

  • Human Development and Poverty


What caused the crisis market failure policy failure

Employment:

The greatest impact on employment was in the garment and mining industries.

Jobs lost:

In 2009. 25,000 to 30,000 garments workers’ jobs lost in Bangladesh.

In 2009, Cambodia lost a third of garment workers (102,527 jobs)

A third of Zambia ‘s mining jobs lost:10,000

Three quarters of miners in DRC (18,000 people) lost jobs

Cambodia has been hit hard with job losses in garments, tourism, and construction industries.

Philippines: most lay-offs in export processing zones (EPZs) - 75 % are women workers

Thailand: 125,700 women (I in 4 export industries) laid off or lost regular work that turned temporary. 


What caused the crisis market failure policy failure

In Indonesia and Thailand: (Oxfam evidence)

Using crisis as an excuse: Factories dismissed workers in order to hire younger, cheaper workers.

In Serang, Indonesia, in one factory, 79 employees with 8 to 14 years seniority were dismissed Then, hired younger workers with flexible, lower paid short-term contracts, apprenticeships, and for outsourcing.


What caused the crisis market failure policy failure

  • Impact of the 2008 Financial Crisis (FC): DW

  • Economy and Finance

  • Employment and Economic security

  • Human Development and Poverty


What caused the crisis market failure policy failure

  • Human Development in DW:

  • Families : In Indonesia: If with jobs, give up meat or fish.

  • Women now unemployed - only food twice a day instead of three times - eat less at each meal.

  • Forego food to give food to their children or husbands

  • Watered down the milk to babies and feeding children less

  • No money for school meals

  • For the first three months my kids found it very difficult to give up rice, tempe, and tofu and just eat soup and the cheapest thing.

  • – (Dismissed worker in a focus group discussion, Indonesia)

  • My husband and I skip meals to make sure our baby has milk.

  • – (Woman in focus group discussion, the Philippines)

  • Men deserve to eat more food because they are physically stronger, do hard work on the farm, and earn income for the family.

  • – (Focus group discussion, Viet Nam)


What caused the crisis market failure policy failure

Human Development:

In Cambodia, 70% of the poor took out loans from relatives or friends, or bought food on credit.

Parents in urban areas in Indonesia report eating less and selling assets to keep their children in school.

“It is better for us not to eat than for our kids not to go to school.”

– (Woman in a focus group discussion, Indonesia)


What caused the crisis market failure policy failure

Mexico does not have a national unemployment insurance program, but the Distrito Federal initiated an unemployment insurance program in fall 2008 for city residents working for firms in the city for six months or more.

Mexico set up a temporary Job Preservation Program in 2008. It provided subsidies of $110 Mexican Pesos per day (about US$8.23 with September exchange rate) for up to three quarters of the workers in participating firms, for up to a total of $5,100 Mexican pesos per worker (US$382).

Mexico scaled up it Programa de Empleo Temporal (PET) as one of several labor market measures.


What caused the crisis market failure policy failure

Mexico (cont’d)

With the global crisis, it was scaled up, covering 285,000 beneficiaries in 2008, 682,000 in 2009 and 894,000 in 2010 (World Bank 2011; ILO/OECD 2011).

Conditional cash transfer programs (CCTs) are meant to break the intergeneration transmission of poverty, by transferring cash to poor households on the condition that those household make prespecified investments in the human capital of their children (Fiszbein and Schady 2009).


What caused the crisis market failure policy failure

Source: Understanding the Poverty Impact of the Global Financial Crisis in Latin America and the Caribbean -Part II: The role of social protection DRAFT 1/31/13

Margaret Grosh, Anna Fruttero, Maria Laura Oliveri, World Bank

Global Financial Crisis, its Impact on India and the Policy Response NirupamBajpaiWorking Paper No. 5 July 2011


What caused the crisis market failure policy failure

Social spending in India after the crisis:

 The spending on social sector has been increased (US$ 30 billion) in 2010-11, which is 37 percent of the total plan outlay in 2010-11.

 Another 25 percent of the plan allocations are devoted to the development of rural infrastructure.

Education :

 allocation for school education increased by 16 percent (US$ 6 billion) in 2009-10. US$ 7 billion in 2010-11.

 In addition, States will have access to US$ 792 million for elementary education for 2010-11.

Health

 allocation to Ministry of Health & Family Welfare increased US$ 5 billion for 2010-11.

The measures undertaken by government of India to counter the effects of the global meltdown on the Indian economy have resulted in shortfall in revenues and substantial increases in government expenditures,


What caused the crisis market failure policy failure

India


What caused the crisis market failure policy failure

Key Drivers to Recovery India

- High Government Expenditure, funded largely through borrowings.

- Increased incomes in rural areas due to greater social spending and high farm good prices; creation of wage employment are National Rural Employment Guarantee Programme (MGNREGA) in the rural areas and SwarnaJayantiShahariRozgarYojana (SJSRY) in the urban areas.

Food security

 Livelihood security

 Water security

 Ecological Security

 Flood risk reduction


What caused the crisis market failure policy failure

World


What caused the crisis market failure policy failure

India: Nearly 40 per cent of female respondents were the primary income earners in their household, and in other households, women’s income made crucial contribution to the sustenance of their household income. The above survey results indicated that the income-earning burden on women seemed to be intensifying, as 20 per cent of respondents reported recent retrenchments of household members during the previous six months, and 40 per cent reported a drastic reduction of income provided by one or more members of the household in the same period. An increased number of informal women workers were supporting the entire family on less income. (Source: Horn, Zoe Elena (2010), ‘Effects of the global economic crisis on women in the informal economy: research

findings from WIEGO and the Inclusive Cities partners’, Gender & Development, 18:2, 263–276.)


What caused the crisis market failure policy failure

National Rural Employment Guarantee Programme in India

The main feature of the programme promoting women’s employment and income opportunities entails:

- one third of jobs should be given to women;

- equal wages for work of equal value;

- requiring the provision of a crèche when there are more than five women on a programme.

The national average of women’s participation was 49 per cent. In 20 States, women made up at least 30 per cent of participants in 2008. The programme reduced distressed migration, and improved income and nutrition in the workers’ households. Due to the wage payment at post offices or through banks, the programmehas introduced some sections of the community to use formal financial institutions for the first time.

Source: 2009, UN New York: World survey on role of women in development: Women’s control over economic resources and access to financial resources, including microcredit, pp. 74–75.


What caused the crisis market failure policy failure

India

http://www.voxeu.org/article/india-s-economic-slowdown-and-what-should-be-done-about-it


What caused the crisis market failure policy failure

Population: 1.22 billion (2011)

Yearly increase: 18 million

Major group: 50% - 0 – 25 years

More than 1.53 billion people by the end of 2030.

Average life expectancy: 68.6 years

Average fertility rate: 2.7 children per woman

Male literacy rate at 75.96% and female at 54.28%

LR 74.04% in 2011 from 65.38% in 2001

About 72.2% of the population lives in some 638,000 villages and the rest 27.8% in about 5,480 towns and urban agglomerations

Homes without electricity: 25 per cent


What caused the crisis market failure policy failure

In 2011, World Bank reported, 32.7% of Indians below the international poverty line of US$ 1.25 per day (PPP) while 68.7% live on less than US$ 2 per day.


What caused the crisis market failure policy failure

  • India's banks are stable compared to those in richer countries.

  • Bollywood is thriving as movies sell even in hard times.

  • People in India save, not spend their earnings

  • Every Indian tries to save for a house even if it takes 20 years to build own house. Seldom do they borrow to finance their lifestyle.

  • The country’s domestic demand does not slump


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