1. Week 13 - Movie Display at the class - Inside Job http://www.imdb.com/title/tt1645089/ (May 22) Week 14 – Submission of movie review at the class (print-out) - Globalization, Growth, Poverty, Inequality, Resentment, and Imperialism ( May 29) Week 15 – Review before Final (June 5)

2. The Political Economy of Global Financial Crises Week 12

3. Lecture Plan Introduction National Politics and International Markets Nature and Variety of International Financial Crises The Changing Global Context Crisis Prevention Crisis Management and Resolution

4. Introduction Financial crises, and especially banking crises, are recurrent phenomena Financial crises began to spread more easily across national borders, with greater interdependence of financial markets, since 1970s and abolition of capital controls The recent series of international financial crises have led many to question the wisdom of financial liberalization

6. ‘’…Manias are never identical and yet there is a similar pattern. The increase in prices of commodities or real estate or stocks is associated with euphoria; household wealth increases and so does spending. There is a sense of ‘We never had it so good.’ Then the asset prices peak, and then begin to decline. The implosion of a bubble has been associated with declines in the prices of commodities, stocks and real estate, and often these declines have been associated with a crash or a financial crisis.’’(Kindleberger,p.11-12)

8. ‘’The cycle of manias and panics results from the pro-cyclical changes in the supply of credit; the credit supply increases relatively rapidly in good times, and then when economic growth slackens, the rate of growth of credit has often declined sharply. A mania involves increases in the prices of real estate or stocks or a currency or a commodity in the present and near- future that are not consistent with the prices of the same real estate or stocks in the distant future.’’ (Kindleberger,p.12)

9. The appearance of a mania or a bubble raises the policy issue of whether governments should seek to moderate the surge in asset prices to reduce the likelihood or the severity of the ensuing financial crisis or to ease the economic hardship that occurs when asset prices begin to decline. Virtually every large country has established a central bank as a domestic ‘lender of last resort’ to reduce the likelihood that a shortage of liquidity would cascade into solvency crisis. The practice leads to the question of the role for an international ‘lender of last resort’ that would assist countries in stabilizing the foreign exchange value of their currencies and reduce the likelihood that a sharp depreciation of the currencies because of a shortage of liquidity would trigger large numbers of bankruptcies. (Kindleberger,p.14)

20. National Politics & International Markets (1) Financial markets exist to support the development of “real” economies (?) – Rapid and severe fluctuations in the prices of financial assets can disrupt the “real” economy and be socially destructive – “Orderly” fluctuations of prices of financial assets can be constructive in promoting growth and innovation – Challenge: find ways to limit the scope of market instability and more fairly to share burdens

21. National Politics & International Markets (2) The globalizing political economy post-1945 – Rested on the assumption of a widening circle of shared prosperity – International economic interdependence formed a core element of systemic stabilization and development – Economic liberalization initially excluded financial activity that was not trade related – By 1970s, policy choices in advanced industrial countries led to freer international capital movements

24. That capitalism’s globalizing tendencies were revived after 1945 through the postwar “golden age” had a great deal to do with the way the capitalist states of Europe and Japan were restructured under the aegis of the American state. And although the economic turmoil of the 1970s demonstrated that capitalist crises were by no means a thing of the past, the degree of integration between the advanced capitalist states led them—in contrast to the 1930s—to promote the acceleration of capitalist globalization, rather than retreat from it.(Panitch&Gindin,2012,p.2)

27. Casino Capitalism Unregulated dynamics of global capital movements. It began after the partial collapse of the BW system in the late 1970s and early 1980s. Thanks to innovations in the global financial world (e.g.options, futures, swaps),the financial system has become much more complex and uncontrollable. What is new is the speed with which money travels in search of profitable opportunities from speculative investments in the global financial system, whose original function had been to facilitate cross-border trade and investment.

28. Negative effects of the domination of financial capital 1)Providing economic incentives to speculate on financial investments, global finance capital diverts funds from long-term productive investments. 2)Encourages banks and financial institutions to maintain high interest rates, which significantly reduces the ability of productive industries to access credit. 3)Brings uncertainty and volatility in interest and exchange rates that is extremely harmful to various real economic sectors. 4)Undermines efforts by governments to support full employment and reduce inequality.

31. National Politics & International Markets (3) Stable, well-functioning financial markets require stable, well-functioning regulation – Property rights have to be established, and adjudicated when conflicts arise – Predictable procedures to handle bankruptcies – Deposit insurance has to be in place – Lender-of-last-resort created – Supervision of financial intermediaries – Investor of last resort

32. National Politics & International Markets (4) In an open, more integrated global market, who has authority and responsibility to provide stable, well- functioning regulation? – This is the central political dilemma posed by the move toward broader financial openness Doubts about the distributive justice of ever more tightly linked financial markets

33. Nature and Variety of Crises (1) Financial crises begin with sharp breaks in the prices of key financial instruments – Banking crisis: value of banking assets plummet – Currency crisis: value of currency plummets Capitalist economies rest on debt – Aggregate financial claims of debtors and creditors should, in principle, be supportable as long as expected future incomes exceed expected future debt repayments – When expectations change and shocks are generalized, financial panic can ensue

39. Nature and Variety of Crises (2) The probability of crisis increases when financial markets cross borders as information becomes less readily accessible to all market participants Financial markets can sometimes be excessively volatile in capitalist economies Keynesians argue that decisive leadership (read state) is necessary to manage and resolve a severe financial crisis with minimal social damage

40. The Changing Global Context (1) Inward flows of private capital make it possible for economies to grow more rapidly than if they rely solely on domestic sources – But this might come with the costs of crisis- induced capital outflows, bank bailouts and lost of investor confidence Immediately after WWII, policy priority was given to exchange rate stabilization and maintaining independent monetary policies

41. Unholy trinity (Impossible Trinity) Impossible to have all 3 at the same time If a nation were to adopt position a, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

42. The Changing Global Context (2) By 1980s, capital mobility and monetary autonomy were privileged – By logic of “unholy trinity”, exchange rates had to be floated – In the 1970s, developing countries sought to limit the role of private international capital but this quest was eventually abandoned – Through the effect on exchange rates, capital movement is expected to impose economic discipline and cross-border policy adjustments

43. The Changing Global Context (3) Governments have not designated an international overseer for systemically significant international financial flows – No international agency has been authorized to regulate or supervise international capital flows – No international agency has been provided with the resources to act as true lender-of-last-resort – Instead, national regulators would informally coordinate their supervisory policies and emergency practices to the extent necessary

44. The Changing Global Context (4) At the moment of crises, who would be responsible? – Last-resort facilities are the responsibility of individual states – Home states of financial intermediaries bear primary regulatory and supervisory responsibilities – But preemptive or precautionary credit might be made available to others by key states

45. Crisis Prevention (1) All contemporary markets that are legal rest on standards and enforcement procedures associated with government authority International financial crises expose jurisdictional ambiguities and overlaps – Yet, we still do not have an unambiguous global standard-setter or a global agency capable of final enforcement – What we have are selected agencies that coordinate standard-setting and enforcement

48. Crisis Prevention (2) Basel Committee on Banking Supervision – Sets standards for the largest financial institutions operating across national borders Determines protocols for minimum standards for back-up capital reserves to be held by banks Associated with the Bank for International Settlements and works with the International Organization of Securities Commissions

49. Crisis Prevention (3) Other policy instruments that states can use to prevent financial crises from affecting them – Capital controls – Accumulating foreign exchange reserves – Wide use of such measures would undermine the global experiment in financial integration For international financial integration to succeed, we need mutually sustainable fiscal and monetary policies – But how do we achieve this?

50. Crisis Management & Resolution (1) There is no mechanism for the orderly bankruptcy of a national economy – No lender-of-last-resort – No internationally agreed liquidation procedures – No final court to replace managers and supervise the forced adjustment of national balance sheets

51. Crisis Management & Resolution (2) Main creditor states and private financial institutions have instead resorted to ad-hoc functional equivalents of last-resort lending or debt-restructuring services States have the right to resort to default (failure to meet obligations) but have incentives not to do so

54. Crisis Management & Resolution (3) IMF is a key institution in stabilizing the financial market – Provides a mechanism for creditor states to share the burden of providing emergency financial assistance to debtors – It is politically better placed than individual countries to exert pressure and impose conditions on borrowers – Its annual surveillance activities can help hold members accountable for the external impact of their economic policy choices

55. Crisis Management & Resolution (4) New IMF accommodation of capital controls – May reduce countries’ incentives to self-insure through accumulation of foreign exchange reserves Reconciling cooperation and competition, and managing the distribution of adjustment costs and improved market regulation remains elusive

57. Week 13 - Movie Display at the class - Inside Job http://www.imdb.com/title/tt1645089/ (May 22) Week 14 – Submission of movie review at the class (print-out) - Globalization, Growth, Poverty, Inequality, Resentment, and Imperialism ( May 29) Week 15 – Review before Final (June 5)