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1 Political Reactions to the Unfolding Financial Crisis: The Return of the State Dr. Shawn Donnelly UD, European Economic Governance Centre for European.

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Presentation on theme: "1 Political Reactions to the Unfolding Financial Crisis: The Return of the State Dr. Shawn Donnelly UD, European Economic Governance Centre for European."— Presentation transcript:

1 1 Political Reactions to the Unfolding Financial Crisis: The Return of the State Dr. Shawn Donnelly UD, European Economic Governance Centre for European Studies Regulation, Europe and Innovation Legal and Economic Governance Studies

2 2 Overview 1. Review 2. Where are we now? 3. Return of the state, Mark I 4. Restrictions on state involvement 5. Return of the State, Mark II 6. Possible Outcomes 7. Reading

3 3 1: Review Bank outsourcing of risk through derivatives, massive over-lending Systemic crisis of confidence of asset values and risk management Collapse of liquidity / solvency –governments respond with capital Need to regulate credit creation, ratings

4 4 2: Where are we now? Still fighting the fire: Financial market shake-out continues –Quarterly cycle of financial reporting Emergency measures to stabilise banking systems Emergency liquidity to the corporate sector Review of financial reporting standards

5 5 2: Where are we now? Questioning the retreat of the state 1980s, 1990s, 2000s dominated by deregulation, privatisation Now regulation was too week Now state ownership is a practical reality The State is back. But in what form?

6 6 3: Return of the State, Mark I State intervention as emergency measure State as lender of last resort As shareholder/owner of last resort As provider of fiscal stimulus / money to boost consumption How does intervention differ by country?

7 7 3: Return of the State, Mark I 2009 will be the year of unemployment –Already in recession –Orders down –Layoffs continuing –State role in unemployment insurance key

8 8 3: Return of the State, Mark I How to measure state involvement now? –Bank liquidity injections –State as shareholder in banks –Bank nationalisation –Bank merger –State as shareholder in corporate economy –State aid to corporations –Mortgage subsidies –Consumption subsidies / deposit guarantees –Fiscal stimulus / monetary policy accommodation

9 9 Systemic Stability Measures Bank Liqui dity Bank Shar ehold Natio nalis ation Bank Merg er Corp Shar ehold Corp State Aid Mortg age Subs. Cons umpti on S. Fisc- al Stim. Mone tary Acc. US▲▲▲▲▲▲▲▲ EU/ MS ▲▲▲▲▲▲▲ EU►►►► Int’l►

10 10 4: Restrictions on the State’s Return Current EU rules limit a lasting change Commission approves state aid / state ownership on a temporary basis only –Future battles to be fought on reprivatisation by 2010/2011 ECB, Commission insist on maintaining borrowing restrictions for EMU members –But: EMU rules allow big deficits in hard recessions, Council controls sanctions –Member States are more deficit-friendly now Elsewhere, rules are more flexible Will EU rules constrain a return of the state?

11 11 5: Return of the State, Mark II Regulation issues are returning Ideological barriers falling –Stiglitz: “The fall of Wall Street is to market fundamentalism what the fall of the Berlin Wall was to Communism” Recognition that private, self-regulation failed –Profit incentives outweighed responsibility

12 12 5: Return of the State, Mark II Issues: Transparency of financial derivatives Using derivatives as assets Credit rating agencies & products Financial reporting: shadow banking Accounting standards Reserve ratios and risk assessments State investigation and enforcement power

13 13 5: Return of the State, Mark II Much of the experimentation is done at the national level –Regulation initiatives initiated, implemented, enforced, legitimated here The international level coordinates minimum standards –How robust are those standards?

14 14 5: Return of the State, Mark II EU Recovery Plan (1.5% GDP) High Level Group on Fin. Stability Commission urges common action on –Crisis management, prevention –Minimum reserves / risk management –Sovereign wealth funds –Improving ‘early warning systems’ and transgovernmental cooperation

15 15 Regulatory Measures Deriva tive Trade Deriv. Trans parent Credit Rating CRA Gover nance Finan cial Repor Accou nting Stds Reser ve Ratios Self- Regul ation Statut ory Reg’n US ▲▲▲▲▲▲ EU / MS ▲▲▲▲ EU ►►►► Int’l ►►►

16 16 6: Possible Outcomes Theoretical Expectations of Policy Dvpt: Functional –Enough regulation to allow functioning markets. Regulation is similar everywhere Policy ideas –Cross-country policy-learning leads to similar solutions everywhere –Constructed norms defining the problem and solutions are thought to be powerful

17 17 6: Possible Outcomes Coalitions –Solutions will be national, different –Will reflect ideas supported by a majority of societal actors Historical institutionalism –Countries and the EU will follow options that fit existing institutions –Often combined with policy ideas embedded in them

18 18 6: Possible Outcomes National regulations amplified / constrained by the international collective action (minimum standards) –Basel Committee (Banks) –IOSCO (Securities Exchanges, CRAs) –IASB (Accounting Standards) –IMF / World Bank –G20

19 19 Reading J. Barth et. al (2008) Rethinking Bank Regulation J. Braithwaite (2008) Regulatory Capitalism B. Eichengreen (1996) Globalizing Capital B. Eichengreen (2000) Financial Crises J. Flower (2002) Global Financial Reporting P. Gourevitch (1986) Politics in Hard Times P. Hall (1989) The Political Power of Economic Ideas P. Hall (1986) Governing the Economy C. Kindleberger (1973/2005) Manias, Panics and Crashes J. Stiglitz (2003) The Roaring Nineties R. Wade (1988) Governing the Market L. Weiss (1998) The Myth of the Powerless State


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