Download l`état social et la théorie de la régulation

AFTER THE SUBPRIME
MORTGAGE CRISIS:
WHAT STRATEGY FOR
EUROPE?
Robert BOYER
PSE (Paris-Jourdan Sciences Économiques)
Babbot Room, The Octagon, Amherst College,
March 26, 2008
INTRODUCTION
• Entering a new and quite uncertain epoch:
What will be the consequences for the US of
the sub-prime mortgage crisis?
How interdependent is the world with respect
to the American economy?
Is a finance-led growth regime a fatality?
How should new regulations restore the
structural stability of such a regime?
Will Europe be drastically affected by the sub-
prime mortgage crisis?
What alternative strategies for the European
Union?
• The strategy of this presentation
An institutional analysis of the origins of
financialization
A simple macro model of finance-led growth
An interpretation of the origins of financial crises
Diversity and legacy of European institutional
configurations: an alternative to financialization
SYNOPSIS OF
PRESENTATION
I.
The pressures towards a finance-led
regime.
II. The homeland of financialization is
the US…but potential macroeconomic instability.
III. From the Internet bubble to the subprime mortgage crisis.
IV. How Europe will be affected?
V. The European Union: the search for
alternative models.
VI. Conclusions
I. THE PRESSURES TOWARDS
A FINANCE-LED REGIME
Back to social history
The 60s: a de facto compromise between
managers and wage earners
Consumers
Patient financial market
Managers
Permissive
international regime
Wage-earners
Strong links
Weak links
Direction of influence
The 80s: An international competition led
regime weakens the bargaining power of
wage earners
Consumers
Gain from trade
Managers
More
international
competition
Discipline
Erosion of past
compromise
Wage-earners
Strong links
Weak links
Direction of influence
The 90s: The ex post alliance of investors
and managers
Consumers
Transparency
Managers
Large and powerful
financial markets
Share holder value
More risk
Financialisation of
income and pensions
Wage-earners
Strong links
Weak links
Direction of influence
The 2000s: The emerging tensions within the
finance industry and the rise of the lawyer
State,
as the last resort
THE LAWYER
Institutional
Investors
Managers
Auditors
Financial Analysts
Rating Agencies
Fund Mangers
Pension funds
Flow of information
Financial flow
Intermediation of conflicts
and related income
Financialization is part of a long term
structural transformation of contemporary
capitalism, after the crisis of Fordism
International
opening
Crisis of the
Fordist growth
regime
Regained power
of managers
Demand addressed
to managers =
shareholder value
Surge of CEO
compensation
Erosion of wageearners bargaining
power
Acceptance of
pension funds
Inflow on the
stock market
Conservative
backlash
Financial
deregulation
Multiple
innovation in
finance
Financial
bubble
II.THE HOMELAND OF
FINANCE LED GROWTH:
THE US…
An accumulation regime at odds with Fordism:
the centrality of the stock market
+
Dividends
and
Pension funds
+
High stock
market
price
+
Easy access
to
credit
Profit
+
+
Consumption
+
Production
+
Employment
Diffusion of
Financial norms
-
Careful management
of investment
+
Globalised
Financial
regime
Shareholder value as a
new form of competition
and governance mode
Highly reactive
wage labour
nexus
The multiple channels of financialization
+
Monetary policy,
Financial market
stabiliser
+
Limitation of
public borrowing
G
Credibility
of Government actions
-
Public
expenditure
+
Stock Market
prices
F
E
Tax system favourable to the most
mobile factors
+
+
+
Industrial specialisations, Financial concentration
Raising the
required rate
of return
-
Productive
investment
A
FINANCIAL SYSTEM
Management
of firms for shareholders
B
+
+
Labour contract flexibility
+
+
Productive
capacity
“Patrimonial” Equity based Household
behaviour
C
Privatisation
of elements
of social security
D
Wealth effect on
Savings/Consumption
Allocation
+
+
Current consumption
+
Pensions via
stock market
Purchase of
housing and
durable
goods
+
+
+
Effective demand
-
Employment,
wages
+
+
+
Profit
Secured borrowing
+
A simple
macroeconomic
model
Various regimes
A finance-led regime is possible if:
– The financial wealth / income ratio is high
– The investment is profit led
This regime is structurally stable if:
Wage formation is not too much competitive
The rate of return required by shareholders is
not too high
The Central Bank has to react quickly to
financial bubbles
Testing the model for some OECD countries
The US: the only finance-led regime
…..BUT A POTENTIAL
MACROECONOMIC
INSTABILITY
The development of financial market first
extends the likelihood of a finance-led
regime…
But up to some threshold, the economy
enter into a zone of structural instability.
III. FROM THE INTERNET
BUBBLE TO THE SUB-PRIME
MORTGAGE CRISIS.
• This regime is generating speculative bubbles
that burst out…
• …But are cured by an active monetary policy…
• …And the positive impact of financial
innovations…
• …For instance the securitisation first prevents
the fragility of banks
A strong paradox: an unstable accumulation
regime rescued by the deepening of financial
innovations
• …But private innovations, such as subprime
loans, exploit this opportunity to shift the
risk…
• …The boom of this market reaches its limits,
the reversal of confidence challenges
macroeconomic stability…
• …And again the Central Bank is the rescuer of
last resort in order to preserve the viability of
the financial system
Figure 1 – A typical sequencing of financial crises
Viability of the
regulated
innovation
New cycle
Regulation by the
government
Lender as a
last resort
Private
innovation
Success
/ High
profit
Rapid
adoption
Entry in the
zone of
financial
fragility
No public
intervention:
collapse of the
innovation
Figure 2 – A first example: energy derivatives and the
ENRON collapse
Energy
derivatives
Potential for
new crisis
A structural
weakness
Unprecedented
profit
Creative
accounting
Bankruptcy
Prevention from
any public control
by lobbying
But not any reform of
accountability
principles
New rules of
accountability
for CEO and
CFO
Figure 3 – A second example: rise and collapse of Northern Rock
Financing by
bonds of
mortgage loans
High profit /
Rapid capture
of market
shares
More bonds
issued
Banking
run
No reaction
of Financial
Service
Agency
A failed
innovation
Worsening
of the crisis
Conflict between Bank of
England, Treasury, FSA
Nationalization
of Northern
Rock
Initially, Bank
of England
did not bail
out
Search for self
regulation
Systemic
crisis
Figure 4 – A third example: the sub-prime mortgage
Sub-prime
mortgage
Searching for
new
regulations
A systemic
financial
crisis
New and
growing
market
Securitization
shift the risk
Reversal
of the
housing
market
Absence of
public
regulation
Melting down
of the subprime market
Limited
FED
intervention
Unlimited access to
liquidity from FED
Mergers among
banks
Recapitalization
by sovereign
funds
A creeping
banking
crisis
Diffusion of
Non
Performing
Assets (NPA)
IV.HOW EUROPE WILL BE
AFFECTED?
The financial led regime is not observed in
Europe
COUNTRIES
PARAMETERS
1.Average propensity to
consume (1996)
2. Wealth
in
disposable
(1997) %
United
States
Great
Britain
Canada
Japan
Germany
0.95
0.926
0.956
0.869
0.884
France
0.908
shares/
income
145
75
95
30
25
20
3. Extent of capital gains
/disposable income (%)
35.5
15
11
-7
7
5
4. Proportion of shares
and bonds in households’
financial assets
28.4
52.4
n.a.
25.3
21.3
1.Monetary market rate
1.Return on bonds
1.Reference profitability
5.34
6.51
12%-16%
7.38
5.59
5.20
0.32
3.5
7.30
1.06
3.97
5%
6% -7%
12%-16% 12 - 16%
14.5
3.46
4.23
9%
Actually, in other OECD countries alternative
alliances may exist and govern different
accumulation regimes
Managerial
expertise
THE
AMERICAN
FIRM
Governance
under
shareholder
value
The firm as a
bundle of
competences
Financial
capital
Firm specific
competences
ESOP
Employee
ownership/
co-management
THE GERMAN FIRM
THE
JAPANESE
FIRM
The different channels of the diffusion of
American financial crisis
Many European financial institutions have non
performing sub-prime loans or derivatives: how
important are they?
The impact of the American recession upon
world trade…possibly compensated by Asian
dynamism.
The negative impact of the appreciation of the
euro upon growth and employment in Europe.
A long lasting revaluation of financial risk, as a
source of credit crunch.
The imperfection of the European policy mix (a
single monetary policy but contrasted national
budgetary policies): a clear limitation to the
reactivity of the EuropeanUnion.
V. THE EUROPEAN UNION: THE
SEARCH FOR ALTERNATIVE
MODELS
A change of epoch: from the primacy of the
wage labor nexus to the omnipresence of a
financial logic
 The European treaties codify this swing in the
hierarchy of the economic institutions
Figure 1 – The hierarchy of the European procedures: the
primacy of the monetary regime
 Any growth
strategy has
to take into
account the
shift in the
conception
of economic
policy
Source : Freely inspired of
EC/DGE "Reinforcement of
mechanisms for economic
policy coordination", July 28,
1999.
A survey of alternative strategies
S1 – Promote a better policy mix in order to
rejuvenate growth
S2 - Convert Information and Communication
Technologies (ICT) into a knowledge based
economy (KBE)
S3 - Gender equality and the response to ageing as
sources of a welfare / services driven growth
S4 - A recurring temptation of some member states
riding the financial globalisation
Figure 2 – First strategy:
A pragmatic coordination of monetary and fiscal policies in order to
promote growth and creation of jobs.
Table 2 – Institutional conditions of this first strategy
Figure 3 – Second strategy: convert Information and
Communication Technologies (ICT) into a knowledge based
economy (KBE)
Table 3 – Institutional conditions of this first strategy
Figure 4 – A third strategy: gender equality and the response
to ageing as sources of a welfare / services driven growth
Figure 5 – Strategy four : Riding the financial globalisation,
as a recurring temptation of some member states
Table 2- What growth regime for the early 21st century?
CONCLUSION
C1 - The US is the first economy to
experience the benefits and the risks of
a finance-led regime.
C2 - The recurrence of powerful financial
innovations is at the origin of most
financial crises in the US, but their
macroeconomic consequences differ
drastically.
C3 - The collapse of the sub-prime mortgage
is the last one and the most severe since
WWII. It sheds a crude light upon the
danger of a bold financial liberalization
C4 - This is an incentive to reassess the role
of financial re-regulation, in order to try
to reduce the instability potentially
associated to intense financial
innovations.
C5 – With the possible exception of UK, no
European economy is following the
American trajectory. This reduces the
risk of an equivalent melting down, but
many channels will diffuse the
American recession to the rest of the
world.
C6 - A priori, financialization may well be
detrimental to most non US economies.
Consequently they should resist to
further financial liberalization.
C7 – The mission of European Union should
be to contribute to the disciplining of
the international finance and the
promotion of welfare enhancing growth
strategies.
MANY THANKS FOR YOUR
ATTENTION
Robert BOYER
CNRS (PSE- Paris Jourdan Sciences Economiques),
EHESS, CEPREMAP
48, Boulevard Jourdan 75014 PARIS
+ 33 (0)0 43 13 62 56
 [email protected]
Site WEB : http://www.jourdan.ens.fr/~boyer/