The End of Financial Capitalism- What Now
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Transcript of The End of Financial Capitalism- What Now
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The End of Financial
Capitalism: What Now?
By:
Mukul G Asher
Professor of Public Policy
National University of Singapore
C.C Shroff Memorial LectureK.C College, Mumbai
Friday, 13 February, 2009
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The highest form a civilizationcan reach is a seamless webof deserved trust
Charlie Munger
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Dr Reddys Characterization offinancial capitalism
The complexity, sophistication andfinesse associated with it gave thefinancial sector a larger than life
profile. Lulled by the seeminglybenign economic environment, wedeluded ourselves into believing thatfor every real life problem, no matterhow complex, there is a financial
sector solution
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Source: RBI Governor speech, Dec 4, 2008
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Forgotten in the euphoria of financialalchemy is the basic tenet that the
financial sector has no standing of itsown; it derives its strength andresilience from the real economy. It isthe sector that should derive thefinancial sector, not the other way
round
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Continued
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So the issue for debate is, how do wekeep the real sector inline with the
real sector
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Continued
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The tail (financial sector) waggedthe dog (real economy)
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Financial Sector Share of GDP (LHS) Non-financial sector share of GDP
Source: Bureau of Economic Analysis
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Excesses of Financial Capitalism :CEOs vs Average Worker
USA - 344 times
FTSE 350 boards - 39 times
Japan - 3 times
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Size of financial assets as a shareof GDP (larger in UK as than in US)
8
0
2
4
6
8
10
87 97 07 87 97 07 99 07
OthersInsurance and pension funds
Depository banks
Size of financial assets as share of GDP
US UK EMU
Multiples of GDP
Source: US board of Governors of the Federal Reserve System; ONS, ECB and IMF
Why would you want to
own the pound?
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664.2$4,133,712$181,587HSBC
177.6$38,673,967$1,359,071Bank ofAmerica
259.5$35,645,429$1,207,007Citi
400.2$87,688,008$1,768,657J.P.MorganChase
CreditExposure toCapitalRatio
DerivativesAssetsBank
Credit Exposure to Capital Ratio (inMillions)
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Source: Alphabet soup of liquidity, Serhan Cervik, Morgan Stanley ResearchJuly 11, 2007
Weapons of Obscurity
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Liquidity Pyramid
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Source: David Roche, Independent Strategy in New Monetarism
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Why did financial capitalism end in globaleconomic crisis?
Two fundamental causes:
Inconsistency between globalization of finance anddisproportionate role of the financial sector in the
major economies on the one hand and the limited
institutional and regulatory capacities of the
domestic agencies on the other have been
demonstrated to be unsustainable
Large and unsustainable global macroeconomicimbalances
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Chinas trade surplus jumped 10 times over2003 - 2007
Source:http://www.rgemonitor.com/blog/setser/240454cited in Nageswaran A (2008) Trends and issues in capital Markets Indiain the regional and global context. Presentation at the Lee Kuan Yew School of Public Policy, 16th September 2008.
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Structure of External Position of China,Japan and US
Source: SAFE, BoJ
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Understanding the CreditSqueeze
Source: Financial Times ft.com
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Understanding the CreditSqueeze
Source: Prof. Jeffrey Frankelhttp://www.rgemonitor.com/us-monitor/254697/origins_of_the_economic_crisis_-_in_one_chart
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Banks Market Cap - Then and Now
17Source: Bloomberg
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The US Congress has agreed to inject US$ 789bn to stimulate the economy
While the details of the sources of money
are not available, it does appear that asubstantial proportion throughmonetization of fiscal deficits
Moreover there are indications that
political considerations in economicnationalism may play disproportionate rolein their allocation
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Steps to Deal With the Global Crisis
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Monetization of fiscal deficit at such alarge scale could lead to high levels ofinflation
The other concern is excessive economicnationalism and protectionism which ifadopted widely could lead to downward
spiral in output and employment
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Implications of Crisis
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Aggressive fiscal policies by the US is
already being reflected in increasing riskof US Government defaulting hasincreased as indicated by the insurancemarket
Thus the annual cost of insuring 10 mm 5year Treasurys up from - $7,680 in 2008to $66,000 in 2009
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This could threaten thelivelihoods and food security ofmillions of people around theworld. If this happens theeconomic will turn into a socialand political crisis
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Continued
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Indias Priority
It is imperative that India manages thecurrent economic crisis in such a way thatit does not advance to being a social and
political crisis
These are also the imperatives for Asiaand rest of the world