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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 US$30 trillion loss in sharemarkets to March 2009 – largest ever US$1.9 trillion internationally to bail out banks 2 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 More on causes…. Deregulation - repeal of the GlassSteagall 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 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. Finance Sector Growth 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. 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. Decline in Bank Market Value 2007 to 2009 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 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 … 11 World trade New York Times, 11 April 2009 12 … and manufacturing: Industrial Production 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 14 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) 15 World Outlook (according to IMF) Annual change in GDP % (Forecasts from Sept 2009 to 2010) 10 8 6 Emerging 4 World Advanced 2 0 -2 -4 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -6 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 ...". 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). 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$0.70 – hurting exporters But cautious optimism 20 Recession + Familiar Problems Current account deficit Low productivity levels and growth GDP per capita trends Low savings Small export sector High dollar/monetary policy 19 70 19 71 19 72 19 73 19 74 19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 Real GDP per capita as ratio of OECD average 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Australia Denmark New Zealand United Kingdom United States Household Debt 1995 to 2009 Source: Treasury Monthly Economic Indicators, October 2009 House prices: no longer falling September 2009 (Quotable Value) Despite predictions Treasury Budget forecast: House prices to decline nearly • 8% in the year to March 2010 • 4% in the year to March 2011. In fact – values are now only 1.1% below the same time last year, but 7.1% below 2007 peak House prices: no longer falling Source: Treasury Monthly Economic Indicators, October 2009 Interest rates compared - Oct 07 to Sep 09 Source: Reserve Bank of New Zealand 14 Business base lending rate Interest Rate (%) 12 10 Floating first mortgage new customer housing rate 8 2-year fixed rate 6 6 month term deposit rate 4 OCR 2 0 The Current Account Deficit (CAD) 1999 to 2013 0 0.0% -1.0% -2 -2.0% -4 -6 -4.0% -8 -5.0% -6.0% -10 -7.0% -12 -8.0% -14 -9.0% -16 -10.0% 1999 2000 2001 2002 2003 CAD ($b) % GDP (RHS) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 CAD forecast ($b) Forecast %GDP (RHS) % of GDP $ Billion -3.0% Annual Change in GDP (%) 1999 to 2013 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -1.0% -2.0% -3.0% Actual Forecast (Treasury) Projection (RBNZ) 2011 2012 2013 Quarterly changes in GDP by broad sector, September 07 to June 09 4.0 Quarterly change (%) 3.0 2.0 1.0 Primary industries Goods-producing industries Service industries Total GDP 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Quarter Annual Unemployment Rate March 1999 to March 2009 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1999 2000 2001 2002 2003 2004 2005 Unemployment Rate (%) 2006 2007 2008 2009 Projected Unemployment 2010-2012 (Forecasts: Reserve Bank, Sept 09) 8% 180,000 Percentage unemployed 6.5% 6% 6.0% 6.5% 6.8% 6.9% 6.8% 6.7% 6.4% Numbers unemployed 160,000 7% 140,000 6.5% 5.9% 120,000 5% 5.0% 100,000 4% 80,000 3% 60,000 2% 40,000 1% 20,000 0% 0 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Unemployment rate (LHS) Forecast Unemployment Rate (LHS) 31 Numbers of working aged people receiving main benefits 1999 - 2009 400,000 350,000 300,000 250,000 200,000 150,000 100,000 Domestic Purposes Benefits Sickness Benefits Invalid's Benefits Other main benefits All main benefits Unemployment Benefits Mar-09 Mar-08 Mar-07 Mar-06 Mar-05 Mar-04 Mar-03 Mar-02 Mar-01 Mar-00 0 Mar-99 50,000 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 $1.45 billion for Budgets 2009 to 2012 Cuts in spending to pay for new priorities – Superannuation fund – Adult and Community Education – Pay and Employment Equity Unit – Public service redundancies and continuing reviews… 33 Greatly increased debt Did they do enough? New Zealand Government Operating Balance Before Investment Gains and Losses (NZ$ billion) 1999 - 2013 8 6 4 2 $ billion 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -2 -4 -6 -8 -10 -12 Actual Forecast 2009 2010 2011 2012 2013 Ratio of Government Debt to GDP (%) 1999-2013 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -5% -10% Gross (Actual) Net including NZS (Actual) Net excluding NZS (Actual) Gross (Forecast) Net including NZS (Forecast) Net excluding NZS (Forecast) Public Debt (Percent of GDP) New Zealand Source: IMF World Economic, Sept 2009 36 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 Government Spending (OECD average 2009= 41.5% of GDP) 60 Jun-91 50.2 50 Jun-96 41.1 40 Jun-00 39.2 30 Jun-07 40.3 20 Jun-08 41.1 Jun-09 45.3 10 Jan-07 Jan-08 Jan-09 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-91 Jan-92 Jan-93 0 Annual Change in Average Ordinary-Time Hourly Earnings (%), 1999 to 2013 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1999 2000 2001 2002 2003 2004 2005 Actual 2006 2007 2008 Forecast 2009 2010 2011 2012 201 Annual Change in Average Ordinary-Time Hourly Earnings compared with CPI 1999-2013 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -1.0% Actual Earnings Forecast Earnings CPI % Reserve Bank CPI Forecast 2012 2013 The Wages Question Share the pain… weren’t so keen on sharing the gain Still shortages in many areas Pressures – CPI, affordability, line-byline reviews, tax cuts, jobs focus Catch up with Australia – ever? Real wages vs labour productivity gains 1980-2008 $40.00 Wage in June 2009 dollars 2200 $35.00 2000 $30.00 1800 $25.00 1600 $20.00 1400 $15.00 1200 Productivity wage, 1980 base (Left axis) Productivity wage, 1989 base (Left axis) Real average ordinary time wage, June 2009 dollars (Left axis) Labour Cost Index of real ordinary time hourly wage or salary (Right axis) 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 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. 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 44 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 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 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 47 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) 48 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 49 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 50 Environment Green New Deal – Tax breaks for investment in environmentally beneficial technology or services Investment in skills for a low carbon economy Just transition for workers and communities affected by climate change policies Alternatives to gross domestic product (GDP) to measure progress 51 Productivity Establish Productivity Commission which includes support for workplace initiatives Address poor returns to workers from productivity gains – Living Standards Review Authority with tripartite involvement 52 Employment Skills Investment Fund Booster package (after 13 weeks unemployment) Flexisecurity – 90% income replacement on job loss – Active labour market policies – Support for up-skilling – Tripartite design and governance Increase minimum wage: $16.87 (66% of average wage) Good employer criteria for those seeking permanent skilled migrants Pay and Employment Equity workplace assessments 53 Housing Low interest funding for new housing through Reserve Bank Assessment of housing need to create a National Housing Strategy More low cost housing – Expand NZ’s housing stock by 20% – Local council/developers to meet quota of affordable housing – Increase tenant security by reforming tenancy laws – Sponsor designs of low cost, green, healthy housing Increase affordability by – Subsidised lending for low income/disadvantaged groups – Expand shared equity and Kiwisaver house purchase schemes 54 Retirement Enhanced Kiwisaver scheme: – 6% compulsory employer contributions (phased in over 4 years) – 2% compulsory employee contribution – 2% government top-up Allow beneficiaries and non-working parents to receive government contributions equivalent to 6% of average wage Inquiry into equity issues for those on low pay rates and women 55 Participation Improve worker participation through: – Representative structures in workplaces – Industry sector councils (productivity/ skills/ industry development / firm networking) – Mechanisms for workers voice Enterprises (20+ workers) to provide access for community organisations /local govt to consult workers Increase depth and diversity of NZ media – Trust-owned ‘public service’ newspapers and other media – Funding for investigative print journalism 56 Conclusion Workers did not create this economic crisis Worst financial crisis in 70 years Opportunity to rethink unfair and unsuccessful economic and social policies