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A UNION PERSPECTIVE ON THE GLOBAL FINANCIAL CRISIS

A UNION PERSPECTIVE ON THE GLOBAL FINANCIAL CRISIS. Peter Conway Secretary N Z Council of Trade Unions. International crisis. Began as financial crash in the US Spread to Europe and rest of world Very quickly because of integration, lack of regulation of international capital

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A UNION PERSPECTIVE ON THE GLOBAL FINANCIAL CRISIS

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  1. A UNION PERSPECTIVE ON THE GLOBAL FINANCIAL CRISIS Peter Conway Secretary N Z Council of Trade Unions

  2. International crisis Began as financial crash in the US Spread to Europe and rest of world Very quickly because of integration, lack of regulation of international capital US$30 trillion loss in sharemarkets to March 2009 – largest ever US$1.9 trillion internationally to bail out banks

  3. Causes? Leverage – from 8 or 12:1 to 30:1 or even higher Collaterised debt obligations, credit default swaps, derivatives – pooling/securitisation Mexican strawberry picker in the US earning an average of $14,000 a year and granted a 100% mortgage to buy a house for $750,000

  4. More on causes…. Deregulation - repeal of the Glass-Steagall Act in 1999 Derivatives excluded from Commodity Futures Modernization Act in 2000. Bush's policy of "voluntary" regulation of investment banks at the SEC Global imbalances Financialisation, hollowing out, and growth of private equity/hedge funds

  5. Finance Sector Growth From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. This decade, it reached 41 percent. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

  6. Finance Sector Growth

  7. Alternative Views Greenspan held interest rates too low for too long, thus distorting the prices to which the market responded. US Government was actually encouraging banks to lend to sub-prime borrowers. Government spending far more than it raised in taxes and thus running protracted budget deficits.

  8. Alternative Views Community Reinvestment Act, which prevents banks from "redlining" minority neighbourhoods as not creditworthy. Fannie Mae and Freddie Mac for causing the trouble by subsidising and securitising mortgages with an implicit government guarantee. Mark to market accounting.

  9. Decline in Bank Market Value 2007 to 2009

  10. Global Imbalances • Bollard to Jobs Summit • Western countries need to save more, export more and adjust to lower currencies • Eastern countries have to consume more, run down Reserves and adjust to higher exchange rates

  11. The real economy Spread to real economy: Rapidly falling house prices Companies unable to expand or renew debt People and firms cut spending Particularly affected trade …

  12. World trade New York Times, 11 April 2009

  13. … and manufacturing:Industrial Production

  14. Effects of crisis so far “73 to 103 million more people will remain poor or fall into poverty” as a result – mainly in East and South Asia (UN) 4.1% contraction expected in the OECD in 2009, 8.3% unemployment in 2009, 9.8% in 2010

  15. Huge loss in output • US$8 trillion loss so far –almost two months output of the world economy • US$5.5 trillion stimulus so far in the US, Europe and Asia • OECD expects to contract by 4.1% in 2009 • Unemployment: • OECD forecast 8.3% in 2009, 9.8% in 2010 • Currently 10.2 % in US (26 year high)

  16. IMF now says! IMF blames policymakers for "a general belief in light-touch regulation based on the assumption that financial market discipline would root out reckless behaviour and that financial innovation was spreading risk, not concentrating it. Both these assumptions proved wrong, and the result was a massive asset price bubble ...".

  17. Bank of England says.. Andrew Haldane, the Bank of England’s executive director for financial stability, says failures due to “disaster myopia” (the tendency to underestimate risks), a lack of awareness of “network externalities” (spill­overs from one institution to the others) and “misaligned incentives” (the upside to employees and the downside to shareholders and taxpayers).

  18. Australia and New Zealand • New Zealand and Australia not as hard hit • Sounder banking system – less competition? Less savings? Banks would have if they could have? (Former Governor of the Reserve Bank of Australia, Ian Macfarlane) • Australia hit less • Partly due to China; partly government response • Did not go into recession, unemployment at 5.7% - less than New Zealand

  19. New Zealand Trade falls, commodities hit less Economy appears to have stopped contracting Unemployment at 6.5%, still rising – consensus forecasts for over 7% in 2010 and 2011 (but Reserve Bank forecasts 6.9% peak in March 2010) Manufacturing and construction particularly hard hit Exchange rate over US$0.70 – hurting exporters But cautious optimism

  20. Recession + Familiar Problems Current account deficit Low productivity levels and growth GDP per capita trends Low savings Small export sector High dollar/monetary policy

  21. Real GDP per capita as ratio of OECD average

  22. Household Debt 1995 to 2009 Source: Treasury Monthly Economic Indicators, October 2009

  23. House prices: no longer falling • Despite predictions • Treasury Budget forecast: • House prices to decline nearly • 8% in the year to March 2010 • 4% in the year to March 2011. • In fact – values are now only 1.1% below the same time last year, but 7.1% below 2007 peak September 2009 (Quotable Value)

  24. House prices: no longer falling Source: Treasury Monthly Economic Indicators, October 2009

  25. Budget 2009 • Increased expenditure $3 billion this Budget • Of which “operating allowance” for new spending $1.45 billion (down from $1.75 b) • But only $1.1 billion in future years (growing at 2% per year). Health usually takes $750 m! • Capital allowance $1.45 billion for Budgets 2009 to 2012 • Cuts in spending to pay for new priorities • Superannuation fund • Adult and Community Education • Pay and Employment Equity Unit • Public service redundancies and continuing reviews… • Greatly increased debt • Did they do enough?

  26. Public Debt (Percent of GDP) NewZealand Source: IMF World Economic, Sept 2009

  27. More on Debt September net debt 11.8% of GDP UK net debt 59.2% of GDP NZ Gross debt 26.9% of GDP Was 35.7% in 1999

  28. Government Spending (OECD average 2009= 41.5% of GDP)

  29. The Wages Question • Share the pain… weren’t so keen on sharing the gain • Still shortages in many areas • Pressures – CPI, affordability, line-by-line reviews, tax cuts, jobs focus • Catch up with Australia – ever?

  30. Is it over?New Zealand • Unemployment will continue to rise – but not as much as originally feared • Banks safe – but finance sector still shaky • Exports down, exchange rate a barrier, but commodity prices holding • Manufacturing and construction seem to have bottomed out • But big risk of housing price bubble reigniting • Risk of jobless growth • Constraints on government spending – some real, some political

  31. Is it over? - Overseas • UK still in recession, US coming out – due to govt • Still very high unemployment, low trade • Still concerns about the financial sector… • CIT Group, 100-year-old lender, filed for bankruptcy yesterday, will probably cost US taxpayers around US$2.3 billion. “Stocks tumbled around the world amid renewed fears about the state of the U.S. financial sector.” • …and back to their old ways • The biggest US banks (e.g. Goldman Sachs, JPMorgan Chase) which have grown even bigger due to takeovers and have received tens of billions of US government money “are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis” • “the five biggest banks’ average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago” • Bailouts came quickly, but new financial regulation has been slow, in large part because of resistance from the financial sector. • “

  32. Now on the agenda… • A lot of rethinking of old assumptions – • More, not less government • Stabilisation approach • Address underlying causes of domestic recession and economic vulnerability • Green New Deal? • Case for nationalisation • Regulation and global supervision of local and international finance • Changing power relationships – e.g. G20 • Greater development focus internationally

  33. Principles to stand by • Fairness • Greater equality, equity and valuing diversity • Participation • Te Tiriti, and greater voice in workplaces and society • Security • Security of employment and income, role of the state • Improving living standards • Wages, social wage, leisure, our environment • Sustainability • Economic, social, cultural, environmental

  34. A framework for change • Sustainable economic development • A strong economy which takes account of its side effects on the environment, society and cultures • Decent work and a good life • Good and fair wages, rewarding jobs, effective unions, secure employment, social protections , low inequality, social equity • Voice: real participation in workplace, economic and community decision-making

  35. Economic Development • Government support of firms, with conditions i.e. employment creation / export or import substitution potential / industry standard employment agreements / commitment to skills development / fair remuneration / progress to pay equity • Buy back Telecom’s physical network and begin to buy back the electricity system • Support Māori economic development • Encourage worker cooperatives and other alternative investment

  36. Financial and Monetary Policy • Closer oversight over financial institutions • Stabilise exchange rate • Management of international capital flows / currency controls / cooperation with other nations • Reserve Bank to: • Take action on exchange rate and international capital flows • Have broader monetary policy including employment, living standards, etc. • Finance for investment in NZ (Kiwi bonds, NZ Super Fund)

  37. International Economic Relationships Support better international financial regulation and supervision Support a cross-border financial transactions (Tobin) tax Manage international capital movements to and from NZ New internationalism: need for cooperation rather than market approach (e.g. trade agreements) Controls on foreign direct investment

  38. Taxation Introduce a 45% tax rate for incomes $150,000+ End deductibility of losses in investment property against personal income Capital gains tax exempting primary homes Land tax exempting most primary homes Research and development funding for firms

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