WEED PeWa

Peter Wahl

World Economy, Ecology &

Development Association

Berlin

Berlin 17. November 2008Berlin 17. November 2008

Financial MarketsFinancial MarketsCrisis and DevelopmentCrisis and Development

On the character of the crisis

1. The biggest financial crisis since the Great Depression

2. It is not over3. Its epicentre is the US, the still biggest economy in

the world4. It heavily affects real economy5. Industrial countries in recession6. Whole world will be affected7. Systemic crisis of finance8. The bankrupcy of the economic paradigm of self-

regulating markets, laissez-faire9. Collapse of the finance based growth model

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A systemic crisis – which system?

Financialisation Asset driveneconomy

Shareholdercapitalism

Financecapitalism

Predatorcapitalism

Turbo capitalism

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Some current explanations

Gree

dEasy m

oney

Lack of supervision

Subprime crisis

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Basic characteristics ofthe finance based model

• Dominance of finance over real economy

• Speculation

• New instruments• New actors

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Traditional role of international financial markets

• providing efficient services payment system for households and real economy

• providing money for public and private investment - lending

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Real Economy

Service function of financial markets

Financial markets

Subordination

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Real Economy

A new system has emerged

Financial markets

Dominance quantitaively &qualitatively

• Wealth, asset driven

• Centred around the shareholder value

New economic environmentafter Bretton Woods

Floating exchange ratesBig bang of

financialisation

Transn

atio

nal M

arke

ts

Newpr

of

it

so

ur

ce

s

Liberalisation

Deregulation

Foreign Exchange Reserves and Foreign Exchange Turnover

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2 trilli

on $

per work

day

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Volume of trade and FDI Iess than 3%

20% hedging („hot potatoe trade“)The rest is arbitrage and speculation

Overliquidity - Instability

Extreme expansion of markets

Interest rates

Exchange rate

Equity,shares etc.

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Speculation

Speculation

Speculation

Speculation on global level is now possible

Casino Economy (Keynes)Casino Economy (Keynes)

New Instruments

Certification, derivatives

Certification/Derivatives I

Transformation of debt

into

tradeable asset

Certification II

Switch of company financing

from bank

to financial markets

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BankBank

Gives CreditGives Credit

InterestsInterests Principal repayments Principal repayments

Traditional Credit Cycle Traditional Credit Cycle

Certification

FghhgFghhg678678hjltrhjltr676676

FghhgFghhg678678hjltrhjltr676676

FghhgFghhg678678hjltrhjltr676676

CreditCredit

CertificationCertification

FghhgFghhg678678hjltrhjltr676676

FghhgFghhg678678hjltrhjltr676676

etcetc.. WEED PeWa

The vicious cycle

Debt is permanently growing faster than real

economy

Servicing the debt through new debt

Further Increase of debt

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HLI (highly leveraged inst.)

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Up to 30 times of own capital as credit

The Ponzi Economy

New Actors

The institutional investor

The institutional investorBanks

Pension Funds

Investment FundsProfessionalisation

Institutionalisation

Sophistication

Specialisation

PISS

of the property function

=

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Shareholder OrientationTraditional use of shares:

Share

Dividend

ShareSale

ShareBuying Sale buying

Shareetc.

Shareholder Value:

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- Minimum investment (1 mio. onwards)- Based in OFCs- Institutional Investors & HNWIs- leverage

The locustsHedgefunds &Private Equity

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Consequences of finance based accumulation

• Instability of financial system

• Unequal distribution• Reducing policy space

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Consequences on financial stability

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Contagion: Market integration creates linkages which increase speed and magnitude of spillovers

Momentumtrading

Risks of risk-

managemnent

Procyclical Rating

Short term investment

Herdingbehaviour

Increasing frequency of crashes

1994 Mexico

1998 Russia

2000 Turkey

1998 Brazil

1997 Asia

2000 New Economy

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1984 Debt Crisis

2001Argentina

Consequences on real economy

Speculation, arbitrage, certifiation

Investment goes into portfolio investment

Structural underinvestment in real economyWEED PeWa

Decreasing investment in real economy

increasing profits

Profitquote und Investitionsquote in der EU-15, 1975-2005

18

20

22

24

26

28

30

32

34

1975 76 77 78 79 1980 81 82 83 84 1985 86 87 88 89 1990 91 92 93 94 1995 96 97 98 99 2000 1 2 3 4 2005

in %

des

BIP

Investitionsquote

Profitquote

Linear (Profitquote)

Linear(Investitionsquote)

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Since the nineties, real wages in most countries

are stagnating or decreasing

Lohnquoten in den USA, Japan und der EU-15, 1975-2005

65

67

69

71

73

75

77

79

81

Lo

hn

qu

ote

*

EU-15 USA JapanQuellen: European Economy, 6/2002 und 6/2004, Statistical Annex, jedw eils Table 32

* bereinigt um Veränderungen der Beschäftigtenanteile

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0

5

10

15

20

25

30

35

1996 2005

Wachstum Kapitalvermögen HNWIs 1996-2005

Bilionen USD

16

33

Quelle: Wor ld Wealth Repor t 2005

Between 1996 and 2005 the liquid assets of HNWIs have more than doubled: from 16 trillion to 33 trillion US

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”As a result of the extended exit option which capital is enjoying, the policies of governments have become hostage of the financial markets.”

Yilmaz Akyüz, former chief economist UNCTAD

„Today, investors have not any longer to follow governments, but goverments have to follow investors“

Rolf E. Breuer, former boss of Deutsche Bank

„ We cannot make political decisions against the financial markets“

Joschka Fischer, former German foreign minister

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Thank you

For your attention

Peter Wahl

peter.wahl@weed-online.org