The End of Financial Capitalism- What Now

8/14/2019 The End of Financial Capitalism- What Now

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The End of Financial

Capitalism: What Now?

By:

Mukul G Asher

Professor of Public Policy

National University of Singapore

([email protected])

C.C Shroff Memorial LectureK.C College, Mumbai

Friday, 13 February, 2009


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The highest form a civilizationcan reach is a seamless webof deserved trust

Charlie Munger


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Dr Reddys Characterization offinancial capitalism

The complexity, sophistication andfinesse associated with it gave thefinancial sector a larger than life

profile. Lulled by the seeminglybenign economic environment, wedeluded ourselves into believing thatfor every real life problem, no matterhow complex, there is a financial

sector solution

3

Source: RBI Governor speech, Dec 4, 2008


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Forgotten in the euphoria of financialalchemy is the basic tenet that the

financial sector has no standing of itsown; it derives its strength andresilience from the real economy. It isthe sector that should derive thefinancial sector, not the other way

round

4

Continued


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So the issue for debate is, how do wekeep the real sector inline with the

real sector

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Continued


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The tail (financial sector) waggedthe dog (real economy)

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Financial Sector Share of GDP (LHS) Non-financial sector share of GDP

Source: Bureau of Economic Analysis


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Excesses of Financial Capitalism :CEOs vs Average Worker

USA - 344 times

FTSE 350 boards - 39 times

Japan - 3 times

7


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Size of financial assets as a shareof GDP (larger in UK as than in US)

8

0

2

4

6

8

10

87 97 07 87 97 07 99 07

OthersInsurance and pension funds

Depository banks

Size of financial assets as share of GDP

US UK EMU

Multiples of GDP

Source: US board of Governors of the Federal Reserve System; ONS, ECB and IMF

Why would you want to

own the pound?


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664.2$4,133,712$181,587HSBC

177.6$38,673,967$1,359,071Bank ofAmerica

259.5$35,645,429$1,207,007Citi

400.2$87,688,008$1,768,657J.P.MorganChase

CreditExposure toCapitalRatio

DerivativesAssetsBank

Credit Exposure to Capital Ratio (inMillions)


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Source: Alphabet soup of liquidity, Serhan Cervik, Morgan Stanley ResearchJuly 11, 2007

Weapons of Obscurity


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Liquidity Pyramid

11

Source: David Roche, Independent Strategy in New Monetarism


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Why did financial capitalism end in globaleconomic crisis?

Two fundamental causes:

Inconsistency between globalization of finance anddisproportionate role of the financial sector in the

major economies on the one hand and the limited

institutional and regulatory capacities of the

domestic agencies on the other have been

demonstrated to be unsustainable

Large and unsustainable global macroeconomicimbalances


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13

Chinas trade surplus jumped 10 times over2003 - 2007

Source:http://www.rgemonitor.com/blog/setser/240454cited in Nageswaran A (2008) Trends and issues in capital Markets Indiain the regional and global context. Presentation at the Lee Kuan Yew School of Public Policy, 16th September 2008.


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Structure of External Position of China,Japan and US

Source: SAFE, BoJ


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15

Understanding the CreditSqueeze

Source: Financial Times ft.com


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16

Understanding the CreditSqueeze

Source: Prof. Jeffrey Frankelhttp://www.rgemonitor.com/us-monitor/254697/origins_of_the_economic_crisis_-_in_one_chart


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Banks Market Cap - Then and Now

17Source: Bloomberg


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The US Congress has agreed to inject US$ 789bn to stimulate the economy

While the details of the sources of money

are not available, it does appear that asubstantial proportion throughmonetization of fiscal deficits

Moreover there are indications that

political considerations in economicnationalism may play disproportionate rolein their allocation

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Steps to Deal With the Global Crisis


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Monetization of fiscal deficit at such alarge scale could lead to high levels ofinflation

The other concern is excessive economicnationalism and protectionism which ifadopted widely could lead to downward

spiral in output and employment

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Implications of Crisis


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Aggressive fiscal policies by the US is

already being reflected in increasing riskof US Government defaulting hasincreased as indicated by the insurancemarket

Thus the annual cost of insuring 10 mm 5year Treasurys up from - $7,680 in 2008to $66,000 in 2009

20


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This could threaten thelivelihoods and food security ofmillions of people around theworld. If this happens theeconomic will turn into a socialand political crisis

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Continued


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Indias Priority

It is imperative that India manages thecurrent economic crisis in such a way thatit does not advance to being a social and

political crisis

These are also the imperatives for Asiaand rest of the world

Documents

The End of Financial Capitalism- What Now