by Jan Toporowski
In the discussion about the financial crisis, one important factor has been overlooked, namely the distribution of income and wealth. It is obvious that the social consequences of the financial crisis have been made so much more painful by the growing inequalities of income and wealth in the United States and the United Kingdom. But there are also connections between such inequalities and financial instability. These have been highlighted by many critics of financialised capitalism. For example, John Hobson, most famous for his 1902 classic Imperialism A Study, argued that inequalities of wealth and income gave rise to over-saving, and hence economic stagnation. More recently, the late John Kenneth Galbraith noted the connection between tax cuts for the rich and asset inflation.
Asset inflation and income and economic inequalities are intimately linked. Asset inflation means rising values of financial assets and housing. Such inflation allows owners of such assets to write off debts against capital gains, buying an asset with borrowed money, and then repaying that borrowing together with interest and obtaining a profit when the asset is sold. Hence the proliferation of borrowing by households and consumption ultimately financed by debt. When the asset is housing, its inflation is especially pernicious. The housing market then redistributes income and wealth from young people earning less at the start of their careers and indebting themselves hugely in order to get somewhere decent to live, to people enjoying highest earnings at the end of their careers. But housing inflation is also like a pyramid banking scheme because it requires more and more credit to be put into the housing market in order to allow those profiting from house inflation to be able to realise their profits.
Nevertheless, even those entering the system with large debts hope to be able to profit from it. Such has been the dependence of recent governments and society in general on asset inflation that the political consensus is ‘intensely relaxed’ about such regressive redistribution of income. That consensus has encouraged the belief that the best that young people can do to enhance their prospects is to indebt themselves in order to ‘get on the property ladder’, i.e., enrich themselves (or at least improve their housing) through housing inflation.
Those at the bottom of the income distribution inevitably suffer most from rising house prices because, living in the worst housing, they have the least possibility to accommodate their house purchase to their income by buying cheaper, smaller housing. Having little other option but to over-indebt themselves in order to secure their housing, default rates among households in this social group are also most likely to rise with house price inflation. This inequality lies behind the problems in the sub-prime market in the U.S. and the equivalents of that market in the U.K. and elsewhere. Paradoxically, a more equal distribution of income and wealth is more likely to keep the housing market in equilibrium, because any increase in house prices above the rate of increase in income and wealth is more likely to result in a fall in demand for housing. Where income and wealth are already unequally distributed, and house prices rise faster than incomes, a fall in demand from those who can no longer afford a given class of housing is off-set by the increased demand for that class of housing among households that previously could afford better housing. In this way, the redistribution of income and wealth from those with more modest incomes to those with on higher incomes also facilitates asset inflation in the housing market.
Thus asset inflation has increased inequalities of wealth and income and those inequalities have further fed that inflation. Such inflation is therefore a self-reinforcing pathology of financial markets and society, rather than, as the economics establishment tells us, a temporary disequilibrium (a ‘bubble’) in the markets. Financial stability rests not only on sound banking and financial institutions. It also requires a much more equal distribution of income and wealth.
Wednesday, February 11, 2009
Monday, February 9, 2009
The Brazilian Real’s “Fundamental” Problem
by Annina Kaltenbrunner
Between August and December 2008 the Brazilian Real depreciated by more than 60 %. At the same time, foreign exchange reserves at the central bank stood at over US$ 200 billion in August 2008 and for the first time in its history the country had acquired “net creditor status”. Forgotten were the claims of “decoupling”, as the international financial crisis (once again) hit the countries at the periphery. However initially, “decoupling” seemed to have become reality.
When financial markets in the developed world first started to be shaken by the sub-prime implosion in autumn 2007, money continued to pour in some emerging markets as high real interest rates became particularly interesting in the face of falling yields in developed markets. Indeed foreign reserves at the Brazilian central bank continued to increase by near 30% between August 2007 and 2008 and the Real gained another 20% against the US dollar over the period.
Then, in August 2008 the market turned, first slowly and later in an accelerated fashion as the US government refused to support the struggling Lehman Brothers. Although expectations of faltering domestic growth – on reduced external demand – and slowing commodity prices might have contributed to the currency’s decline, the Brazilian Real’s main “fundamental” problem was (and is) the country’s increased and ongoing integration into international financial markets and the financialisation of the domestic economy.
First, as losses in international financial markets mounted, deleveraging and the flight from risky assets did not spare emerging markets. Brazilian (currency) assets are among the most liquid and widely traded emerging market assets in (international) investors’ portfolios, whose adjustments can result in large capital flows and currency movements, seemingly unwarranted by “fundamentals”. And indeed, Brazil’s capital account reversed from an average monthly surplus of around US$ 6 billion over the first half of the year to a deficit of more than US$ 9 billion in October and November 2008!
Second, the reversal in the currency’s value hit several of Brazil’s biggest companies, which – on the backdrop of years of sustained currency appreciation – had taken substantial currency bets on the derivatives market. The increased involvement of real sector companies in the financial market weighed on the currency through two channels: first, a scramble for foreign exchange as the affected companies hurried to cover their losses; and second, concerns about financial sector stability, as uncertainty about banks’ exposure to the affected companies reigned.
Finally, and probably most importantly for currency dynamics, increased financial integration has not only affected exchange rate behaviour through capital markets, but also through the banking sector. Although unique among Latin American countries in having a strong presence of domestic banks, Brazilian banks have increasingly used the wholesale market to acquire - short-term - funding. Thus, as international money markets dried up in the wake of the crisis, so did credit lines to Brazilian banks, which found themselves unable to extend short-term financing, mainly trade credit lines. The inability to obtain and/or rollover outstanding external debt and the necessity to meet other foreign exchange payments again led to scrambling in an already strained foreign exchange market, pushing the currency to recently experienced depreciated level.
And why should we care? Around 44% of the income generated in Brazil continues to accrue to the richest 10% of the population (and this excludes wealth!), while the 20% poorest of the population earn a total of 2.9%. This is also related to the processes described above, because while gains on currency speculation are reaped by a few market participants, the costs of (currency) crisis are borne by the population as a whole!!
Between August and December 2008 the Brazilian Real depreciated by more than 60 %. At the same time, foreign exchange reserves at the central bank stood at over US$ 200 billion in August 2008 and for the first time in its history the country had acquired “net creditor status”. Forgotten were the claims of “decoupling”, as the international financial crisis (once again) hit the countries at the periphery. However initially, “decoupling” seemed to have become reality.
When financial markets in the developed world first started to be shaken by the sub-prime implosion in autumn 2007, money continued to pour in some emerging markets as high real interest rates became particularly interesting in the face of falling yields in developed markets. Indeed foreign reserves at the Brazilian central bank continued to increase by near 30% between August 2007 and 2008 and the Real gained another 20% against the US dollar over the period.
Then, in August 2008 the market turned, first slowly and later in an accelerated fashion as the US government refused to support the struggling Lehman Brothers. Although expectations of faltering domestic growth – on reduced external demand – and slowing commodity prices might have contributed to the currency’s decline, the Brazilian Real’s main “fundamental” problem was (and is) the country’s increased and ongoing integration into international financial markets and the financialisation of the domestic economy.
First, as losses in international financial markets mounted, deleveraging and the flight from risky assets did not spare emerging markets. Brazilian (currency) assets are among the most liquid and widely traded emerging market assets in (international) investors’ portfolios, whose adjustments can result in large capital flows and currency movements, seemingly unwarranted by “fundamentals”. And indeed, Brazil’s capital account reversed from an average monthly surplus of around US$ 6 billion over the first half of the year to a deficit of more than US$ 9 billion in October and November 2008!
Second, the reversal in the currency’s value hit several of Brazil’s biggest companies, which – on the backdrop of years of sustained currency appreciation – had taken substantial currency bets on the derivatives market. The increased involvement of real sector companies in the financial market weighed on the currency through two channels: first, a scramble for foreign exchange as the affected companies hurried to cover their losses; and second, concerns about financial sector stability, as uncertainty about banks’ exposure to the affected companies reigned.
Finally, and probably most importantly for currency dynamics, increased financial integration has not only affected exchange rate behaviour through capital markets, but also through the banking sector. Although unique among Latin American countries in having a strong presence of domestic banks, Brazilian banks have increasingly used the wholesale market to acquire - short-term - funding. Thus, as international money markets dried up in the wake of the crisis, so did credit lines to Brazilian banks, which found themselves unable to extend short-term financing, mainly trade credit lines. The inability to obtain and/or rollover outstanding external debt and the necessity to meet other foreign exchange payments again led to scrambling in an already strained foreign exchange market, pushing the currency to recently experienced depreciated level.
And why should we care? Around 44% of the income generated in Brazil continues to accrue to the richest 10% of the population (and this excludes wealth!), while the 20% poorest of the population earn a total of 2.9%. This is also related to the processes described above, because while gains on currency speculation are reaped by a few market participants, the costs of (currency) crisis are borne by the population as a whole!!
Tuesday, February 3, 2009
The Current Situation in Greece: a sketch
by George Lambrinidis
The state of affairs in Greece is hot, no doubt about that. This is not new, nor is it directly correlated to the current financial crisis; rather, we have a scaling of the tension that is definitely related to the fact that the Greek oriented capital manages to achieve very high rates of profitability, while there is a very strong political movement. The key factors in this contradiction are the low level of organization of the workers and the historical roots of the Communist Party in society. This post is the first of a series that will highlight some key features of the current situation in Greece, starting with the presentation of the main frontiers.
At the time of writing the farmers were in the 9th day of their blockage of the highways, borders and other major roads with their tractors, practically paralyzing the road network. Some of their claims are against the Common Agricultural Policy and the policies that shrink the income of smaller producers to the benefit of big companies. This has been an open frontier for years, and has its own issues.
In the cities, now, there are two frontiers. The first one concerns education. The students are preparing their next move, after the demonstrations of December and those supporting the Palestinians. The main issues concern the founding of private universities (until now constitutionally forbidden), the abolishment of asylum (so police can enter the universities), the equalization of diplomas from universities with those from private colleges, the breakdown of the undergraduate into two cycles (until now 4 years minimum), the imposition of fees, the salaries and the working conditions of the professors, the facilities; practically everything.
The events of December following the execution of a 15-year old by a policeman also deserve some comment. First, they occurred against a background of already heightened tension due to very low wages and incomes, strict fiscal policy, inflation, persistent unemployment at the official rate of 9% (the real figure is at least 14%), state terrorism and government corruption and, most importantly, no perspective for improvement; on the contrary, the country was on the brink of crisis. So the murder of the child was the last straw.
Second, several other factors were less reported. Another pupil was shot on the 10th, outside his school, while discussing with other pupils their participation in next day’s demo. The bullet stuck in his arm and that prevented him from dying. On the 22nd, the secretary of the union of the cleaners, a 44-year old woman from Bulgaria was murderously attacked with acid in response to her fighting stance the previous period. The murderers even forced her to drink the acid! During the time that the cities were on fire, the police forces were beating and arresting 10- to 15-year old pupils in the morning, while successfully playing an old game with rioters at night.
Finally, big strikes were held, workers demonstrated in the streets with their children and teachers with their pupils, but the media of the bourgeoisie ignored them, presenting only repeated scenes of destruction, appalling people and discouraging them from participating in the demonstrations.
Which brings us to the third frontier: that of the workers. Despite the fact that the workers are struggling, there are serious limits to their fight. In the next post we will discuss the working movement and the political situation.
The state of affairs in Greece is hot, no doubt about that. This is not new, nor is it directly correlated to the current financial crisis; rather, we have a scaling of the tension that is definitely related to the fact that the Greek oriented capital manages to achieve very high rates of profitability, while there is a very strong political movement. The key factors in this contradiction are the low level of organization of the workers and the historical roots of the Communist Party in society. This post is the first of a series that will highlight some key features of the current situation in Greece, starting with the presentation of the main frontiers.
At the time of writing the farmers were in the 9th day of their blockage of the highways, borders and other major roads with their tractors, practically paralyzing the road network. Some of their claims are against the Common Agricultural Policy and the policies that shrink the income of smaller producers to the benefit of big companies. This has been an open frontier for years, and has its own issues.
In the cities, now, there are two frontiers. The first one concerns education. The students are preparing their next move, after the demonstrations of December and those supporting the Palestinians. The main issues concern the founding of private universities (until now constitutionally forbidden), the abolishment of asylum (so police can enter the universities), the equalization of diplomas from universities with those from private colleges, the breakdown of the undergraduate into two cycles (until now 4 years minimum), the imposition of fees, the salaries and the working conditions of the professors, the facilities; practically everything.
The events of December following the execution of a 15-year old by a policeman also deserve some comment. First, they occurred against a background of already heightened tension due to very low wages and incomes, strict fiscal policy, inflation, persistent unemployment at the official rate of 9% (the real figure is at least 14%), state terrorism and government corruption and, most importantly, no perspective for improvement; on the contrary, the country was on the brink of crisis. So the murder of the child was the last straw.
Second, several other factors were less reported. Another pupil was shot on the 10th, outside his school, while discussing with other pupils their participation in next day’s demo. The bullet stuck in his arm and that prevented him from dying. On the 22nd, the secretary of the union of the cleaners, a 44-year old woman from Bulgaria was murderously attacked with acid in response to her fighting stance the previous period. The murderers even forced her to drink the acid! During the time that the cities were on fire, the police forces were beating and arresting 10- to 15-year old pupils in the morning, while successfully playing an old game with rioters at night.
Finally, big strikes were held, workers demonstrated in the streets with their children and teachers with their pupils, but the media of the bourgeoisie ignored them, presenting only repeated scenes of destruction, appalling people and discouraging them from participating in the demonstrations.
Which brings us to the third frontier: that of the workers. Despite the fact that the workers are struggling, there are serious limits to their fight. In the next post we will discuss the working movement and the political situation.
Tuesday, January 27, 2009
Bank expropriation is rational, but neither socialist nor sufficient
by Paulo L dos Santos
The chronic banking crisis is flaring up again. Banks in the US and Britain continue to hemorrhage capital as recession and falling asset prices add to their losses. CDS spreads on bank debt are back on the rise. And the only thing propping up bank shares are daily promises of innovative ways to inject billions of fresh public money into the sclerotic veins of privately-run banks.
The latest such cures being prescribed involve either state-backed insurance of bank assets or the establishment of a state-backed ‘bad bank’ that would buy and hold toxic assets. The argument behind them, made most clearly by Paul Myners of the British Treasury, is that if the public takes on the bulk of the asset risks and losses lurking in bank portfolios, banking will become profitable once again, helping their private recapitalisation, and an eventual resumption of normal lending levels.
Why should the public lose its shirt to restore profitability to a sector that has pocketed billions as it created a crisis that will likely cost tens of trillions of dollars? Because, Mr Myners states without the distraction of substantiation, ‘The capacity for soundly managed banks and markets to support the generation of wealth in the economy could never be matched by the public sector’. The same argument has been made recently by The Economist and Alan Greenspan, also on the basis of pure chutzpah.
Yet the evidence supports a much dimmer view on the ‘entrepreneurial’ capacities for ‘wealth creation’ of private banks. Leading private equity boss Guy Hands recently commented to the Financial Times that, to his mind, British banks have lost all capacity to make loans to corporations in the domestic real economy. In my recent study of the activities of top international banks, I have documented what has been keeping them busy and profitable. The picture that emerges is one of remarkably well remunerated parasitism.
Even when they actively made loans, Citigroup, Bank of America, HSBC, Barclays and RBS centered their lending on mortgages, credit card and other loans to individuals, and loans supporting financial engineering. Lending to individuals has transferred increasing shares of wage income into bank profits, and its high profitability was a central contributor to the current financial crisis. Financial engineering operations aim to capture capital gains that are significantly funded from the mass of retail investors through fees and systematically lower returns on their pension, education and other savings. Lastly, banks have drawn astronomical revenues from card fees and other account service charges paid by clients to access and use their own money and accounts: a total of US$ 50 billion for Bank of America, Citibank, HSBC and Barclays in 2006.
In addition to being remarkably poor value for public money, plans to insure bank assets or create a public ‘bad bank’ are almost guaranteed not to work. They assume it is possible to identify and fence off ‘bad assets’ and quantify associated losses. This is impossible at this early stage of what will likely be a protracted recession. Any such programme would be followed by a steady stream of new losses, triggering new panics, renewed instability, and new cuts in lending. Ask the Japanese.
That takes me to the question of nationalisation, which, for all the recent hand wringing in the financial press, is a monumental non-issue. Bank losses will continue to mount and private appetite for investment in banks is unlikely to improve for many years. Gone are the good old days when Western states could count on their wealthy political clients in the Persian Gulf to pitch in the odd billion to support their private banks. In this setting, states will have little choice but eventually to nationalise weaker banks. That, in turn will likely send remaining private investors in other banks running for the exits, as recently argued in the New York Times.
The question is how banks will be nationalised and run. The Economist demands that any necessary nationalisations be undertaken ‘at market prices’, without seriously considering what those would be had states not supported banks. And both British and US governments have noted their commitment to run their investments on arms-length bases, leaving control to the officers and major shareholders that created the current financial mess.
There is a simple, rational alternative that needs urgent public discussion. Expropriate the banks—or, for those partial to more diplomatic language, nationalise them at the market prices that would prevail had the public not poured hundreds of billions into them. Then run the banks under the sole imperative of stabilising the financial system and paving the way for economic recovery, with no constraints imposed by the need to attract private capital or maintain future private franchise value.
Expropriation would lower the fiscal impact of state intervention. It would also curb the massive hoarding currently taking place as banks try to build up capitalisation levels. State banks could maintain lower capital reserves—after all, the only thing maintaining public confidence in the solvency of banks are state guarantees. This would allow additional room for credit creation, and render recent interest rate cuts effective.
State banks would also be able to provide relief on the debts currently saddling many households, helping provide a welcome boost to aggregate demand. Lastly, state banks could curb the more egregious practices of private banks: exorbitant account, overdraft and transaction fees; interest rates on credit to households; gains made on trading and own accounts at the expense of retail savers; and, of course, bonuses.
These measures are unlikely to be taken by currently dominant political forces, even though such policies are neither socialist nor in themselves steps towards socialism. They are just rational attempts to stop the current economic bloodletting. Economic recovery will require taking on the long-term systemic economic imbalances that conditioned the current meltdown. Those include falling real investment by non-financial corporations, mediocre productivity growth, growing private provision of pensions, health and education, and rising inequality.
Addressing those issues will require significant socialist inroads into the functioning of the economy and dramatic political changes. They also require an integrated, long-term understanding of the current crisis and secular developments in the real economy. Stay tuned.
The chronic banking crisis is flaring up again. Banks in the US and Britain continue to hemorrhage capital as recession and falling asset prices add to their losses. CDS spreads on bank debt are back on the rise. And the only thing propping up bank shares are daily promises of innovative ways to inject billions of fresh public money into the sclerotic veins of privately-run banks.
The latest such cures being prescribed involve either state-backed insurance of bank assets or the establishment of a state-backed ‘bad bank’ that would buy and hold toxic assets. The argument behind them, made most clearly by Paul Myners of the British Treasury, is that if the public takes on the bulk of the asset risks and losses lurking in bank portfolios, banking will become profitable once again, helping their private recapitalisation, and an eventual resumption of normal lending levels.
Why should the public lose its shirt to restore profitability to a sector that has pocketed billions as it created a crisis that will likely cost tens of trillions of dollars? Because, Mr Myners states without the distraction of substantiation, ‘The capacity for soundly managed banks and markets to support the generation of wealth in the economy could never be matched by the public sector’. The same argument has been made recently by The Economist and Alan Greenspan, also on the basis of pure chutzpah.
Yet the evidence supports a much dimmer view on the ‘entrepreneurial’ capacities for ‘wealth creation’ of private banks. Leading private equity boss Guy Hands recently commented to the Financial Times that, to his mind, British banks have lost all capacity to make loans to corporations in the domestic real economy. In my recent study of the activities of top international banks, I have documented what has been keeping them busy and profitable. The picture that emerges is one of remarkably well remunerated parasitism.
Even when they actively made loans, Citigroup, Bank of America, HSBC, Barclays and RBS centered their lending on mortgages, credit card and other loans to individuals, and loans supporting financial engineering. Lending to individuals has transferred increasing shares of wage income into bank profits, and its high profitability was a central contributor to the current financial crisis. Financial engineering operations aim to capture capital gains that are significantly funded from the mass of retail investors through fees and systematically lower returns on their pension, education and other savings. Lastly, banks have drawn astronomical revenues from card fees and other account service charges paid by clients to access and use their own money and accounts: a total of US$ 50 billion for Bank of America, Citibank, HSBC and Barclays in 2006.
In addition to being remarkably poor value for public money, plans to insure bank assets or create a public ‘bad bank’ are almost guaranteed not to work. They assume it is possible to identify and fence off ‘bad assets’ and quantify associated losses. This is impossible at this early stage of what will likely be a protracted recession. Any such programme would be followed by a steady stream of new losses, triggering new panics, renewed instability, and new cuts in lending. Ask the Japanese.
That takes me to the question of nationalisation, which, for all the recent hand wringing in the financial press, is a monumental non-issue. Bank losses will continue to mount and private appetite for investment in banks is unlikely to improve for many years. Gone are the good old days when Western states could count on their wealthy political clients in the Persian Gulf to pitch in the odd billion to support their private banks. In this setting, states will have little choice but eventually to nationalise weaker banks. That, in turn will likely send remaining private investors in other banks running for the exits, as recently argued in the New York Times.
The question is how banks will be nationalised and run. The Economist demands that any necessary nationalisations be undertaken ‘at market prices’, without seriously considering what those would be had states not supported banks. And both British and US governments have noted their commitment to run their investments on arms-length bases, leaving control to the officers and major shareholders that created the current financial mess.
There is a simple, rational alternative that needs urgent public discussion. Expropriate the banks—or, for those partial to more diplomatic language, nationalise them at the market prices that would prevail had the public not poured hundreds of billions into them. Then run the banks under the sole imperative of stabilising the financial system and paving the way for economic recovery, with no constraints imposed by the need to attract private capital or maintain future private franchise value.
Expropriation would lower the fiscal impact of state intervention. It would also curb the massive hoarding currently taking place as banks try to build up capitalisation levels. State banks could maintain lower capital reserves—after all, the only thing maintaining public confidence in the solvency of banks are state guarantees. This would allow additional room for credit creation, and render recent interest rate cuts effective.
State banks would also be able to provide relief on the debts currently saddling many households, helping provide a welcome boost to aggregate demand. Lastly, state banks could curb the more egregious practices of private banks: exorbitant account, overdraft and transaction fees; interest rates on credit to households; gains made on trading and own accounts at the expense of retail savers; and, of course, bonuses.
These measures are unlikely to be taken by currently dominant political forces, even though such policies are neither socialist nor in themselves steps towards socialism. They are just rational attempts to stop the current economic bloodletting. Economic recovery will require taking on the long-term systemic economic imbalances that conditioned the current meltdown. Those include falling real investment by non-financial corporations, mediocre productivity growth, growing private provision of pensions, health and education, and rising inequality.
Addressing those issues will require significant socialist inroads into the functioning of the economy and dramatic political changes. They also require an integrated, long-term understanding of the current crisis and secular developments in the real economy. Stay tuned.
Monday, January 26, 2009
Gender and Finance
by Christina Laskaridis and Nuray Ergunes
The differences between genders have received little attention in the analysis of the capitalist system because women’s unequal state within society stems from patriarchal relations which are accepted as natural. Mainstream economics’ lack of insight into the interactions between non-economic and economic relations is a major reason for this ignorance.
As the expansion of financial relations changes that interaction, generally and specifically, through the intrusion into non-economic spheres, we seek to examine the gendered impact of these changes. Whereas, the gendered division of labour has been reasonably well explored, the gendered relations within finance are less so. How gender inequality is manifested during a period of financialisation will be explored through a series of blogs-to-come under the following issues:
a) With a detailed focus on microcredit, we will investigate how financial relations have penetrated the household sphere. Neoliberalism’s removal of social safety nets and privatisation of social welfare are the key factors here and are determined through class relations. It has allowed microcredit, sometimes labeled a ‘poverty management strategy’, to target women, adding a debt burden to women’s inequality.
b) The falsehood of microcredit as a solution to combat neoliberalism can be explored by examining certain characteristics of women’s work, and thus a gendered approach to the exploitative nature of financial inclusion can be developed.
c) Given that finance’s impact differs across genders, we will explore the extent to which financial products and conditions of disbursement and repayment can be differentiated between men and women.
d) Economic crisis tends to exacerbate existing inequalities: e.g. daughters are taken out of school, women take on extra work whilst still maintaining the household. We will explore the impact of the current crisis on women in developed and developing countries.;
e) The demands by civil society for a better financial architecture in response to the current crisis will remain incomplete without considering the above issues.
Underlying these areas of interest is an investigation of how the economic and non-economic spheres interact. This differentiation may be less distinct when considered in light of the increasing informality of women’s labour, especially in developing countries. Discussion of these recent changes of women’s position in the economy, is required to introduce more concretely the topics we will examine.
As a result of neo-liberal policies an increase in poverty and unemployment has been a worldwide phenomenon. In the name of fighting poverty, global management strategies have been developed, some of which have actually become socially threatening. One of these is microfinance, which has mostly targeted women based largely on the argument that it would strengthen and enhance their status. This argument relies on the peculiar characteristic of women’s labour, being determined through patriarchal relations. Characteristics such as being more reliable, self-sacrificing and easy to control are seen through examples of women’s lack of right to their income, expenditure of their income on needs of the household including children and through the efficacy of social pressure in the re-payment system of micro-credits.
In fact, microfinance leads to the commodification of women’s labour through finance. Increased labour market flexibility is one of the core patterns within financialised capitalism, the basic features of which are: increased informal labour, the removal of collective bargaining, increased income inequalities and the expansion of women’s labour. In other words, it means expansion of the gender-based labour market structure and the spread of production into small enterprises and households, especially in developing countries where the production is export-oriented and an increase in informal labour has meant the feminisation of labour. Throughout this process home-based work has had its social base widened. The reason for this is to resolve the conflict between women’s societal role (such as being wife, mother, daughter), and the role of labour needed by the capitalist system, which is flexible and cheap. Not only have these processes have been reinforced through microfinance but microfinance adds a burden of repayment into women’s life, with it’s associated anxiety and stress.
Although women’s labour has increased in the informal area, the unemployment ratio of women has increased in the formal employment area. The determination of formal employment by the structuring in the informal employment area has other dimensions. Within this context, women’s labour, which is determined by the patriarchal system, has formed a model of new employment and labour relations which is characterised by low wages, long working hours and unsecure working conditions. This form of labour is typical of the financialised capitalism era.
The differences between genders have received little attention in the analysis of the capitalist system because women’s unequal state within society stems from patriarchal relations which are accepted as natural. Mainstream economics’ lack of insight into the interactions between non-economic and economic relations is a major reason for this ignorance.
As the expansion of financial relations changes that interaction, generally and specifically, through the intrusion into non-economic spheres, we seek to examine the gendered impact of these changes. Whereas, the gendered division of labour has been reasonably well explored, the gendered relations within finance are less so. How gender inequality is manifested during a period of financialisation will be explored through a series of blogs-to-come under the following issues:
a) With a detailed focus on microcredit, we will investigate how financial relations have penetrated the household sphere. Neoliberalism’s removal of social safety nets and privatisation of social welfare are the key factors here and are determined through class relations. It has allowed microcredit, sometimes labeled a ‘poverty management strategy’, to target women, adding a debt burden to women’s inequality.
b) The falsehood of microcredit as a solution to combat neoliberalism can be explored by examining certain characteristics of women’s work, and thus a gendered approach to the exploitative nature of financial inclusion can be developed.
c) Given that finance’s impact differs across genders, we will explore the extent to which financial products and conditions of disbursement and repayment can be differentiated between men and women.
d) Economic crisis tends to exacerbate existing inequalities: e.g. daughters are taken out of school, women take on extra work whilst still maintaining the household. We will explore the impact of the current crisis on women in developed and developing countries.;
e) The demands by civil society for a better financial architecture in response to the current crisis will remain incomplete without considering the above issues.
Underlying these areas of interest is an investigation of how the economic and non-economic spheres interact. This differentiation may be less distinct when considered in light of the increasing informality of women’s labour, especially in developing countries. Discussion of these recent changes of women’s position in the economy, is required to introduce more concretely the topics we will examine.
As a result of neo-liberal policies an increase in poverty and unemployment has been a worldwide phenomenon. In the name of fighting poverty, global management strategies have been developed, some of which have actually become socially threatening. One of these is microfinance, which has mostly targeted women based largely on the argument that it would strengthen and enhance their status. This argument relies on the peculiar characteristic of women’s labour, being determined through patriarchal relations. Characteristics such as being more reliable, self-sacrificing and easy to control are seen through examples of women’s lack of right to their income, expenditure of their income on needs of the household including children and through the efficacy of social pressure in the re-payment system of micro-credits.
In fact, microfinance leads to the commodification of women’s labour through finance. Increased labour market flexibility is one of the core patterns within financialised capitalism, the basic features of which are: increased informal labour, the removal of collective bargaining, increased income inequalities and the expansion of women’s labour. In other words, it means expansion of the gender-based labour market structure and the spread of production into small enterprises and households, especially in developing countries where the production is export-oriented and an increase in informal labour has meant the feminisation of labour. Throughout this process home-based work has had its social base widened. The reason for this is to resolve the conflict between women’s societal role (such as being wife, mother, daughter), and the role of labour needed by the capitalist system, which is flexible and cheap. Not only have these processes have been reinforced through microfinance but microfinance adds a burden of repayment into women’s life, with it’s associated anxiety and stress.
Although women’s labour has increased in the informal area, the unemployment ratio of women has increased in the formal employment area. The determination of formal employment by the structuring in the informal employment area has other dimensions. Within this context, women’s labour, which is determined by the patriarchal system, has formed a model of new employment and labour relations which is characterised by low wages, long working hours and unsecure working conditions. This form of labour is typical of the financialised capitalism era.
Friday, January 16, 2009
CDS Central Clearing – will it really help?
by Duncan Lindo
“Credit Swap Clearing House to be running by year end” claim the headlines. But is the current lack of CDS central clearing really the cause of our multi trillion dollar financial crisis? If central clearing had been in place between 2001 and 2007 would it have averted the crisis? The only reasonable answer is no.
The authorities are reacting to the failure of markets by simply trying to implement markets twice as hard. Moreover we are witnessing a scramble between regulators to talk tough, act decisively and win the mandate for post-2008 regulation with little thought about what needs regulating and how.
Two of the largest alleged benefits are reductions in credit and operational risk but the advantages over the OTC market are slight and the impact on the causes of the crisis minimal. Prevention of a systemic chain of derivative counterparty defaults is a noble aim – but collateral agreements meant even Lehman’s default did not trigger such an event – 200mUSD of losses per bank is estimated not 20-40bnUSD per bank. A central clearer or an exchange should improve discipline and reduce operational risk – but the OTC market has shown it can clear up its act (e.g. tear ups, compression, clearing up confirms etc) and there’s nothing to suggest operational risk in the CDS market is systemic.
On these issues you might argue central clearing is marginally better than not but it’s hard to argue they are really fundamental to trillion dollar losses.
Transparency and prices are other areas mentioned. Apparently “buyers and sellers will know what they buying and selling” on an exchange (what an extraordinary thing that they collectively invested trillions of dollars without knowing that before!). In fact might not the reassurance of a clearing house further discourage active investigation and analysis by investors?
The same goes for prices. A clearing house will determine prices for every contract every day but very few of the outstanding contracts trade every day. The exchange will have to invent (“model”) the missing prices. It seems very likely that a clearing house publishing prices will only reduce the incentive for participants to use their own analysis and judgement. Isn’t this exactly the opposite of what is required?
Credit Risk Transfer started as bespoke, private and negotiated deals between those bearing credit risk (e.g. bank loan desks) and investors. Deals took time, details were analysed. Over time, and with the help of the dealers, the contract has become more standardised, information more social, markets more liquid; easier to trade in fact. In the moments before the crisis break there were many buyers and sellers, many transactions, much information about underlying corporate credits: few would have argued (in particular for standard corporate credit) that the market was not efficient. Yet the price was simply wrong. Risk premium was far too low.
The reaction to this market failure is to try even harder for the market. A clearing house is yet another step in the march of standardisation, liquidity and faster, easier trading. Is that really going to improve the quality of prices?
“Credit Swap Clearing House to be running by year end” claim the headlines. But is the current lack of CDS central clearing really the cause of our multi trillion dollar financial crisis? If central clearing had been in place between 2001 and 2007 would it have averted the crisis? The only reasonable answer is no.
The authorities are reacting to the failure of markets by simply trying to implement markets twice as hard. Moreover we are witnessing a scramble between regulators to talk tough, act decisively and win the mandate for post-2008 regulation with little thought about what needs regulating and how.
Two of the largest alleged benefits are reductions in credit and operational risk but the advantages over the OTC market are slight and the impact on the causes of the crisis minimal. Prevention of a systemic chain of derivative counterparty defaults is a noble aim – but collateral agreements meant even Lehman’s default did not trigger such an event – 200mUSD of losses per bank is estimated not 20-40bnUSD per bank. A central clearer or an exchange should improve discipline and reduce operational risk – but the OTC market has shown it can clear up its act (e.g. tear ups, compression, clearing up confirms etc) and there’s nothing to suggest operational risk in the CDS market is systemic.
On these issues you might argue central clearing is marginally better than not but it’s hard to argue they are really fundamental to trillion dollar losses.
Transparency and prices are other areas mentioned. Apparently “buyers and sellers will know what they buying and selling” on an exchange (what an extraordinary thing that they collectively invested trillions of dollars without knowing that before!). In fact might not the reassurance of a clearing house further discourage active investigation and analysis by investors?
The same goes for prices. A clearing house will determine prices for every contract every day but very few of the outstanding contracts trade every day. The exchange will have to invent (“model”) the missing prices. It seems very likely that a clearing house publishing prices will only reduce the incentive for participants to use their own analysis and judgement. Isn’t this exactly the opposite of what is required?
Credit Risk Transfer started as bespoke, private and negotiated deals between those bearing credit risk (e.g. bank loan desks) and investors. Deals took time, details were analysed. Over time, and with the help of the dealers, the contract has become more standardised, information more social, markets more liquid; easier to trade in fact. In the moments before the crisis break there were many buyers and sellers, many transactions, much information about underlying corporate credits: few would have argued (in particular for standard corporate credit) that the market was not efficient. Yet the price was simply wrong. Risk premium was far too low.
The reaction to this market failure is to try even harder for the market. A clearing house is yet another step in the march of standardisation, liquidity and faster, easier trading. Is that really going to improve the quality of prices?
Monday, December 1, 2008
The US yield curve: the “mirror” of the financial conditions
US Yield Curve (29/10/2008), source: Financial Times website
by Juan Pablo Painceira
The importance and hegemony of the US dollar within the global financial system has become the subject of much debate in recent years. As a consequence of the financial crisis the dollar’s position as the world currency has been analysed and challenged by some analysts, for example N. Roubini (http://www.rgemonitor.com/roubini-monitor/). However, another important analytical tool to understand recent movements in the financial markets has been neglected, namely the US Treasuries yield curve. This curve can be seen as a “mirror” of US financial conditions. This is because the state bonds market – and in particular US public securities - has been the key element in the expansion of finance around the global economy in the last 30 years. It has been also the benchmark for other capital assets.
The yield curve has taken on an unusual shape since the beginning of September (around 10th), as there is now a “dent” around the maturity of 2 years. Since then there has been a gradual move towards a “normalization” of the US yield curve, but this anomaly has persisted (http://www.bloomberg.com/markets/rates/index.html). Although the causes are complex –for example the effects of other financial markets such as money market and corporate bonds market – there are some clear short term short term and long term drivers for what has happened.
Short-term, the expectation of rate cuts has driven investor bets towards the short-term part of the curve, implying that there has been a risk premium in the yield curve, mainly around the maturity of 1 and 2 years. It is important to note that the new market for one year T-bills (officially called 52 week bills) was reopened only in June 2008, with the previous auction in February 2001. Another point is that the freezing in the money markets has slashed short-term interest rates, reflecting banks’ preference for hoarding cash and very liquid government bonds.
Longer term, the strong demand for Treasuries around 2 and 3 year maturity can be related to problems in corporate bond markets, where companies have had huge problems in getting finance. The corporate sector has also affected the shortest-term part of the yield curve through the crunch in the commercial paper market (securities up to 90 days market). The Federal Reserve’s balance sheet has showed an increase in what it terms its “other loans” item, where the total amount of securities with maturity over 1 to 5 years is now around $70 billion.
The huge drop in bond issuance in the corporate markets is important for ordinary people as even the biggest companies have had difficulties in accomplishing the simplest of obligations, for example their payroll! It is the main reason why the Federal Reserve has intereved in the corporate bond market through financing operations in the same way it usually does with financial institutions, mainly commercial banks. These operations are called repo operations, where the FED accepts the securities in exchange for cash for a pre-determined period of time. In another words, the Federal Reserve will be acquiring companies’ bonds in order to finance them for a certain period of time.
Finally, the aggressive emphasis on the steepening of the yield curve is related to the recovery of banking industry profitability, where we have the traditional “borrow short and lending long” strategy. However, the Fed has only succeeded in returning the yield curve to its normal shape (upwards) after 2 years maturity, and the fed funds rate has not followed this drop.
This emphasis can be also connected with the banking bailout plans around the global economy, as public financing for the banking recapitalizations is much cheaper. It happens because the US Treasury has been focused on short term financing in its strategy of debt management - the reoffering of 52 week bills and the release of new 3 year treasuries notes are a good example. The main assumption underlining this strategy could be related to the US authorities’ expectations on the final resolution of the financial crisis. As we can see, the US yield curve has much to tell us about conditions in the broader financial markets and economy.
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