Download 2007-2009 Global financial crisis

Financial Crisis 101:
Asia 1997-98
Global 2008-2009
Rene E. Ofreneo, Ph.D.
Professor XII
Lesson 1
Crisis due to bubbles bursting
1997-98 Asian financial crisis
-- bubbles in currency, stock, real estate & money markets
-- bubbles burst w/ herd-like withdrawal from the markets
by global financial speculators
-- financial meltdown became industry meltdown
(Most affected: Thailand, SKorea, Indonesia, Malaysia & RP)
-- spread to Russia, Latin America before reaching LTCM
(immediately bailed out by US banking industry)
2007-2009 Global financial crisis
-- bubbles in US sub-prime housing market, US & UK banking sector,
global commodity market
-- bubbles burst w/ collapse of Lehman & Bear Stearns
-- crisis spread quickly from a few banks to whole banking sector, from
Wall Street to Main Street, from New York to London, from OECD
to developing world
The Subprime Bubble
Goldman
Sachs
AIG
Citigroup
Morgan
Stanley
Freddie Mac
Washington
Mutual
Fannie Mae
Wachovia
Lehman
Brothers
Bear
Stearns
More Bubbles Surface
Privately-held
Banks
PNC
Financial
Services
New York
Life
Insurance
Prudential
Financial
Citigroup
State and
Local
Governments
Automakers
AIG
Metlife Inc
Freddie Mac
Washington
Mutual
Other
Corporates
Fannie Mae
Morgan
Stanley
Goldman
Sachs
Wachovia
Lehman
Brothers
Bear
Stearns
Lesson 2
Reason for the crisis:
liberalization w/o regulation, direction
1997-98 Asian financial crisis – preceded by FDI liberalization, FOREX
liberalization, stock market liberalization
-- yet no prudential rules put in place, portfolio investors, e.g., hedge funds
like Soros’ fund operated w/ impunity (short-selling speculative ventures,
but WB-IMF initially blamed ‘moral hazards’ in SEA)
2007-2009 Global financial crisis
-- preceded by slack in corporate
and financial regulation & supervision (Alan Greenspan intoned on selfregulating markets, US repeal in ’99 of Glass-Steagal Act provision on
separation of banking, insurance & investment activities [1933 law])
– Reckless financialization by big banks w/ connivance by global rating
companies (US Congressional hearing disclosed an SMS exchange
between two rating-agency executives that said: "We rate every deal. It
could be structured by cows and we would (still) rate it."
Example of US Sub-prime business
• Photo of Arizona property
mortgaged with Integrity
Funding LLC for
US$103,000 in 2006
• Borrower: Maureene
Halterman, jobless for 13
yrs, junk collector, highly
indebted, substance user,
US$3,000/mo from welfare
• Loan sold to Wells Fargo,
later sold to HSBC
Holdings, then bundled
with other mortgages and
sold with triple A rating to
investors.
• Sold for just US$18,000 in
Dec. ’08 to neighbors who
tore house down.
Strange-sounding financial products:
MBSs, CDOs, LBOs (bottom line: banks
packaging & selling loans & speculating
on uncertain present & future values)
Lesson 3
Gov’t intervention critical in ending crisis
1997-98 Asian financial crisis
– Malaysia defied IMF & Soros: imposed capital controls, fixed ringgit at 3.8
to US dollar, engaged in gov’t spending
-- SKorea, Thailand & Indonesia surrendered to IMF diktat: painful
economic restructuring. Indonesia’s “krisis monetar” led to Suharto’s
downfall.
-- RP – saved by OFW remittances
Later, stricter financial rules put in in place, e.g., higher capital adequacy
2007-2009 Global financial crisis
-- US, UK, OECD, BRIC & other
countries reacted by uniformly reviving Keynesian-type stimulus spending.
Arguments: can not afford to let banking sector to collapse, esp. big ones (too
big to fail); can not afford to have more unemployment
Lesson 4
W/ financial recovery,
hard economic issues easily forgotten
Asian financial crisis, GFC
once financial recovery (esp. of banks) sets in, governments forget to address
hard economic issues, specifically:
employment (US growing joblessness [9.8 per cent or 15M]
means recovery is “phantom recovery”, Europe’s
unemployment rate about 9 per cent, Japan’s unemployment
at post-WWII high, & global job growth generally flat except
for a few countries, including China)
putting banking back to its original purpose – linking savers &
investors, supporting big/medium/small/family businesses
building balanced national, regional & global economy
Is Washington Consensus dead?
In G20 meeting in London, April 2009, Gordon Brown intoned:
“Washington Consensus is dead”.
Yet, G20 hardly altered existing model of neo-liberal, one-size-fits-all
liberalization of trade in goods & services & agriculture, deregulation &
privatization of economy & investment. Instead, only a G20 Consensus
(April/September ’09 meetings) on timid measures such as:
-- monitoring tax havens in Switzerland & elsewhere
-- limit to bankers’ pay/bonuses (problem: bailout w/o gov’t control)
-- capital build-up for IMF, expanded role for China
-- support for huge stimulus packages, now totalling $3T +
-- call for WTO’s Doha Round completion (altho GATS-like financial
liberalization responsible for GFC)
There were no calls to reform WB-IMF, review development vision of WTO,
APEC, bilats, RTAs (all promoting free trade in a narrow way)
Issues of financialization, speculative investments & global trade & dev’t &
income imbalances not addressed or remain unaddressed.
Lesson 5
Deeper explanation for
Asian crisis & GFC missed
Global & regional contradiction:
Overproduction vs. Underconsumption
Global overproduction, due to global supply chains (esp. in China & Asia) & new
technology (ICT, transport, etc.) facilitated by free trade policy (IFIs, WTO, etc.).
Rise of Factory Asia.
Yet global underconsumption, due to limited compensation to global mass
producers (workers/farmers) – global RACE to the Bottom. Attacks on unionism,
CB via EPZs, etc.
& Winners bring global profits to US/UK & invested on speculation, e.g., GE,
Ford, Toyota going financial; even China invested $1trillion in US bonds &
acquired Blackstone, a PE hedge company. SPECULATIVE FINANCE RULING
OVER PRODUCTIVE INDUSTRIAL, AGRICULTURAL & EVEN BANKING
CAPITAL & WORK!
Globalization:
finance dominating trade
Figure 1
Finance driven globalization
180
350
160
140
250
US$ Trillions
120
200
100
80
150
60
100
40
50
20
0
0
1980
1990
1995
2000
2006
Years
Global financial assets
Global financial assets as a percentage of GDP (right axis)
Global merchandise trade
Global merchandise trade as a percentage of GDP (right axis)
11
As percent of GDP, indices 1980=100
300
US productivity/compensation gap – 1947-2008
ILO 2008-2009 Global Wage Report
1995-2007
global wages grew by 0.75 per cent annually
vs.
GDP per capita growth of one (1) per cent annually
Moreover,
-- share of wages in GDP going down
-- share of profits in GDP going up
-- gap between top wages and bottom wages widening
-- wage gaps between genders remain high
-- collective bargaining coverage going down
Highlights of ADB 07 Report on Inequality
-- Inequality growing Asia-wide, w/ China (a job gainer) registering highest
growth of inequality after Nepal but ahead of Cambodia
-- Annual salary of top mgmt vs. ordinary staff widening (US$, 2004):
Top mgmt
Staff
Production Worker
India
57,699
7,260 3,521
Indonesia
56,756
5,443 2,182
Thailand
77,557
7,661 3,528
-- RP’s labor share in national income, declining by 0.6 per cent/ year from
the 1980s to 1996
-----------------------------------In US – CEO pay rising faster vs average wage ($130,000 vs $40,000 in 2000)
But US debates on financial sector indicate
average wage of employee in Goldman Sachs -- $777,000
top executives
1,000,000
top marketing people
$10,000,000
Lesson 6
Failure to learn from history
Labor rights helped solve Great Depression of 1930s!
1930s – Great Depression gave birth to
-- Keynesian economics (gov’t has central role)
-- institutional economics (instis matter)
-- industrial relations discipline (L-M relations mgmt)
-- stronger unions, collective bargaining, social security, etc. established
-- strengthening of ILO (supported by the likes of John Rockefeller)
After WWII up to mid-1970s -Above reforms deepened by Social Democrats/labor govts in Europe & Canada
(Social Market Economy model in West Germany).
Welfare states w/ strong unions & social security grew & competed w/ EEurope
US tripartism (big government, industry, unions) led John Dunlop to theorize
on IR system.
Japan developed nenko, productivity gain sharing, lifetime employment.
Golden decades of Western capitalism – Aggregate Demand = Aggregate Supply
But in 1980s-present…
Neo-liberal thinking prevailed & became a global
•
Washington Consensus starting w/
privatization programs of Reagan & Thatcher
and
WB’s “structural adjustment programs” (SAP) for
indebted countries (preaching privatization,
economic deregulation and trade liberalization)
Neo-liberalism spread in labor economics
Protective labor institutions seen by neo-liberal economists
as “rigidities” in the labor market
In practice, neo-liberalism became a
Global race to the bottom &
gave rise to Factory Asia
Neo-liberal globalization means
crisis of IR, unionism & employment
Erosion of post-WWar II Social Contract in OECD
Erosion of tripartism, w/ unionism steadily
marginalized everywhere, labor market
flexibility becoming the rule everywhere,
outsourcing (varied levels) subverting
traditional concept of job security
Crisis of Industrial Relations
HRM overshadowing IR
In Asia: good jobs for a few, but many excluded
(informals constitute 65 per cent of labor force!, large
number of “informalized” formals)
Lesson 7
Challenge of transforming
Race 2 D Bottom to a Race 2 D Top
Character of globalization need to be changed, social &
labor dimension need to be strengthened. Global
architecture of economy need to be revisioned &
changed.
ILO’s DWAgenda – good starting point for a debate:
-- core labor standards
-- job creation for men & women
-- social dialogue
-- social protection for all
However, ILO’s campaign clear only on core labor
standards – how to address job creation, social
dialogue & social protection unclear. G20 issues +
rhetorics on above w/o any clear measures.
Policy Coherence a Must
Coherence
in economic, social and labor policies
•

Efforts to cast aside one-size-fits-all framework and
mindless proliferation of bilaterals and regionals

Review of world’s experience with trade liberalization,
w/ special focus on winners and losers

Revival of SDT principle in global trade talks
(calibrating trade policies w/ development priorities)

An end to global/regional race to the bottom. Integrate
w/ trade talks 6 guidelines identified by the 1999 HDR -ethics, equity, inclusion, human security, sustainability,
and development. And ADD: Climate Change!
Lesson 8
Social Protection for All
•
Asian crisis, GFC -Shows many countries have no or underdeveloped safety nets,
esp. for the displaced by economic crisis or restructuring
Yet, history also shows that
No country is too poor not to be able to provide social
protection for all (experience of post-war Germany, initiatives
from India today).
ILO study shows less than 6 per cent of GDP is need to finance
comprehensive social security, much less than country
spending on military/defence. Global social security floor is a
must & attainable.
•
Lesson 9
Unions must have a voice in
Development/Policy Forums
At 97-98 Asian crisis & GFC today, unions hardly
consulted. G20 no inputs from the TU movement.
This explains why labor and social dimension not
addressed in these meetings.
Social Dialogue, to be meaningful, should also be
sustained, continuous & substantial
(not staged for shows or done occasionally like the
institutionalization of CB & L-M Dialogue at Firm
Level)
Eventually, unions should have a seat in the table –
ASEAN, EAC, APEC, WTO, WB-IMF, ADB!
Lesson 10
Unionism for All
•
To be an effective voice of society & roll back race to the
bottom (national, regional & global), unions should
become strong and united . This is the only way.
One way of forging unity and developing strength is
to renew trade unionism
– as organization of regular & non-regular, formal &
informal
-- as organization of women, youth
-- as organization with shared values, shared sense of
community & humanity, shared vision of the future
-- as true organization of people in solidarity w/ one
another