2007 – 2008 2007 – 2008 The first World financial The first World financial

crisiscrisis

Michael R. KrMichael R. Kräätke tke

University of Amsterdam University of Amsterdam

Chronology of a world eventChronology of a world event 2006 – the first warnings 2006 – the first warnings Summer 2007 – the first hedge funds fall Summer 2007 – the first hedge funds fall August 2007 collapse of the market for August 2007 collapse of the market for

mbas - the credit crunch begins mbas - the credit crunch begins From september 2007 to august 2008 – From september 2007 to august 2008 –

banks tumbling down all over the world banks tumbling down all over the world September 2008 – the black september of September 2008 – the black september of

financial markets financial markets October 2008 – fighting the Big Bang October 2008 – fighting the Big Bang The world economic crisis – the next Great The world economic crisis – the next Great

Depression – coming closer Depression – coming closer

Not the first (probably not the Not the first (probably not the last) international financial last) international financial

crisiscrisis The US stock market crash of 1987The US stock market crash of 1987 The US savings and loans crisis of 1986 -The US savings and loans crisis of 1986 -

9696 The Japanese real estate and banking The Japanese real estate and banking

crisis – 1990 – 2000crisis – 1990 – 2000 The EMS crisis in Europe 1992The EMS crisis in Europe 1992 The Mexico – crisis of 1994-95The Mexico – crisis of 1994-95 The Asian crisis 1997 – 1998The Asian crisis 1997 – 1998 The Russian crisis 1998The Russian crisis 1998 The dot.com crisis 2000 – 2002The dot.com crisis 2000 – 2002 The Argentina crisis 2001 The Argentina crisis 2001

The new pattern of cycles and The new pattern of cycles and crises since the 1980scrises since the 1980s

The business cycle is still there, but…The business cycle is still there, but… The short term erratic cycle of financial bubbles The short term erratic cycle of financial bubbles

and crises prevails and crises prevails On average: one major international financial On average: one major international financial

crisis every three yearscrisis every three years From one bubble to the next – the flight of From one bubble to the next – the flight of

international capital from one object of international capital from one object of speculation to the next (from ITC to real estate, speculation to the next (from ITC to real estate, from real estate to world trade commodities like from real estate to world trade commodities like oil)oil)

Booms are driven by bubbles / bursting bubbles Booms are driven by bubbles / bursting bubbles trigger off major crises trigger off major crises

What is new today? What is new today? All previous financial crises were regional /local All previous financial crises were regional /local

crises crises In all previous financial crises the effects could be In all previous financial crises the effects could be

contained contained The present financial crisis is the first truly world The present financial crisis is the first truly world

crisis of financial markets / financial capitalism crisis of financial markets / financial capitalism It hits all the stock markets in the world / all financial It hits all the stock markets in the world / all financial

centres of the world (more or less at the same time)?centres of the world (more or less at the same time)? It hits all internationally operating banks /financial It hits all internationally operating banks /financial

concerns / institutional investorsconcerns / institutional investors There are no safe havens (not even Zwitserland)There are no safe havens (not even Zwitserland) A real world crisis starts in the USA (like it did A real world crisis starts in the USA (like it did

before)before)

Has Capitalism changed Has Capitalism changed recently? recently?

Capitalism with derivatives – the explosion of finance in Capitalism with derivatives – the explosion of finance in general – and of the trade in derivatives in particulargeneral – and of the trade in derivatives in particular

Stock markets as multinationals Stock markets as multinationals International banks- present on all the major financial International banks- present on all the major financial

markets (as capital markets perform the traditional function markets (as capital markets perform the traditional function of banks)of banks)

Institutional investors (mutual funds, pension funds, Institutional investors (mutual funds, pension funds, insurance companies) insurance companies)

Shift from Commercial Banking to Investmentbanks – and Shift from Commercial Banking to Investmentbanks – and their structured investment vehicles and “conduits” their structured investment vehicles and “conduits”

Rise of the Hedge Funds and Private Equity Funds Rise of the Hedge Funds and Private Equity Funds (completely different from traditional “long-only” mutual (completely different from traditional “long-only” mutual funds / investment funds)funds / investment funds)

The waning divide between banks and non-banks The waning divide between banks and non-banks

Financialization Financialization What financialization means: What financialization means: The predominance of finance – the relative The predominance of finance – the relative

rise of the FIRE (finance, insurance, real rise of the FIRE (finance, insurance, real estate) sector which becomes more important estate) sector which becomes more important than manufacturing (22,6 % of GDP in the US than manufacturing (22,6 % of GDP in the US to 14,9% in 2005)to 14,9% in 2005)

households are urged to behave like households are urged to behave like businesses businesses

businesses are urged to behave like banks businesses are urged to behave like banks banks are urged to behave like hedge fundsbanks are urged to behave like hedge funds basic rationale: creating profits without basic rationale: creating profits without

creating new value (thriving on mere price creating new value (thriving on mere price differentials) differentials)

Securitization Securitization

basic logic: transforming illiquid loans in basic logic: transforming illiquid loans in banks’ portfolios into marketable / banks’ portfolios into marketable / tradeable / negotiable assets tradeable / negotiable assets

expanding the secondary markets for expanding the secondary markets for derivatives / creating new derivative derivatives / creating new derivative markets markets

inventing / creating compound inventing / creating compound (structured) financial derivatives (structured) financial derivatives

inventing / creating off-balance sheet inventing / creating off-balance sheet conduits – SIVs (structured investment conduits – SIVs (structured investment vehicles) to hold such assets vehicles) to hold such assets

For instance: creating a MBS For instance: creating a MBS (mortgage backed security)(mortgage backed security)

first step: a new mortgage is issued first step: a new mortgage is issued second: the mortgage bank /company sells it to a second: the mortgage bank /company sells it to a

firm specialized in buying and reselling mortgages firm specialized in buying and reselling mortgages (like Fannie or Freddie)(like Fannie or Freddie)

third: the buyer aggregates many such loans into third: the buyer aggregates many such loans into a pool and issues a new bond based upon this pool a pool and issues a new bond based upon this pool (a right to a profit arising from payments for the (a right to a profit arising from payments for the original loans)original loans)

fourth: the buyer (Fannie or Freddie) sells this new fourth: the buyer (Fannie or Freddie) sells this new paper – the MBS – to others – typically institutional paper – the MBS – to others – typically institutional investors and /or hedge funds investors and /or hedge funds

Fifth: the hedge funds (or other buyers) start Fifth: the hedge funds (or other buyers) start trading these papers on the secondary markets trading these papers on the secondary markets (making profits from rising prices / price (making profits from rising prices / price differentials arising on those markets differentials arising on those markets

The explosion of the trade in The explosion of the trade in derivatives derivatives

Since the 1970s the volume of international trade Since the 1970s the volume of international trade in derivatives has explodedin derivatives has exploded

The real news: the rise of “financial” derivatives to The real news: the rise of “financial” derivatives to the forefront the forefront

Among them: “structured” products like mbs / the Among them: “structured” products like mbs / the most important class of new “structured” financial most important class of new “structured” financial assets being the CDOs (collaterized debt assets being the CDOs (collaterized debt obligations) and CMOs (collaterized mortgage obligations) and CMOs (collaterized mortgage obligations) – rapidly growing between 2000 and obligations) – rapidly growing between 2000 and 20062006

For instance: volume of outstanding interest For instance: volume of outstanding interest swaps, currency swaps and interest options was swaps, currency swaps and interest options was 3450bn $ in 19903450bn $ in 1990

286000 bn $ end 2006 (six times global gross 286000 bn $ end 2006 (six times global gross product) product)

The explosion of the trade in The explosion of the trade in structured financial products structured financial products

different types: the “alphabet soup” different types: the “alphabet soup”

The brave new world of The brave new world of international finance: international finance:

Deregulation Deregulation The race to reduce / abolish capital controls and The race to reduce / abolish capital controls and

foreign exchange controls started in the 1970s foreign exchange controls started in the 1970s It continued throughout the 1980s and 1990s It continued throughout the 1980s and 1990s Two US examples: the repeal of the Glass – Two US examples: the repeal of the Glass –

Steagall Act of 1933 (in 1999) and the passing of Steagall Act of 1933 (in 1999) and the passing of the Futures Modernization Act in 2000 (both still the Futures Modernization Act in 2000 (both still under Clinton)under Clinton)

By mid – 20th century the financial sector was By mid – 20th century the financial sector was everywhere highly regulated everywhere highly regulated

Today, the global financial sector is as liberalized Today, the global financial sector is as liberalized as it was before 1914 as it was before 1914

The brave new world of The brave new world of international finance: Beyond international finance: Beyond

regulation regulation Shift towards non-regulated area’sShift towards non-regulated area’s The rise of “shadow-banking”The rise of “shadow-banking” Non-banks becoming banks (like GM, Non-banks becoming banks (like GM,

Chrysler f.i. – making more profits with their Chrysler f.i. – making more profits with their financial activities than by producing cars) financial activities than by producing cars)

Intermediaries abound Intermediaries abound The explosion of OTC – transactionsThe explosion of OTC – transactions The rise and multiplication of offshore-The rise and multiplication of offshore-

markets and offshore-finance (offshore-markets and offshore-finance (offshore-markets and tax havens throughout the markets and tax havens throughout the world – more than half of them in good old world – more than half of them in good old Europe) Europe)

The rise of “financial The rise of “financial engineers” engineers”

the new “science of finance” in economics the new “science of finance” in economics In the 1960s Fischer Black with associatesIn the 1960s Fischer Black with associates (among them Nobel prize winnars Scholes and Merton) (among them Nobel prize winnars Scholes and Merton)

developed new models to describe / analyze asset pricing in developed new models to describe / analyze asset pricing in financial markets financial markets

Their major finding was quickly forgotten: no empirical Their major finding was quickly forgotten: no empirical evidence whatsoever that the activity of funds managers added evidence whatsoever that the activity of funds managers added anything to the value of the funds’ assets (more embarrassing anything to the value of the funds’ assets (more embarrassing findings)findings)

However, the new generation of funds managers claimed to be However, the new generation of funds managers claimed to be scientifically trained experts scientifically trained experts

Fischer Black rethinking the “efficient market hypothesis” – Fischer Black rethinking the “efficient market hypothesis” – referring to “values” and very wide margins referring to “values” and very wide margins

Fischers “science of finance” is not exact at all Fischers “science of finance” is not exact at all Fischer was a market radical, but clear-sighted enough to see Fischer was a market radical, but clear-sighted enough to see

the futures exchanges as “gambling houses” (if people wanted the futures exchanges as “gambling houses” (if people wanted to gamble there, the state should tax their gains heavily as he to gamble there, the state should tax their gains heavily as he does with other forms of gambling)does with other forms of gambling)

The peculiar riddle of today’s The peculiar riddle of today’s world financial crisis world financial crisis

It started in one relatively small segment It started in one relatively small segment of the US – real estate and mortgage of the US – real estate and mortgage market (the socalled “subprime” segment)market (the socalled “subprime” segment)

and it ended up as a world financial crisisand it ended up as a world financial crisis

affecting all international financial affecting all international financial markets and all capitalist countries in the markets and all capitalist countries in the worldworld

How was this possible?How was this possible?

Subprime and prime – the US-Subprime and prime – the US-housing market housing market

What is peculiar about the subprime segmentWhat is peculiar about the subprime segment Selling properties to the ninjas (no income, no job, Selling properties to the ninjas (no income, no job,

no assets)no assets) Teaser rates and other tricks – apparently very low Teaser rates and other tricks – apparently very low

costs (at the beginning) – but renewal of the loan costs (at the beginning) – but renewal of the loan due at variable conditions – variable interest rates due at variable conditions – variable interest rates to begin with to begin with

Credit default – no problem as long as the bubble Credit default – no problem as long as the bubble thrivesthrives

Credit default swaps – decoupling the loan from Credit default swaps – decoupling the loan from the default risk the default risk

subprime mortgages – 160 billion $ in 2001 to subprime mortgages – 160 billion $ in 2001 to more than 600 billion $ in 2006 more than 600 billion $ in 2006

Subprime and prime – the US Subprime and prime – the US housing market housing market

simple mortgages – homeowners and simple mortgages – homeowners and (local) banks (local) banks

the ever extending system of financial the ever extending system of financial intermediation intermediation

an ever wider range of highly specialized an ever wider range of highly specialized institutions institutions

mortgage finance, refinance (public mortgage finance, refinance (public concerns like Fannie and Freddie) and concerns like Fannie and Freddie) and insurance insurance

the thriving secondary markets for the the thriving secondary markets for the mortgage based assets mortgage based assets

Selling US-mortgages Selling US-mortgages (subprimes) worldwide (subprimes) worldwide

Basic technique of financial capitalism – securitizationBasic technique of financial capitalism – securitization Secondary markets for mbas are local – but the Secondary markets for mbas are local – but the

market actors (hedge funds / banks) are operating on market actors (hedge funds / banks) are operating on a global level a global level

Volume of mbas shot up from 56 bn$ to 528 bn$ in Volume of mbas shot up from 56 bn$ to 528 bn$ in five yearsfive years

US structured financial products are sold, repackaged US structured financial products are sold, repackaged and resold to investors all over the world (Europe, the and resold to investors all over the world (Europe, the America’s, Asia)America’s, Asia)

on an ever larger scale: the US real estate bubble on an ever larger scale: the US real estate bubble provides more and more of these assets provides more and more of these assets

A hyperspeculation arises – the Minsky moment A hyperspeculation arises – the Minsky moment occurs occurs

The brave new world of The brave new world of structured financial products structured financial products

From the simple IOY (I owe you) to the “alphabet From the simple IOY (I owe you) to the “alphabet soup” soup”

Investment banks buying and reselling Investment banks buying and reselling structured financial products all over the world structured financial products all over the world

packaging and repackaging debts (poor and packaging and repackaging debts (poor and good, of very different origins) into cdo’s good, of very different origins) into cdo’s (collaterized debt obligations) and other products(collaterized debt obligations) and other products

selling and reselling / trading cdo’s all over the selling and reselling / trading cdo’s all over the worldworld

Hence: the risk of bad loans (subprimes) and / or Hence: the risk of bad loans (subprimes) and / or the default insurance risk is everywhere the default insurance risk is everywhere

The housing bubble – rising The housing bubble – rising mountains of debt mountains of debt

Bubble driven by rising house prices (at double Bubble driven by rising house prices (at double digit rate)digit rate)

House prices driven by increasing demandHouse prices driven by increasing demand Increasing demand driven by the permanent Increasing demand driven by the permanent

expansion of mortgage financeexpansion of mortgage finance from prime to subprime – expansion of the market from prime to subprime – expansion of the market stagnant labour incomes – explosive growth of stagnant labour incomes – explosive growth of

private debt, but also – growth of pirvate wealth private debt, but also – growth of pirvate wealth (making money by selling a house / by refinancing (making money by selling a house / by refinancing the mortgage based upon ever higher real estate / the mortgage based upon ever higher real estate / house prices) house prices)

the US consumption levels based upon rising the US consumption levels based upon rising mountains of debt (with stagnant wages for the mountains of debt (with stagnant wages for the large majority of workers)large majority of workers)

The making of an international The making of an international speculation bubble speculation bubble

Securitization – the chance to sell any sort Securitization – the chance to sell any sort of debt and loans immediately at a good of debt and loans immediately at a good price is the base for the expansion of price is the base for the expansion of mortgage financemortgage finance

Huge amounts of capital flow into the Huge amounts of capital flow into the secondary markets all over the world secondary markets all over the world (mostly OTC transactions)(mostly OTC transactions)

Investment banks playing the game – pass Investment banks playing the game – pass the parcel (with mba’s, cdo’s etc.) – among the parcel (with mba’s, cdo’s etc.) – among themselves, the financial markets follow themselves, the financial markets follow their exampletheir example

not one housing bubble, but several (Spain, not one housing bubble, but several (Spain, UK, Ireland, Belgium and so on)UK, Ireland, Belgium and so on)

The importance of high The importance of high leverageleverage

All these transactions are financed by credit – All these transactions are financed by credit – basic rule: you don’t risk your own money, you basic rule: you don’t risk your own money, you risk other people’s money risk other people’s money

Speculators (hedge funds in particular) use very Speculators (hedge funds in particular) use very high leverage (up to 1 : 26) to finance their high leverage (up to 1 : 26) to finance their transactionstransactions

Hence: if the asset purchased is losing its market Hence: if the asset purchased is losing its market “value” or becoming worthless, all that remains is “value” or becoming worthless, all that remains is a huge amount of debt! a huge amount of debt!

Intermediaries flock to the markets as long as Intermediaries flock to the markets as long as the markets are on the rise – helping to establish the markets are on the rise – helping to establish “high leverage” for more and more participants “high leverage” for more and more participants

The dubious role of rating The dubious role of rating agencies agencies

The structure of the market for ratingsThe structure of the market for ratings The big three – Standard & Poor’s, Moody’s and Fitch The big three – Standard & Poor’s, Moody’s and Fitch

(together, they control nearly 90% of the market for ratings (together, they control nearly 90% of the market for ratings world wide) world wide)

How they make their money – creating structured financial How they make their money – creating structured financial products and evaluating them – while the issuing agent who products and evaluating them – while the issuing agent who wants to bring these products on the markets pays them a wants to bring these products on the markets pays them a fee for their double service fee for their double service

Impressive ratings were a prerequesite for the rising Impressive ratings were a prerequesite for the rising demand for such products demand for such products

At the height of the cdo’s /cds’s boom, rating agencies At the height of the cdo’s /cds’s boom, rating agencies received more than half their income from such fees received more than half their income from such fees

Such papers were rated as high as state / treasury bonds, Such papers were rated as high as state / treasury bonds, but yielded much higher returns – hence the frenzy of but yielded much higher returns – hence the frenzy of institutional investors institutional investors

The bubble bursts The bubble bursts Credit defaults happen – first and foremost in the Credit defaults happen – first and foremost in the

subprime sectorsubprime sector Rising interest rates – rising levels of foreclosures - Rising interest rates – rising levels of foreclosures -

a faltering market (rapid decline of new a faltering market (rapid decline of new mortgages)mortgages)

More and more subprime mortgage loans get foul More and more subprime mortgage loans get foul Declining house prices make refinance ever more Declining house prices make refinance ever more

difficult difficult Credit rationing by the banks (flight from Credit rationing by the banks (flight from

mortgage finance)mortgage finance) And – flight from trash and into quality, rapid And – flight from trash and into quality, rapid

selling off of mba’s, cmo’s and other structured selling off of mba’s, cmo’s and other structured products – the market for these derivatives crashesproducts – the market for these derivatives crashes

Fear spreads Fear spreads

Everybody in the financial world is Everybody in the financial world is involvedinvolved

The mortgage backed securities have The mortgage backed securities have been traded world widebeen traded world wide

Mortgage backed securities have been Mortgage backed securities have been bought by banks all over the worldbought by banks all over the world

But where are the foul credits But where are the foul credits They can be everywhere, everyone is They can be everywhere, everyone is

probably at riskprobably at risk

The first banks fall – the case The first banks fall – the case of Northern Rock of Northern Rock

The fifth largest mortgage financier in The fifth largest mortgage financier in the UK the UK

One of the major actors in the British One of the major actors in the British housing bubblehousing bubble

Credit defaults – falling price of NR Credit defaults – falling price of NR sharesshares

The reaction: A classical “run” on the The reaction: A classical “run” on the bank in october 2007bank in october 2007

followed by a bail – out (later followed by a bail – out (later nationalization in early 2008)nationalization in early 2008)

The big credit crunch – a crisis The big credit crunch – a crisis of the money market of the money market

Interbank lending – the central part of the money marketInterbank lending – the central part of the money market From september 2007 onwards: banks restrict or refuse From september 2007 onwards: banks restrict or refuse

interbank lending (sharp rise of interbank interest rates like interbank lending (sharp rise of interbank interest rates like the LIBOR and/or credit rationing)the LIBOR and/or credit rationing)

There is no “liquidity crisis” - banks are not lacking liquidity There is no “liquidity crisis” - banks are not lacking liquidity but hoarding it – because they don’t trust each other’s but hoarding it – because they don’t trust each other’s solvency in the longer runsolvency in the longer run

Institutional investors rush to state papers (and commodity Institutional investors rush to state papers (and commodity exchanges)exchanges)

There is an “insolvency crisis” – hidden bankruptcies There is an “insolvency crisis” – hidden bankruptcies because of the losses still undisclosed because of the losses still undisclosed

Since october 2007 central banks have stepped in several Since october 2007 central banks have stepped in several times – sometimes in joint actions - as money market times – sometimes in joint actions - as money market lenders of the last resortlenders of the last resort

The giants fall The giants fall

The big Wall Street five in crisis The big Wall Street five in crisis From Bear Stearns to Lehman Brothers From Bear Stearns to Lehman Brothers Fannie Mae and Freddie Mac in crisis Fannie Mae and Freddie Mac in crisis AIC - the second largest insurance AIC - the second largest insurance

corporation corporation Dozens of larger banks have fallen - Dozens of larger banks have fallen -

hundreds of larger and smaller banks (in the hundreds of larger and smaller banks (in the US and elsewhere) are presumably in trouble US and elsewhere) are presumably in trouble

The fearsome domino effect (some banks are The fearsome domino effect (some banks are just to big to fall)just to big to fall)

The big Bail-out begins: Banks The big Bail-out begins: Banks first, women and children last! first, women and children last! Bailing out – an old and common Bailing out – an old and common

practicepractice An ever increasing volume of bail outsAn ever increasing volume of bail outs First stage (september 2007 – august First stage (september 2007 – august

2008) – selective bail outs for individual 2008) – selective bail outs for individual banks in distress (ad hoc rescues)banks in distress (ad hoc rescues)

Second stage (from september/october Second stage (from september/october 2008 onwards): bailing out the whole 2008 onwards): bailing out the whole banking sector banking sector

The return of state socialismThe return of state socialism Nationalizing the banks, socializing the Nationalizing the banks, socializing the

losses losses UK leads the move: First nationalizing UK leads the move: First nationalizing

single banks (at least temporarily) single banks (at least temporarily) now: nationalizing the junk papers of all the now: nationalizing the junk papers of all the

banks banks US plan following the same pattern: helping US plan following the same pattern: helping

the banks to get rid of the “junk papers” the banks to get rid of the “junk papers” no rescue for the shareholders, rescues for no rescue for the shareholders, rescues for

the managers are restrictedthe managers are restricted tens of thousands of bank employees have tens of thousands of bank employees have

already lost their jobs, much more to come already lost their jobs, much more to come

The return of central The return of central bankingbanking

A series of individual and collective actions taken by A series of individual and collective actions taken by central banks of the major capitalist countries (Fed, central banks of the major capitalist countries (Fed, BoE, ECB, BoJ, Swiss National Bank) to provide BoE, ECB, BoJ, Swiss National Bank) to provide liquidity (short term credits) for the banking systemliquidity (short term credits) for the banking system

A few days ago: the first concerted action to pump A few days ago: the first concerted action to pump liquidity into the markets and to reduce the bank rateliquidity into the markets and to reduce the bank rate

Lowering the standards: More and lower rated papers Lowering the standards: More and lower rated papers are accepted as collaterals for central bank credits are accepted as collaterals for central bank credits

To no avail – actually, the central banks are now To no avail – actually, the central banks are now substituting the private banks as providers of substituting the private banks as providers of interbank loans interbank loans

How long can the central banks go on? How long can the central banks go on?

The meaning of this crisis: The The meaning of this crisis: The end of the Wall Street Regimeend of the Wall Street Regime

A month ago, only two of the big Five A month ago, only two of the big Five investmentbanks at Wall Street were leftinvestmentbanks at Wall Street were left

Today – noneToday – none The last two giants have chosen to The last two giants have chosen to

transform themselves into commercial transform themselves into commercial banks! banks!

The stock markets crash worldwide – but The stock markets crash worldwide – but Wall Street even more (last week a series Wall Street even more (last week a series of unprecedented stock market crashs all of unprecedented stock market crashs all over the world)over the world)

The meaning of the crisis: The The meaning of the crisis: The end of the dollar hegemony? end of the dollar hegemony?

Due to the decline of the USA as the Due to the decline of the USA as the leading financial power of the world, the leading financial power of the world, the dollar will loose furtherdollar will loose further

The rescue actions of the US government The rescue actions of the US government drive the US public debt to unprecedented drive the US public debt to unprecedented levelslevels

Depending upon the succes of the rescue Depending upon the succes of the rescue actions in Europe and Asia, other currencies actions in Europe and Asia, other currencies will further gain in relation to the dollarwill further gain in relation to the dollar

A major dollar crisis remains possible A major dollar crisis remains possible Anyway, the fate of the dollar will be Anyway, the fate of the dollar will be

decided in Beijing decided in Beijing

The meaning of this crisis: The The meaning of this crisis: The end of Neoliberalism? end of Neoliberalism?

Certainly the end of the myth of the Certainly the end of the myth of the self-regulating markets self-regulating markets

Probably the end of the myth of Probably the end of the myth of financial market “efficiency” under financial market “efficiency” under minimal or no regulation at allminimal or no regulation at all

Rising doubts and second thoughts Rising doubts and second thoughts about “freedom for speculators” about “freedom for speculators”

The myth of the superiority of the The myth of the superiority of the US-model of capitalism is shaken US-model of capitalism is shaken

When will the financial crisis When will the financial crisis tear down the real economy?tear down the real economy?

In March 2008 the world economy seemed still In March 2008 the world economy seemed still growinggrowing

Except in the USA (where a severe recession had Except in the USA (where a severe recession had already begun / the US consumer is broke)already begun / the US consumer is broke)

But now it’ s completely different: But now it’ s completely different: - four major and several smaller EU-economies are - four major and several smaller EU-economies are

in crisis in crisis - Germany’s export industry (the leading export - Germany’s export industry (the leading export

economy of the world) is slowing downeconomy of the world) is slowing down - Japan’s banks are profiting an buying the spoils of - Japan’s banks are profiting an buying the spoils of

the financial crisis in the US and elsewhere, while the financial crisis in the US and elsewhere, while the Japanese real economy is stagnantthe Japanese real economy is stagnant

- the crisis will continue during 2009!- the crisis will continue during 2009!

Will the financial crisis affect Will the financial crisis affect the NICs and NACs of today? the NICs and NACs of today?

The financial crisis has already hit the The financial crisis has already hit the Chinese banks and big insurance concernsChinese banks and big insurance concerns

Asia’s stock markets are hit by a series of Asia’s stock markets are hit by a series of crashes as wellcrashes as well

The slow down of world trade in raw The slow down of world trade in raw materials has already begun (as several materials has already begun (as several indicators show)indicators show)

The BRIC countries will be affected (how The BRIC countries will be affected (how much, depends on the relative size of their much, depends on the relative size of their domestic markets)domestic markets)

Long term effects Long term effects

A new architecture of world finance in the A new architecture of world finance in the makingmaking

A “World Financial Authority” A “World Financial Authority” A new role for the IMF? A new role for the IMF? The shift between financial markets / The shift between financial markets /

financial centres of the world financial centres of the world An end to offshore financial centra? An end to offshore financial centra? The end of banking as private business as The end of banking as private business as

we knew it? we knew it?

When and where will the next When and where will the next bubbles rise?bubbles rise?

Financial market capitalism Anglosaxon style Financial market capitalism Anglosaxon style has only one chance to survive: has only one chance to survive:

Finding new objects for worldwide Finding new objects for worldwide speculation, creating the next bubblespeculation, creating the next bubble

Candidats: Alternative energies, Candidats: Alternative energies, biotechnologybiotechnology

But new bubbles will not solve the underlying But new bubbles will not solve the underlying problem: a bifurcation between a stagnant problem: a bifurcation between a stagnant real economy (with huge overcapacities all real economy (with huge overcapacities all over the world) and a hyperactive financial over the world) and a hyperactive financial economy (with still huge surplus capital all economy (with still huge surplus capital all over the world)over the world)