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Origins: Global Financial Crisis

Origins: Global Financial Crisis. Historical Phases of Global Financial Regulation Bretton Woods Institutions: IMF, World Bank, WTO 1944-71: National Fordism & Keynesian Regulation Breakdown of Fordism, Keynesianism  Globalization 1980-Globalization & Neo-Liberal (Market) Regulation

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Origins: Global Financial Crisis

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  1. Origins: Global Financial Crisis Historical Phases of Global Financial Regulation Bretton Woods Institutions: IMF, World Bank, WTO 1944-71: National Fordism & Keynesian Regulation Breakdown of Fordism, Keynesianism Globalization 1980-Globalization & Neo-Liberal (Market) Regulation 2001-Fed.Chair Greenspan: Post “9-11” Credit Bubble

  2. Crisis of Keynesian Regulation 1967-71  Stagnation decline in labor productivity End of Rising Real Wages/security “Zero-Sum game” US Firms “outsource” LO production/ Mexico & Asia (taxes) Downsizing of Manufacturing Firms/LO social opportunity Decline of Organized Trade Unions LO WC Class Power Decline of “New Deal” Political Coalition Identity Politics

  3. Why did Keynesianism Decline? Keynesianism subsidies political influence Price Supports Rigidities & inflexible markets RigiditiesBarriers to Innovation &Reinvestment Difficult to “clear” weak firms or bad products ‘Rational Expectation’ Rising Prices Inflation

  4. Review: Globalization Processes Increasing FLOWS across borders of nation-states. Flows=s people, capital, media, ideas, goods, data, disease Increasing INTERCONNECTEDNESS X borders Increasing Speed/velocity of Flows across State borders HI Significance Location on Global NETWORKS

  5. Information Revolution 1971?? Shift: Industrial to Informational Society/economy 1971: Invention of microprocessor/micro computing Compression of “Time-Space” relations/boundaries Rise of cheap GLOBAL “real time” communication Rise of Knowledge-Innovation competition @ Silicon

  6. Global Information Industry (1) Digitalization: global conversionall info =s O, 1 *convergence: all human information/knowledge Hardware: chips, servers, HDD computers, INTEL Software: programming, codes, logical instructions Algorithms: instructions to complete TASKs (service ?) Example: The Internet, OS systems, Open source, MS

  7. Global Information Industry (2) Networking: Routers, satellites, fiber-optic Cisco Content: Media, webcasting, films, TV, news FOX Google & MS VS. Open Source Movement New Global Organizational Structure Web of Digital Networks driving global interconnectedness

  8. ICT Networks Financialization Rise of ICT/Computer enabled Financial Services 24/7 24/7 i.e. Global Financial Networks- GE-Ford $$$ Denationalized currency: floating rates, xeno $, “stateless” Inventions: junk bonds, derivatives, , 24/7 SW->Computer program trades, satellite, instant real time NO Global Regulation & LO Institutional Mediation

  9. Global Financial Integration/Risks De-territorialization of Finance no state regulation/oversight Barings>British Bank (Jefferson 1815) Singapore branch trading futures based on Japanese Nikkei index Asian Financial Crisis (1997) Japanese capital Thai real estate Long Term Capital Management (1998) FED $3.625 bailout ICT Networks Compress time/space 24/7 trading, computer programs, hedge funds, derivatives, “subprime CDOs” CDFs Solutions: Global Central Bank: Keynes, Soros, Stiglitz Nov 15th

  10. Greenspan: Origins of Credit Bubble A “true believer” in individual rationality & Ayn Rand Believed Market’s would Price Risk & Self-Regulate Opposed Increased or more aggressive REGULATION Lowered Interest Rates & Deregulated Financial markets Clinton & Greenspan Repealed Glass-Steagle Act (1999)

  11. Global Sub-Prime Financial Crisis What is happening? Panic, Banks collapsing, NO Credit, Nationalization of Banks, IMF SAPs, HI Pain/poverty What are the causes? Credit bubble, Housing inflation Deregulation, No oversight, New financial instruments Why USA first, then Global? Bush II & Neoliberalism How did the Panic become Global? Networks, 24/7

  12. Cause: Credit Bubble & Sub Prime 2001. Fed Chair Greenspan Cheap Credit/LO rates Objective: Revitalize Growth after recession & “9-11” HI USA housing price inflation @ LO rents or income Deregulation: No down payment, Interest only, ReSets Change: Agent making M-Loan did not hold Loan/30y

  13. Financial Alchemy: Securitization Original Mortgages sold to Firms: Bear Stearns, Lehman Assumption: Value of USA houses: No decline/ 1960 Model assumes Rising H prices, Continual ReFinancing Outcome: Rapid expansion of housing/Re financing Mortgages Securitized  Collatoral Debt Obligations

  14. Securitization: CDOs Assumption: Rising Housing Prices raise value/CDOs CDOs bundle representative Sample of mortgages from different locations, quality, interest, principle, etc. CDOs are then Rated by Private Bond Agencies: Standard & Poor, Moodys, Plus new Derivatives Deregulation: Bond Agencies Also Advise promote Sale of Bonds Clear conflict of Interest (Fox/chickens)

  15. CDOs & Global Financial Networks CDOs: Sold as HI income/HI Rated Investments Banks, Pension Funds, Mutual Funds Own CDOs Problem: CDOs difficult to Price: Complexity Panic Insurance: (AIG) Credit Default Swaps/bet both ways CDS: contract to insure value of CDOs/Also sold

  16. Neoliberalism & Deregulation Assumption: Self correcting Markets will price Risk GSA outlaws commercial banks from Brokerage Business\ e.g. underwriting Stocks & securities (Goldman Sachs, Merrill ) Objective: Protect depositors & citizens from Speculation Greenspan’s FED allows Banks 25 % of activity for brokerage Clinton: (1999) Repeal of Glass Steagall Act (GSA) (1933) $300 M lobbying, Treas. Sec. Rubin moves to Citigroup

  17. Origins of the Crash & Panic Fed (6/04) raises Interest rates to control inflation HI Interest Rates END housing price increases Adjustable rates & “Re-set” payments HI foreclosures Housing Prices Decline & Mortgage defaults Rise (2/08) Investment Bank Bear Stearns collapses “The problem is we don’t know who’s holding it.”

  18. Banking & Credit Crisis Many Investment Banks, Merrill Lynch Fail or Merge Uncertainty: Banks refuse to LEND to Banks & Clients Because no one knows if Assets are CDOs, Derivatives Failure of Paulson to recognize Banks Insolvency outrage: 3 page TARP Plan, no oversight buy Mortg’s Britain: G. Brown. Partial Nationalization of Banks

  19. Financializtion & Global Networks Uncertainty & Risk Spread via CDOs & Derivatives Fear: USA is Bankrupt Deficits: trade, savings, budget $100s of Billions lost, Crash of Housing Recession World Economy: No credit/exports to USA Recession Panic: Flight to Quality, Hedge Funds, Buy dollar/yen Weak States currencies collapse IMF SAPs Riots

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