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Financial Markets Crisis and Development. Berlin 17. November 2008. Peter Wahl World Economy, Ecology & Development Association Berlin. WEED PeWa. On the character of the crisis. The biggest financial crisis since the Great Depression It is not over

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WEED PeWa

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  1. Financial MarketsCrisis and Development Berlin 17. November 2008 Peter Wahl World Economy, Ecology & Development AssociationBerlin WEED PeWa

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

  3. A systemic crisis – which system? Financialisation Asset driveneconomy Shareholdercapitalism Predatorcapitalism Turbo capitalism Financecapitalism WEED PeWa

  4. Some current explanations Greed Easy money Subprime crisis Lack of supervision WEED PeWa

  5. Basic characteristics ofthe finance based model • Dominance of finance over real economy • Speculation • New instruments • New actors WEED PeWa

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

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

  8. New economic environmentafter Bretton Woods Transnational Markets Floating exchange rates Big bang of financialisation profit New sources LiberalisationDeregulation

  9. Foreign Exchange Reserves and Foreign Exchange Turnover WEED PeWa

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

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

  12. Casino Economy (Keynes)

  13. New Instruments Certification, derivatives

  14. Certification/Derivatives I Transformation of debt into tradeable asset

  15. Certification II Switch of company financing from bank to financial markets

  16. Traditional Credit Cycle Bank Gives Credit Interests Principal repayments WEED PeWa

  17. Certification Credit Certification Fghhg678hjltr676 Fghhg678hjltr676 Fghhg678hjltr676 Fghhg678hjltr676 Fghhg678hjltr676 etc. WEED PeWa

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

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

  20. The Ponzi Economy

  21. New Actors The institutional investor

  22. The institutional investor Banks Pension Funds Investment Funds PISS Professionalisation Institutionalisation Sophistication Specialisation = of the property function WEED PeWa

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

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

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

  26. Consequences on financial stability Contagion: Market integration creates linkages which increase speed and magnitude of spillovers Momentumtrading Short term investment Herdingbehaviour Risks of risk-managemnent Procyclical Rating WEED PeWa

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

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

  29. Decreasing investment in real economyincreasing profits WEED PeWa

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

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

  32. WEED PeWa

  33. ”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

  34. Peter Wahl peter.wahl@weed-online.org Thank you For your attention WEED PeWa

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