Origins: Global Financial Crisis

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Origins Global Financial Crisis

• Historical Phases of Global Financial Regulation
  
• Bretton Woods Institutions IMF, World Bank, WTO
• 1944-71 National Fordism Keynesian Regulation
• Breakdown of Fordism, Keynesianism? Globalization
• 1980-Globalization Neo-Liberal (Market)
  Regulation
• 2001-Fed.Chair Greenspan Post 9-11 Credit
  Bubble

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Crisis of Keynesian Regulation

• 1967-71 ? Stagnation? decline in labor
  productivity
• End of Rising Real Wages/security? Zero-Sum
  game
• US Firms outsource? LO production/ Mexico
  Asia (taxes)
• Downsizing of Manufacturing Firms/LO social
  opportunity
• Decline of Organized Trade Unions? LO WC Class
  Power
• Decline of New Deal Political Coalition?
  Identity Politics

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Why did Keynesianism Decline?

• Keynesianism? subsidies? political influence
• Price Supports? Rigidities inflexible markets
• Rigidities?Barriers to Innovation Reinvestment
• Difficult to clear weak firms or bad products
• Rational Expectation? Rising Prices? Inflation

4
Review Globalization Processes

• Increasing FLOWS across borders of nation-states.
  
• Flowss people, capital, media, ideas, goods,
  data, disease
• Increasing INTERCONNECTEDNESS X borders
• Increasing Speed/velocity of Flows across State
  borders
• HI Significance? Location on Global NETWORKS

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Information Revolution 1971???

• Shift Industrial to Informational
  Society/economy
• 1971 Invention of microprocessor/micro
  computing
• Compression of Time-Space relations/boundaries
• Rise of cheap GLOBAL real time communication
• Rise of Knowledge-Innovation competition _at_ Silicon

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Global Information Industry (1)

• Digitalization global conversion?all info s O,
  1
• convergence all human information/knowledge
• Hardware chips, servers, HDD computers, INTEL
• Software programming, codes, logical
  instructions
• Algorithms instructions to complete TASKs
  (service ?)
• Example The Internet, OS systems, Open source, MS

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Global Information Industry (2)

• Networking Routers, satellites, fiber-optic
  Cisco
• Content Media, webcasting, films, TV, news FOX
• Google MS VS. Open Source Movement
• New Global Organizational Structure? Web of
  Digital Networks driving global
  interconnectedness

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ICT Networks ?Financialization

• Rise of ICT/Computer enabled Financial Services
  24/7
• 24/7 i.e. Global Financial Networks- GE-Ford
  
• Denationalized currency floating rates, xeno ,
  stateless
• Inventions junk bonds, derivatives, , 24/7
• SW-gtComputer program trades, satellite, instant
  real time
• NO Global Regulation LO Institutional Mediation

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Global Financial Integration/Risks

• De-territorialization of Finance? no state
  regulation/oversight
• BaringsgtBritish Bank? (Jefferson 1815) Singapore
  branch? trading futures based on Japanese Nikkei
  index
• Asian Financial Crisis (1997) Japanese capital?
  Thai real estate
• Long Term Capital Management (1998)? FED 3.625
  bailout
• ICT Networks Compress time/space? 24/7 trading,
  computer programs, hedge funds, derivatives,
  subprime CDOs CDFs
• Solutions Global Central Bank Keynes, Soros,
  Stiglitz Nov 15th

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Greenspan Origins of Credit Bubble

• A true believer in individual rationality Ayn
  Rand
• Believed Markets would Price Risk
  Self-Regulate
• Opposed Increased or more aggressive REGULATION
• Lowered Interest Rates Deregulated Financial
  markets
• Clinton Greenspan Repealed Glass-Steagle Act
  (1999)

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Global Sub-Prime Financial Crisis

• What is happening? Panic, Banks collapsing, NO
  Credit, Nationalization of Banks, IMF SAPs, HI
  Pain/poverty
• What are the causes? Credit bubble, Housing
  inflation Deregulation, No oversight, New
  financial instruments
• Why USA first, then Global? Bush II
  Neoliberalism
• How did the Panic become Global? Networks, 24/7

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Cause Credit Bubble Sub Prime

• 2001. Fed Chair Greenspan? Cheap Credit/LO rates
• Objective Revitalize Growth after recession
  9-11
• HI USA housing price inflation _at_ LO rents or
  income
• Deregulation No down payment, Interest only,
  ReSets
• Change Agent making M-Loan did not hold Loan/30y

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Financial Alchemy Securitization

• Original Mortgages sold to Firms Bear Stearns,
  Lehman
• Assumption Value of USA houses No decline/
  1960
• Model assumes Rising H prices, Continual
  ReFinancing
• Outcome Rapid expansion of housing/Re financing
• Mortgages? Securitized ? Collatoral Debt
  Obligations

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Securitization CDOs

• Assumption Rising Housing Prices? raise
  value/CDOs
• CDOs bundle representative Sample of mortgages
  from different locations, quality, interest,
  principle, etc.
• CDOs are then Rated by Private Bond Agencies
• Standard Poor, Moodys, Plus new Derivatives
• Deregulation Bond Agencies Also Advise promote
  Sale of Bonds? Clear conflict of Interest
  (Fox/chickens)

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CDOs Global Financial Networks

• CDOs Sold as HI income/HI Rated Investments
• Banks, Pension Funds, Mutual Funds Own CDOs
• Problem CDOs difficult to Price Complexity?
  Panic
• Insurance (AIG) Credit Default Swaps/bet both
  ways
• CDS contract to insure value of CDOs/Also sold

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Neoliberalism Deregulation

• Assumption Self correcting Markets will price
  Risk
• GSA outlaws commercial banks from Brokerage
  Business\
• e.g. underwriting Stocks securities (Goldman
  Sachs, Merrill )
• Objective Protect depositors citizens from
  Speculation
• Greenspans FED allows Banks 25 of activity for
  brokerage
• Clinton (1999) Repeal of Glass Steagall Act
  (GSA) (1933)
• 300 M lobbying, Treas. Sec. Rubin moves to
  Citigroup

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Origins of the Crash Panic

• Fed (6/04) raises Interest rates to control
  inflation
• HI Interest Rates END housing price increases
• Adjustable rates Re-set payments? HI
  foreclosures
• Housing Prices Decline Mortgage defaults Rise
• (2/08) Investment Bank Bear Stearns collapses
• The problem is we dont know whos holding it.

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Banking Credit Crisis

• Many Investment Banks, Merrill Lynch Fail or
  Merge
• Uncertainty Banks refuse to LEND to Banks
  Clients
• Because no one knows if Assets are CDOs,
  Derivatives
• Failure of Paulson to recognize Banks Insolvency
• outrage 3 page TARP Plan, no oversight? buy
  Mortgs
• Britain G. Brown. Partial Nationalization of
  Banks

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Financializtion Global Networks

• Uncertainty Risk Spread via CDOs Derivatives
• Fear USA is Bankrupt? Deficits trade, savings,
  budget
• 100s of Billions lost, Crash of Housing?
  Recession
• World Economy No credit/exports to USA Recession
  
• Panic Flight to Quality, Hedge Funds, Buy
  dollar/yen
• Weak States currencies collapse? IMF? SAPs? Riots