WEED PeWa Peter Wahl World Economy, Ecology & Development Association Berlin Berlin 17. November 2008 Financial Markets Crisis and Development

On the character of the crisis 1.The biggest financial crisis since the Great Depression 2.It is not over 3.Its epicentre is the US, the still biggest economy in the world 4.It heavily affects real economy 5.Industrial countries in recession 6.Whole world will be affected 7.Systemic crisis of finance 8.The bankrupcy of the economic paradigm of self- regulating markets, laissez-faire 9.Collapse of the finance based growth model WEED PeWa

A systemic crisis – which system? FinancialisationAsset driven economy Shareholder capitalism Finance capitalism Predator capitalism Turbo capitalism WEED PeWa

Some current explanations Gree d Easy money Lack of supervision Subprime crisis WEED PeWa

Basic characteristics of the finance based model Dominance of finance over real economy Speculation New instruments New actors WEED PeWa

Traditional role of international financial markets providing efficient services payment system for households and real economy providing money for public and private investment - lending WEED PeWa Real Economy Service function of financial markets Financial markets Subordination

WEED PeWa Real Economy A new system has emerged Financial markets Dominance quantitaively &qualitatively Wealth, asset driven Centred around the shareholder value

New economic environment after Bretton Woods Floating exchange rates Big bang of financialisation Transnational Markets New profitprofit sourcessources Liberalisation Deregulation

Foreign Exchange Reserves and Foreign Exchange Turnover WEED PeWa

2 trillion $ per workday WEED PeWa Volume of trade and FDI Iess than 3% 20% hedging („hot potatoe trade“) The rest is arbitrage and speculation Overliquidity - Instability Extreme expansion of markets

Interest rates Exchange rate Equity, shares etc. WEED PeWa Speculation Speculation on global level is now possible

Casino Economy (Keynes)

New Instruments Certification, derivatives

Certification/Derivatives I Transformation of debt into tradeable asset

Certification II Switch of company financing from bank to financial markets

WEED PeWa Bank Gives Credit Interests Principal repayments Traditional Credit Cycle

Certification Fghhg 678 hjltr 676 Credit Certification etc. WEED PeWa

The vicious cycle Debt is permanently growing faster than real economy Servicing the debt through new debt Further Increase of debt WEED PeWa

HLI (highly leveraged inst.) WEED PeWa Up to 30 times of own capital as credit

The Ponzi Economy

New Actors The institutional investor

Banks Pension Funds Investment Funds Professionalisation Institutionalisation Sophistication Specialisation PISS of the property function = WEED PeWa

Shareholder Orientation Traditional use of shares: Share Dividend Share Sale Share BuyingSale buying Share etc. Shareholder Value: WEED PeWa

- Minimum investment (1 mio. onwards) - Based in OFCs - Institutional Investors & HNWIs - leverage The locusts Hedgefunds &Private Equity WEED PeWa

Consequences of finance based accumulation Instability of financial system Unequal distribution Reducing policy space WEED PeWa

Consequences on financial stability WEED PeWa Contagion: Market integration creates linkages which increase speed and magnitude of spillovers Momentum trading Risks of risk- managemnent Procyclical Rating Short term investment Herding behaviour

Increasing frequency of crashes 1994 Mexico 1998 Russia 2000 Turkey 1998 Brazil 1997 Asia 2000 New Economy WEED PeWa 1984 Debt Crisis 2001 Argentina

Consequences on real economy Speculation, arbitrage, certifiation Investment goes into portfolio investment Structural underinvestment in real economy WEED PeWa

Decreasing investment in real economy increasing profits WEED PeWa

Since the nineties, real wages in most countries are stagnating or decreasing WEED PeWa

Between 1996 and 2005 the liquid assets of HNWIs have more than doubled: from 16 trillion to 33 trillion US WEED PeWa

”As a result of the extended exit option which capital is enjoying, the policies of governments have become hostage of the financial markets.” Yilmaz Akyüz, former chief economist UNCTAD „Today, investors have not any longer to follow governments, but goverments have to follow investors“ Rolf E. Breuer, former boss of Deutsche Bank „ We cannot make political decisions against the financial markets“ Joschka Fischer, former German foreign minister

WEED PeWa Thank you For your attention Peter Wahl