Fault of distribution as primary factor of crisis of liberal capitalism

1. Fault of distribution as primary factor of crisis of liberal capitalism by Janusz J. Tomidajewicz - Poznań University of Economics

2. Content : • Genesis of the crisis • Course of crisis in conditions of globalization • Consequences of the crisis for countries in which primal sources of the crisis didn't appear • Accepted methods of fighting against crisis • Conclusions: efficiency of the fight with crisis:

3. 1. Sources and reasons (genesis) of the crisis : • Superficial sources of the crisis : well known and described – excessive number of mortgage credits and their breakdown. • Deeper sources of the crisis : pressure of investors on effective investments and credits supported by the state, connected with interest of managers concerning such investments. • Structural sources of the crisis : excessive accumulation resulting from the concentration of income division,  driving the demand with credit  rapt limitation of demand in situation of breaking down possibilities of the repayment of credit.

4. Structural sources of the crisis • During last 20-30 years the liberal version of capitalistic economy has led to a growing concentration of incomes inside particular domestic economies, but also in the global scale. This concentration causes: • - from one side: formation of significant savings that „search” for possibilities of lucrative investments in the real sphere, but mostly on financial markets. • - from the other side: it leads to a relative, or sometimes to an absolute limitation of internal consumption demand that reduces possibilities of effective investment. • In result the wrong division leads economies to a specific situation of over-accumulation, which is a primal (structural) source of occurrence of financial and further economical crisis's.

5. Methods of development (employment) savings surpluses : • - stimulating the domestic demand by the public sector (redistribution, public spending): - reduced because of limited range of budgetary redistribution and leading to public debt, • - stimulating the internal demand through the private sector : crediting a widely understood consumption (also supported by the state), stimulating investment demand in particular sectors and creating a market bubble in those sectors, creating apparent investment possibilities on financial markets – development of derivatives and derived instruments. All presented methods face sooner or later the barrier of insufficiency of real consumption that would enable realization of profits from those investments. • - foreign expansion: from the export expansion that faced the barrier of competitiveness, by direct foreign investments to investment in foreign securities

6. Barriers of utilization of the over-accumulation : • In each case the basic barrier was the lack of possibilities of realizing predicted profits from artificially created possibilities of investment: • - lack of possibility of payment and service of consumer’s credits, from the side of consumers with limited incomes, • - insufficient efficiency of investment in excessively enlarged market bubbles, • - not reaching (because of excessive investment) predicted profits from foreign expansion (export, foreign investments, foreign securities)

7. In consequence, in result of rapid breaking the demand for free assets down appears: • - the first symptom of breaking down financial and stock markets reveals itself through decrease of values of active assets on appropriate market (fall of prices of adequate securities, e.g. HT companies, decrease of quotations on geographical markets, e.g. Indonesian crisis or fall of prices on mortgage market), • - depending from the level of connection of determined market with other segments of the financial market, the first break down is being transferred to other segments of the financial market, as well as on other geographical markets, • - in the third phase the break down of financial markets is being transposed to the area of real economy

8. 2. Course of the crisis in conditions of globalization • Present crisis has begun in the mortgage credits’ market in USA and in its first phase it had a character of a financial crisis. • It has expanded on global economy (other countries) via: • - the role of USA as the capital supplier on the global financial market and as an investor on foreign markets, • - the role of USA as an importer, • - the impact of crisis in one country on the functioning of global financial markets, • - psychological effect,

9. 3. Consequences of the crisis for countries, in which primal sources of the crisis didn't appear : • Limitation of credit abilities (via world financial crisis) • Decreese of export, • Limitation of domestic production, • Growth of unemployment and fall of domestic consumption, • Crisis spiral as result of factors mentioned above. • Conclusion : the bigger is the sensibility to crisis the stronger is the relation between national financial system and the global financial market and the bigger is the dependency from the export

10. 4. Accepted methods of overcome crisis : • Overcoming of symptoms of the crisis : • Supporting financial institutions for maintaining the continuity of financing in the real sphere of economy, • Reducing interest rates as a form of incentive to maintaining economical activity, • Supporting the demand through supporting indebted and subsidies to specific purchases, etc.

11. Fighting with deeper sources of the crisis : • reinforcing national institutions of control of the banking system and financial markets, • proposals of putting under control the market of secondary and derivative financial instruments, • proposals of reforming the global financial system, • proposals of creating world institutions of regulation of financial markets Remark : All determined means aim to limitation of possibilities of forming artificial directions of allocating surpluses of savings. However, they don’t eliminate this surplus. Therefore they might lead to earlier and constant occurrence of this disproportion that may lead to permanent limitation of abilities of development of particular economies.

12. 5.Efficiency of fight with the crisis : • The crisis manifest itself differently in different countries and its aspects (such as possibilities of giving credits to various units of economic activity, decrease of export, fall of inflow of foreign investment or smaller domestic consumption) can have diversified intensity. • Overcoming symptoms of the crisis has an efficiency that is limited by globalization – instruments implemented in one country have also consequences in other countries. Still the global efficiency of applied means is limited. • The global coordination of instruments that fight with direct causes of crisis meets the barrier of diversification of its range and symptoms. • Ideas of implementation of instruments overcoming deeper sources of the crisis face the resistance of groups connected with the financial capital and national interests.

13. Conclusions : • At present the fight with the crisis must concentrate on upgrading the current situation and affecting on direct causes of the crisis. Still, there is absolutely no reflection on structural sources of the crisis and on methods of removing them .