Understanding The Financial Crisis - Andrew Baker


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Understanding The Financial Crisis - Andrew Baker

  1. 1. Andrew Baker Reader in Political Economy School of Politics, International Studies and Philosophy Queen’s University Belfast
  2. 2. Three questions <ul><li>Where did all the money go to? </li></ul><ul><li>What does it actually mean to talk of a crisis? </li></ul><ul><li>What main interpretations of the crisis have been advanced and what are the intellectual foundations? </li></ul>
  3. 3. Where did all the money go? <ul><li>A $2 trillion -$11 trillion hole in the global financial system </li></ul><ul><li>A starting point is the 9/11 attacks which created climate for low interest rates world wide and consumer/ credit boom in the US and other Anglophone economies </li></ul><ul><li>Banks borrow cheaply by issuing ABCP and investing in high yield but potentially high risk securities – MBS, CDOs and CDS </li></ul><ul><li>Supersized rentierism on steroids? </li></ul>
  4. 4. Where did all the money go? <ul><li>Price of world oil goes up from 2004, central banks raise interest rates – Fed, BoE, ECB </li></ul><ul><li>Heavily indebted consumers and householder default on loans – a glut of credit becomes a trickle – herding and a downward spiral </li></ul><ul><li>The case of the REPO market in the United States and the small problem of 500 million handguns </li></ul><ul><li>The paradox of credit – it is most plentiful, when it is least needed and scarce and almost non existent when it is most needed – ‘procyclicality’ </li></ul><ul><li>The private debt disaster has become a public debt problem – banks - ‘bank on the state’ – but what about round 2? </li></ul>
  5. 5. What is a crisis? <ul><li>A medical term referring to the critical turning point in a disease or condition (is the patient going to die?) </li></ul><ul><li>Financial crises can be conceived of as critical turning points that lead to change </li></ul><ul><li>A crisis is a political moment in which there is a competition over the meaning of the event and the type of change that necessitates </li></ul><ul><li>It therefore matters which explanation of the crisis become dominant </li></ul>
  6. 6. 4 Perspectives <ul><li>1. The market fundamentalist libertarian perspective </li></ul><ul><li>The market as a spontaneous morally superior social order </li></ul><ul><li>Government intervention creates moral hazard </li></ul><ul><li>Governments should not put a floor under a crash </li></ul><ul><li>Governments should focus on enforcing contracts and sound money </li></ul><ul><li>The crash caused by government intervention politicizing the housing market in the United States </li></ul>
  7. 7. 4 perspectives <ul><li>2. The Social Democratic Regulatory perspective </li></ul><ul><li>Neoliberalism and free markets have gone too far – efficient market theories are the problem </li></ul><ul><li>Financial markets are prone to myopia and herding and go to extremes </li></ul><ul><li>Governments need to regulate them through counter cyclical policy and to need to simplify the system – simple systems are more stable than complex ones. </li></ul><ul><li>The need for a new growth model based on different political and social relationships – different to the Anglo Liberal financialised growth model </li></ul><ul><li>Current problem is a lack of demand. Austerity is designed to fuel the old model. </li></ul>
  8. 8. 4 perspectives <ul><li>3. The Corruption or bad apple story </li></ul><ul><li>Greed drives criminal or corrupt behaviour </li></ul><ul><li>Ponzi schemes and mis-selling of products </li></ul><ul><li>Too simple – misses the point? </li></ul>
  9. 9. 4 perspectives <ul><li>4. The structuralist or anti-capitalist perspective </li></ul><ul><li>Contradictions and structures of global capitalism are at fault – global circuits of capital, surplus countries recycling to debtor states brought about the crisis </li></ul><ul><li>A nice cycle until western consumers start defaulting on their loans </li></ul><ul><li>Cheap consumer goods dry up – inflation and prices rise – rising prices + stagnant wages + cuts in services (austerity) = social unrest and class politics </li></ul><ul><li>Banks need to be nationalised and used as a public utility rather than private profit machines </li></ul><ul><li>Alternative forms of economic organization not for profit companies, mutuals, trusts, community ownership – small scale local economies that are environmentally sustainable. </li></ul>