IE/UNICAMP 1 October 2009

1. IE/UNICAMP 1 October 2009 THE CRISIS OF FINANCE-LED CAPITALISM BY ROBERT GUTTMANN (Hofstra University, NY; CEPN - UP13, Paris)

2. The FLC Concept Post-Keynesians: Impact of financial-asset explosion on business investment and output (Hein, Stockhammer). How to put finance into stock-flow models (Lavoie, Mazier, LeHeron). Radicals: Reverse relation industrial stagnation -> financial explosion (Bellamy). Key notion of financialisation (Epstein). Income-distribution effects in favor of finance (Pollin, Krittner). Regulationists: Shareholder value maximization (Aglietta & Reberioux). Unstable financial-market behavior (Orléan) and growth dynamic (Boyer, Aglietta, Plihon). My Own Work: Integrate different FLC approaches -> look at FLC as accumulation regime within long-wave dynamic (revisit Marx’s notion of “fictitious capital,” Polanyi’s “Haute Finance” in terms of political power of finance, and Minsky’s 1964 AER article on financial fragility). Deepen analysis of transformation of financial capital -> change in credit form (from loans to securities); change in savings channel (from bank deposits to mutual/pension/hedge funds); change in primary financial income sources (from dividends and interest to capital gains).

3. The Transformation of Financial Capital Three major structural forces driving the transformation of financial capital: Financial Deregulation: Exchange rates (1973) and interest rates (1979). Merging of bank activities (EU Directive 1989, US FSMA 1999). Abolition of capital controls and opening/privatization of local banking sector in developing countries (in 1980s and 1990s). Financial Innovation: Very different from industrial innovation -> easily copied -> tendency towards opacity and complexity. Regulatory dialectic. Facilitation of leveraging and market formation. Financial Globalization: Finance as most mobile form of capital. Can be organized supra-nationally (via computer networks, cyberspace). Formation of circa 450 globally organized and inter-connected financial groups as nerve-center of FLC.

4. The Global Context of Finance-Led Capitalism The Dollar Standard: Chronic US balance-of-payments deficits as mechanism to transfer dollars into international circulation. First (under Bretton Woods) through US capital exports. Then (after 1985) via growing US trade deficits. The Eurocurrency Markets: Is at center of global FLC. Evolves from private banking network beyond reach of central banks (1960s and 1970s) into global inter-bank market (organized by 450 TNBs) and then grows into inter-connected set of globally organized financial markets. Mobilization of huge two-way capital flows US <-> Rest of World: •US -> ROW: open up and modernize local credit system; shift industrial base; transform developing and transition economies into “emerging-market economies” (EMEs) and integrate them into global supply chains of MNCs/GPNs. •ROW -> US: fund excess spending (US as net debtor, as buyer of last resort). Recurrent financial crises in EMEs: •Petro-$ recycling -> loan defaults 82-87 -> devaluations; Washington Consensus. •EME bubbles (via US funds) -> broken pegs in 90s -> reform local credit system.

5. The “Bubble” Economy Thanks to $-standard US can borrow from ROW in its own currency, has no external constraint, possesses deeper financial markets, and can thereby easily attract capital from ROW. During era of FLC we have three consecutive US-centered asset bubbles. Each was fuelled by lax monetary policy, key financial innovations, mass euphoria, widespread criminal activity at the end. Each provided stimulus to ROW while it lasted: •Corporate Raiders (1982-87): Was fuelled by junk bonds and leveraged buyouts. Stock-market boom. Corporate governance anchored around shareholder value maximization. •Dot-Com (1996-2000): Venture capital ->IPOs in NASDAQ. The Y2K craze. Internet revolution. •Home Equity (2003-07): Securitization and home-equity withdrawals. US consumers as world’s buyers of last resort.

6. A Systemic Crisis (2007-?) Phases of crisis: •Overextension of US consumer debt via home-equity withdrawals and non-traditional mortgages -> re-sets of subprimes -> collapse of MBS-based securitization layers. •Then new type of run on damaged banks via credit-default swaps. •Post-Lehman panic -> Spectacular reversal of globalization channels (trade, cross-border investments, remittances). Unified policy response -> three pillars: ring-fencing banks; fiscal stimuli; unorthodox monetary policies (“credit easing”). Prevents debt-deflation spiral from getting out of control. Strengthen global governance: G-20 cooperation. Harmonize re- regulation of finance via Financial Stability Board and Basel III (BIS). Reform IMF as crisis manager (including use of SDRs).

7. Challenges Ahead What kind of recovery? V-shaped; U-shaped; W-shaped; L-shaped. Reality of global overproduction -> acceleration of global production networks and global oligopoly as dominant models. What sustainable global growth pattern? US no more buyer of last resort -> better global balance needed; also “green” revolution (from FLC to energy-led capitalism?). Dangers of fiscal crisis of states in US and other ICs (public debt explosion; excessive loss socialization). End of Dollar Standard: Formation of a tri-polar multi-currency system. Tension between monetary fragmentation and financial centralization. At end of FLC era key question: what kind of progressive, socially useful finance do we need for 21st century?