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2007 – 2008 The first World financial crisis Michael R. Krätke University of Amsterdam.

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1 2007 – 2008 The first World financial crisis Michael R. Krätke University of Amsterdam

2 Chronology 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 mbas - the credit crunch begins August 2007 collapse of the market for mbas - the credit crunch begins From september 2007 to august 2008 – banks tumbling down all over the world From september 2007 to august 2008 – banks tumbling down all over the world September 2008 – the black september of financial markets September 2008 – the black september of financial markets October 2008 – fighting the Big Bang October 2008 – fighting the Big Bang The world economic crisis – the next Great Depression – coming closer The world economic crisis – the next Great Depression – coming closer

3 Not the first (probably not the last) international financial crisis The US stock market crash of 1987 The US stock market crash of 1987 The US savings and loans crisis of 1986 -96 The US savings and loans crisis of 1986 -96 The Japanese real estate and banking crisis – 1990 – 2000 The Japanese real estate and banking crisis – 1990 – 2000 The EMS crisis in Europe 1992 The EMS crisis in Europe 1992 The Mexico – crisis of 1994-95 The Mexico – crisis of 1994-95 The Asian crisis 1997 – 1998 The Asian crisis 1997 – 1998 The Russian crisis 1998 The Russian crisis 1998 The dot.com crisis 2000 – 2002 The dot.com crisis 2000 – 2002 The Argentina crisis 2001 The Argentina crisis 2001

4 The new pattern of cycles and crises 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 and crises prevails The short term erratic cycle of financial bubbles and crises prevails On average: one major international financial crisis every three years On average: one major international financial crisis every three years From one bubble to the next – the flight of international capital from one object of speculation to the next (from ITC to real estate, from real estate to world trade commodities like oil) From one bubble to the next – the flight of international capital from one object of speculation to the next (from ITC to real estate, from real estate to world trade commodities like oil) Booms are driven by bubbles / bursting bubbles trigger off major crises Booms are driven by bubbles / bursting bubbles trigger off major crises

5 What is new today? All previous financial crises were regional /local crises All previous financial crises were regional /local crises In all previous financial crises the effects could be contained In all previous financial crises the effects could be contained The present financial crisis is the first truly world crisis of financial markets / financial capitalism The present financial crisis is the first truly world crisis of financial markets / financial capitalism It hits all the stock markets in the world / all financial centres of the world (more or less at the same time)? It hits all the stock markets in the world / all financial centres of the world (more or less at the same time)? It hits all internationally operating banks /financial concerns / institutional investors It hits all internationally operating banks /financial concerns / 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 before) A real world crisis starts in the USA (like it did before)

6 Has Capitalism changed recently? Capitalism with derivatives – the explosion of finance in general – and of the trade in derivatives in particular Capitalism with derivatives – the explosion of finance in general – and of the trade in derivatives in particular Stock markets as multinationals Stock markets as multinationals International banks- present on all the major financial markets (as capital markets perform the traditional function of banks) International banks- present on all the major financial markets (as capital markets perform the traditional function of banks) Institutional investors (mutual funds, pension funds, insurance companies) Institutional investors (mutual funds, pension funds, insurance companies) Shift from Commercial Banking to Investmentbanks – and their structured investment vehicles and “conduits” Shift from Commercial Banking to Investmentbanks – and their structured investment vehicles and “conduits” Rise of the Hedge Funds and Private Equity Funds (completely different from traditional “long-only” mutual funds / investment funds) Rise of the Hedge Funds and Private Equity Funds (completely different from traditional “long-only” mutual funds / investment funds) The waning divide between banks and non-banks The waning divide between banks and non-banks

7 Financialization What financialization means: What financialization means: The predominance of finance – the relative rise of the FIRE (finance, insurance, real estate) sector which becomes more important than manufacturing (22,6 % of GDP in the US to 14,9% in 2005) The predominance of finance – the relative rise of the FIRE (finance, insurance, real estate) sector which becomes more important than manufacturing (22,6 % of GDP in the US to 14,9% in 2005) households are urged to behave like businesses households are urged to behave like businesses businesses are urged to behave like banks businesses are urged to behave like banks banks are urged to behave like hedge funds banks are urged to behave like hedge funds basic rationale: creating profits without creating new value (thriving on mere price differentials) basic rationale: creating profits without creating new value (thriving on mere price differentials)

8 Securitization basic logic: transforming illiquid loans in banks’ portfolios into marketable / tradeable / negotiable assets basic logic: transforming illiquid loans in banks’ portfolios into marketable / tradeable / negotiable assets expanding the secondary markets for derivatives / creating new derivative markets expanding the secondary markets for derivatives / creating new derivative markets inventing / creating compound (structured) financial derivatives inventing / creating compound (structured) financial derivatives inventing / creating off-balance sheet conduits – SIVs (structured investment vehicles) to hold such assets inventing / creating off-balance sheet conduits – SIVs (structured investment vehicles) to hold such assets

9 For instance: creating a MBS (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 firm specialized in buying and reselling mortgages (like Fannie or Freddie) second: the mortgage bank /company sells it to a firm specialized in buying and reselling mortgages (like Fannie or Freddie) third: the buyer aggregates many such loans into a pool and issues a new bond based upon this pool (a right to a profit arising from payments for the original loans) third: the buyer aggregates many such loans into a pool and issues a new bond based upon this pool (a right to a profit arising from payments for the original loans) fourth: the buyer (Fannie or Freddie) sells this new paper – the MBS – to others – typically institutional investors and /or hedge funds fourth: the buyer (Fannie or Freddie) sells this new paper – the MBS – to others – typically institutional investors and /or hedge funds Fifth: the hedge funds (or other buyers) start trading these papers on the secondary markets (making profits from rising prices / price differentials arising on those markets Fifth: the hedge funds (or other buyers) start trading these papers on the secondary markets (making profits from rising prices / price differentials arising on those markets

10 The explosion of the trade in derivatives Since the 1970s the volume of international trade in derivatives has exploded Since the 1970s the volume of international trade in derivatives has exploded The real news: the rise of “financial” derivatives to the forefront The real news: the rise of “financial” derivatives to the forefront Among them: “structured” products like mbs / the most important class of new “structured” financial assets being the CDOs (collaterized debt obligations) and CMOs (collaterized mortgage obligations) – rapidly growing between 2000 and 2006 Among them: “structured” products like mbs / the most important class of new “structured” financial assets being the CDOs (collaterized debt obligations) and CMOs (collaterized mortgage obligations) – rapidly growing between 2000 and 2006 For instance: volume of outstanding interest swaps, currency swaps and interest options was 3450bn $ in 1990 For instance: volume of outstanding interest swaps, currency swaps and interest options was 3450bn $ in 1990 286000 bn $ end 2006 (six times global gross product) 286000 bn $ end 2006 (six times global gross product)

11 The explosion of the trade in structured financial products different types: the “alphabet soup” different types: the “alphabet soup”

12 The brave new world of international finance: Deregulation The race to reduce / abolish capital controls and foreign exchange controls started in the 1970s The race to reduce / abolish capital controls and 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 – Steagall Act of 1933 (in 1999) and the passing of the Futures Modernization Act in 2000 (both still under Clinton) Two US examples: the repeal of the Glass – Steagall Act of 1933 (in 1999) and the passing of the Futures Modernization Act in 2000 (both still under Clinton) By mid – 20th century the financial sector was everywhere highly regulated By mid – 20th century the financial sector was everywhere highly regulated Today, the global financial sector is as liberalized as it was before 1914 Today, the global financial sector is as liberalized as it was before 1914

13 The brave new world of international finance: Beyond regulation Shift towards non-regulated area’s Shift towards non-regulated area’s The rise of “shadow-banking” The rise of “shadow-banking” Non-banks becoming banks (like GM, Chrysler f.i. – making more profits with their financial activities than by producing cars) Non-banks becoming banks (like GM, Chrysler f.i. – making more profits with their financial activities than by producing cars) Intermediaries abound Intermediaries abound The explosion of OTC – transactions The explosion of OTC – transactions The rise and multiplication of offshore-markets and offshore-finance (offshore-markets and tax havens throughout the world – more than half of them in good old Europe) The rise and multiplication of offshore-markets and offshore-finance (offshore-markets and tax havens throughout the world – more than half of them in good old Europe)

14 The rise of “financial engineers” the new “science of finance” in economics the new “science of finance” in economics In the 1960s Fischer Black with associates In the 1960s Fischer Black with associates (among them Nobel prize winnars Scholes and Merton) developed new models to describe / analyze asset pricing in financial markets (among them Nobel prize winnars Scholes and Merton) developed new models to describe / analyze asset pricing in financial markets Their major finding was quickly forgotten: no empirical evidence whatsoever that the activity of funds managers added anything to the value of the funds’ assets (more embarrassing findings) Their major finding was quickly forgotten: no empirical evidence whatsoever that the activity of funds managers added anything to the value of the funds’ assets (more embarrassing findings) However, the new generation of funds managers claimed to be scientifically trained experts However, the new generation of funds managers claimed to be scientifically trained experts Fischer Black rethinking the “efficient market hypothesis” – referring to “values” and very wide margins Fischer Black rethinking the “efficient market hypothesis” – 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 the futures exchanges as “gambling houses” (if people wanted to gamble there, the state should tax their gains heavily as he does with other forms of gambling) Fischer was a market radical, but clear-sighted enough to see the futures exchanges as “gambling houses” (if people wanted to gamble there, the state should tax their gains heavily as he does with other forms of gambling)

15 The peculiar riddle of today’s world financial crisis It started in one relatively small segment of the US – real estate and mortgage market (the socalled “subprime” segment) It started in one relatively small segment of the US – real estate and mortgage market (the socalled “subprime” segment) and it ended up as a world financial crisis and it ended up as a world financial crisis affecting all international financial markets and all capitalist countries in the world affecting all international financial markets and all capitalist countries in the world How was this possible? How was this possible?

16 Subprime and prime – the US- housing market What is peculiar about the subprime segment What is peculiar about the subprime segment Selling properties to the ninjas (no income, no job, no assets) Selling properties to the ninjas (no income, no job, no assets) Teaser rates and other tricks – apparently very low costs (at the beginning) – but renewal of the loan due at variable conditions – variable interest rates to begin with Teaser rates and other tricks – apparently very low costs (at the beginning) – but renewal of the loan due at variable conditions – variable interest rates to begin with Credit default – no problem as long as the bubble thrives Credit default – no problem as long as the bubble thrives Credit default swaps – decoupling the loan from the default risk Credit default swaps – decoupling the loan from the default risk subprime mortgages – 160 billion $ in 2001 to more than 600 billion $ in 2006 subprime mortgages – 160 billion $ in 2001 to more than 600 billion $ in 2006

17 Subprime and prime – the US housing market simple mortgages – homeowners and (local) banks simple mortgages – homeowners and (local) banks the ever extending system of financial intermediation the ever extending system of financial intermediation an ever wider range of highly specialized institutions an ever wider range of highly specialized institutions mortgage finance, refinance (public concerns like Fannie and Freddie) and insurance mortgage finance, refinance (public concerns like Fannie and Freddie) and insurance the thriving secondary markets for the mortgage based assets the thriving secondary markets for the mortgage based assets

18 Selling US-mortgages (subprimes) worldwide Basic technique of financial capitalism – securitization Basic technique of financial capitalism – securitization Secondary markets for mbas are local – but the market actors (hedge funds / banks) are operating on a global level Secondary markets for mbas are local – but the market actors (hedge funds / banks) are operating on a global level Volume of mbas shot up from 56 bn$ to 528 bn$ in five years Volume of mbas shot up from 56 bn$ to 528 bn$ in five years US structured financial products are sold, repackaged and resold to investors all over the world (Europe, the America’s, Asia) US structured financial products are sold, repackaged and resold to investors all over the world (Europe, the America’s, Asia) on an ever larger scale: the US real estate bubble provides more and more of these assets on an ever larger scale: the US real estate bubble provides more and more of these assets A hyperspeculation arises – the Minsky moment occurs A hyperspeculation arises – the Minsky moment occurs

19 The brave new world of structured financial products From the simple IOY (I owe you) to the “alphabet soup” From the simple IOY (I owe you) to the “alphabet soup” Investment banks buying and reselling structured financial products all over the world Investment banks buying and reselling structured financial products all over the world packaging and repackaging debts (poor and good, of very different origins) into cdo’s (collaterized debt obligations) and other products packaging and repackaging debts (poor and good, of very different origins) into cdo’s (collaterized debt obligations) and other products selling and reselling / trading cdo’s all over the world selling and reselling / trading cdo’s all over the world Hence: the risk of bad loans (subprimes) and / or the default insurance risk is everywhere Hence: the risk of bad loans (subprimes) and / or the default insurance risk is everywhere

20 The housing bubble – rising mountains of debt Bubble driven by rising house prices (at double digit rate) Bubble driven by rising house prices (at double digit rate) House prices driven by increasing demand House prices driven by increasing demand Increasing demand driven by the permanent expansion of mortgage finance Increasing demand driven by the permanent expansion 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 private debt, but also – growth of pirvate wealth (making money by selling a house / by refinancing the mortgage based upon ever higher real estate / house prices) stagnant labour incomes – explosive growth of private debt, but also – growth of pirvate wealth (making money by selling a house / by refinancing the mortgage based upon ever higher real estate / house prices) the US consumption levels based upon rising mountains of debt (with stagnant wages for the large majority of workers) the US consumption levels based upon rising mountains of debt (with stagnant wages for the large majority of workers)

21 The making of an international speculation bubble Securitization – the chance to sell any sort of debt and loans immediately at a good price is the base for the expansion of mortgage finance Securitization – the chance to sell any sort of debt and loans immediately at a good price is the base for the expansion of mortgage finance Huge amounts of capital flow into the secondary markets all over the world (mostly OTC transactions) Huge amounts of capital flow into the secondary markets all over the world (mostly OTC transactions) Investment banks playing the game – pass the parcel (with mba’s, cdo’s etc.) – among themselves, the financial markets follow their example Investment banks playing the game – pass the parcel (with mba’s, cdo’s etc.) – among themselves, the financial markets follow their example not one housing bubble, but several (Spain, UK, Ireland, Belgium and so on) not one housing bubble, but several (Spain, UK, Ireland, Belgium and so on)

22 The importance of high leverage All these transactions are financed by credit – basic rule: you don’t risk your own money, you risk other people’s money All these transactions are financed by credit – basic rule: you don’t risk your own money, you risk other people’s money Speculators (hedge funds in particular) use very high leverage (up to 1 : 26) to finance their transactions Speculators (hedge funds in particular) use very high leverage (up to 1 : 26) to finance their transactions Hence: if the asset purchased is losing its market “value” or becoming worthless, all that remains is a huge amount of debt! Hence: if the asset purchased is losing its market “value” or becoming worthless, all that remains is a huge amount of debt! Intermediaries flock to the markets as long as the markets are on the rise – helping to establish “high leverage” for more and more participants Intermediaries flock to the markets as long as the markets are on the rise – helping to establish “high leverage” for more and more participants

23 The dubious role of rating agencies The structure of the market for ratings The structure of the market for ratings The big three – Standard & Poor’s, Moody’s and Fitch (together, they control nearly 90% of the market for ratings world wide) The big three – Standard & Poor’s, Moody’s and Fitch (together, they control nearly 90% of the market for ratings world wide) How they make their money – creating structured financial products and evaluating them – while the issuing agent who wants to bring these products on the markets pays them a fee for their double service How they make their money – creating structured financial products and evaluating them – while the issuing agent who wants to bring these products on the markets pays them a fee for their double service Impressive ratings were a prerequesite for the rising demand for such products Impressive ratings were a prerequesite for the rising demand for such products At the height of the cdo’s /cds’s boom, rating agencies received more than half their income from such fees At the height of the cdo’s /cds’s boom, rating agencies received more than half their income from such fees Such papers were rated as high as state / treasury bonds, but yielded much higher returns – hence the frenzy of institutional investors Such papers were rated as high as state / treasury bonds, but yielded much higher returns – hence the frenzy of institutional investors

24 The bubble bursts Credit defaults happen – first and foremost in the subprime sector Credit defaults happen – first and foremost in the subprime sector Rising interest rates – rising levels of foreclosures - a faltering market (rapid decline of new mortgages) Rising interest rates – rising levels of foreclosures - a faltering market (rapid decline of new mortgages) More and more subprime mortgage loans get foul More and more subprime mortgage loans get foul Declining house prices make refinance ever more difficult Declining house prices make refinance ever more difficult Credit rationing by the banks (flight from mortgage finance) Credit rationing by the banks (flight from mortgage finance) And – flight from trash and into quality, rapid selling off of mba’s, cmo’s and other structured products – the market for these derivatives crashes And – flight from trash and into quality, rapid selling off of mba’s, cmo’s and other structured products – the market for these derivatives crashes

25 Fear spreads Everybody in the financial world is involved Everybody in the financial world is involved The mortgage backed securities have been traded world wide The mortgage backed securities have been traded world wide Mortgage backed securities have been bought by banks all over the world Mortgage backed securities have been bought by banks all over the world But where are the foul credits But where are the foul credits They can be everywhere, everyone is probably at risk They can be everywhere, everyone is probably at risk

26 The first banks fall – the case of Northern Rock The fifth largest mortgage financier in the UK The fifth largest mortgage financier in the UK One of the major actors in the British housing bubble One of the major actors in the British housing bubble Credit defaults – falling price of NR shares Credit defaults – falling price of NR shares The reaction: A classical “run” on the bank in october 2007 The reaction: A classical “run” on the bank in october 2007 followed by a bail – out (later nationalization in early 2008) followed by a bail – out (later nationalization in early 2008)

27 The big credit crunch – a crisis of the money market Interbank lending – the central part of the money market Interbank lending – the central part of the money market From september 2007 onwards: banks restrict or refuse interbank lending (sharp rise of interbank interest rates like the LIBOR and/or credit rationing) From september 2007 onwards: banks restrict or refuse interbank lending (sharp rise of interbank interest rates like the LIBOR and/or credit rationing) There is no “liquidity crisis” - banks are not lacking liquidity but hoarding it – because they don’t trust each other’s solvency in the longer run There is no “liquidity crisis” - banks are not lacking liquidity but hoarding it – because they don’t trust each other’s solvency in the longer run Institutional investors rush to state papers (and commodity exchanges) Institutional investors rush to state papers (and commodity exchanges) There is an “insolvency crisis” – hidden bankruptcies because of the losses still undisclosed There is an “insolvency crisis” – hidden bankruptcies because of the losses still undisclosed Since october 2007 central banks have stepped in several times – sometimes in joint actions - as money market lenders of the last resort Since october 2007 central banks have stepped in several times – sometimes in joint actions - as money market lenders of the last resort

28 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 corporation AIC - the second largest insurance corporation Dozens of larger banks have fallen - hundreds of larger and smaller banks (in the US and elsewhere) are presumably in trouble Dozens of larger banks have fallen - hundreds of larger and smaller banks (in the US and elsewhere) are presumably in trouble The fearsome domino effect (some banks are just to big to fall) The fearsome domino effect (some banks are just to big to fall)

29 The big Bail-out begins: Banks first, women and children last! Bailing out – an old and common practice Bailing out – an old and common practice An ever increasing volume of bail outs An ever increasing volume of bail outs First stage (september 2007 – august 2008) – selective bail outs for individual banks in distress (ad hoc rescues) First stage (september 2007 – august 2008) – selective bail outs for individual banks in distress (ad hoc rescues) Second stage (from september/october 2008 onwards): bailing out the whole banking sector Second stage (from september/october 2008 onwards): bailing out the whole banking sector

30 The return of state socialism Nationalizing the banks, socializing the losses Nationalizing the banks, socializing the losses UK leads the move: First nationalizing single banks (at least temporarily) UK leads the move: First nationalizing single banks (at least temporarily) now: nationalizing the junk papers of all the banks now: nationalizing the junk papers of all the banks US plan following the same pattern: helping the banks to get rid of the “junk papers” US plan following the same pattern: helping the banks to get rid of the “junk papers” no rescue for the shareholders, rescues for the managers are restricted no rescue for the shareholders, rescues for the managers are restricted tens of thousands of bank employees have already lost their jobs, much more to come tens of thousands of bank employees have already lost their jobs, much more to come

31 The return of central banking A series of individual and collective actions taken by central banks of the major capitalist countries (Fed, BoE, ECB, BoJ, Swiss National Bank) to provide liquidity (short term credits) for the banking system A series of individual and collective actions taken by central banks of the major capitalist countries (Fed, BoE, ECB, BoJ, Swiss National Bank) to provide liquidity (short term credits) for the banking system A few days ago: the first concerted action to pump liquidity into the markets and to reduce the bank rate A few days ago: the first concerted action to pump liquidity into the markets and to reduce the bank rate Lowering the standards: More and lower rated papers are accepted as collaterals for central bank credits Lowering the standards: More and lower rated papers are accepted as collaterals for central bank credits To no avail – actually, the central banks are now substituting the private banks as providers of interbank loans To no avail – actually, the central banks are now substituting the private banks as providers of interbank loans How long can the central banks go on? How long can the central banks go on?

32 The meaning of this crisis: The end of the Wall Street Regime A month ago, only two of the big Five investmentbanks at Wall Street were left A month ago, only two of the big Five investmentbanks at Wall Street were left Today – none Today – none The last two giants have chosen to transform themselves into commercial banks! The last two giants have chosen to transform themselves into commercial banks! The stock markets crash worldwide – but Wall Street even more (last week a series of unprecedented stock market crashs all over the world) The stock markets crash worldwide – but Wall Street even more (last week a series of unprecedented stock market crashs all over the world)

33 The meaning of the crisis: The end of the dollar hegemony? Due to the decline of the USA as the leading financial power of the world, the dollar will loose further Due to the decline of the USA as the leading financial power of the world, the dollar will loose further The rescue actions of the US government drive the US public debt to unprecedented levels The rescue actions of the US government drive the US public debt to unprecedented levels Depending upon the succes of the rescue actions in Europe and Asia, other currencies will further gain in relation to the dollar Depending upon the succes of the rescue actions in Europe and Asia, other currencies will 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 decided in Beijing Anyway, the fate of the dollar will be decided in Beijing

34 The meaning of this crisis: The end of Neoliberalism? Certainly the end of the myth of the self- regulating markets Certainly the end of the myth of the self- regulating markets Probably the end of the myth of financial market “efficiency” under minimal or no regulation at all Probably the end of the myth of financial market “efficiency” under minimal or no regulation at all Rising doubts and second thoughts about “freedom for speculators” Rising doubts and second thoughts about “freedom for speculators” The myth of the superiority of the US- model of capitalism is shaken The myth of the superiority of the US- model of capitalism is shaken

35 When will the financial crisis tear down the real economy? In March 2008 the world economy seemed still growing In March 2008 the world economy seemed still growing Except in the USA (where a severe recession had already begun / the US consumer is broke) Except in the USA (where a severe recession had 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 in crisis - four major and several smaller EU-economies are in crisis - Germany’s export industry (the leading export economy of the world) is slowing down - Germany’s export industry (the leading export economy of the world) is slowing down - Japan’s banks are profiting an buying the spoils of the financial crisis in the US and elsewhere, while the Japanese real economy is stagnant - Japan’s banks are profiting an buying the spoils of the financial crisis in the US and elsewhere, while the Japanese real economy is stagnant - the crisis will continue during 2009! - the crisis will continue during 2009!

36 Will the financial crisis affect the NICs and NACs of today? The financial crisis has already hit the Chinese banks and big insurance concerns The financial crisis has already hit the Chinese banks and big insurance concerns Asia’s stock markets are hit by a series of crashes as well Asia’s stock markets are hit by a series of crashes as well The slow down of world trade in raw materials has already begun (as several indicators show) The slow down of world trade in raw materials has already begun (as several indicators show) The BRIC countries will be affected (how much, depends on the relative size of their domestic markets) The BRIC countries will be affected (how much, depends on the relative size of their domestic markets)

37 Long term effects A new architecture of world finance in the making A new architecture of world finance in the making 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 / financial centres of the world The shift between financial markets / 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 we knew it? The end of banking as private business as we knew it?

38 When and where will the next bubbles rise? Financial market capitalism Anglosaxon style has only one chance to survive: Financial market capitalism Anglosaxon style has only one chance to survive: Finding new objects for worldwide speculation, creating the next bubble Finding new objects for worldwide speculation, creating the next bubble Candidats: Alternative energies, biotechnology Candidats: Alternative energies, biotechnology But new bubbles will not solve the underlying problem: a bifurcation between a stagnant real economy (with huge overcapacities all over the world) and a hyperactive financial economy (with still huge surplus capital all over the world) But new bubbles will not solve the underlying problem: a bifurcation between a stagnant real economy (with huge overcapacities all over the world) and a hyperactive financial economy (with still huge surplus capital all over the world)


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