The Global Financial Crisis and its Consequences

1
The Global Financial Crisis and its Consequences

• Jean-Claude Delaunay
• October 2009, 17th,
• BUSINESS SCHOOL
• UNIVERSITY OF NANNING

2
Thanks

• First, I have to thank very much Mister Director
  of your Business School (Guangxi University) who
  allowed me to have this conference, to day
• It is also my great pleasure to thank Professor
  Li Xinguang for his nice suggestion to talk with
  you of the present financial crisis.
• My deep thanks are also for Professor Fan Fan who
  took in charge the translation of these slides.

3
Introduction (1)

• To remind some aspects of the chronology of the
  financial crisis, which started in 2007 (1rst
  semester) in the US (subprimes), I have prepared
  a distinct file.
• I only say, in the present file, that this crisis
  is generally considered as a very big stroke on
  the capitalist system.

4
Introduction (2)

• Anyway, the consequences of this crisis dont seem
  as large and deep than the consequences of the
  1930 crisis.
• After 2 years of big crisis, not only in finance
  but also in economy (and some other aspects),
  crisis seems over.
• My expose is divided into 2 parts

5
Introduction (3)

• 1) In the first part, I wonder why governments
  and economist think that crisis is over. I try to
  understand the main differences between 1930
  crisis and 2007 crisis and what are the immediate
  consequences of the decisions taken by the G20.
• 2) In the second part, I wonder if the solutions
  to the 2007 crisis can be considered as efficient
  or if we have serious reasons to doubt of that.

6
FIRST PART CRISIS IS OVER

• 1) The different indexes of present situation
  (first sub part)
• 2) Why the 2007 crisis was rapidly over? (second
  sub part)

7
First Part, SUB PART 1, page 1 (1, I,1)

• The different indexes
• A) Financial
• B) Economic
• C) Employment

8
(1, I, 2)

• Financial consequences
• After a high degree of losses (around 30-50),
  financial markets have a new start, since the
  second part of 2009. Wounds are still there but a
  new period seems to be going on.

9
(1, I, 3)

• Economic consequences
• The financial crisis was not only financial, but
  economic.
• The mechanism of transmission of financial crisis
  to the real sector is well known. In that case,
  1) Banks are suffering the losses caused by the
  fall of their risky assets value. 2) All the
  assets are concerned (not only the risky). There
  is a general lack of confidence.

10
(1, I, 4)

• Because of this lack of confidence for all the
  assets (even the good ones), companies cant find
  funds on the financial markets. Therefore, they
  reduce their activity.
• Because of theirs high losses, banks also reduce
  their credits to companies.
• Because of the spread out of bad assets in all
  the banks accounts, banks cant borrow money from
  the other banks.
• There is A CREDIT CRUNH.

11
(1, I, 5)

• It seems that this situation is over

12
(1, I, 6)

• According to FMI (Perspectives of World economy,
  October 2009), the China yearly growth rate would
  be
• In 2009 8.5
• In 2010 9.0

13
(1, I, 7)

• The annual rate of growth of the world GDP would
  be the following (FMI)
• 2009 2.5
• 2010 3.1

14
(1, I, 8)

• As everybody knows, yearly growth rate is
  calculated in real terms.
• What is interesting, in these forecast, is that,
  if industrial production rates were negative in
  2008 and /or in 2009, there is a new tendency
  expected in 2010. Generally, the GDP should grow
  every where.

15
(1, I,9)

• For example in Europe, the annual rate of GDP
  should be
• - 2.0 2009
• 0.5 2010

16
(1, I,10)

• Another important point is that forecasts are
  more and more confident in the future. In 2008,
  the future was seen pretty grey or black. Now, at
  the end of 2009, economic expectations are far
  better.
• Economies of big countries are going better than
  expected. For example, in the USA, July 2009 GDP
  was 0,2. But in the 2nd semester of 2009,
  annual rate of GDP is assumed to be 3.3.

17
(1, I,11)

• Employment consequences
• However, there is a big question, yet not solved.
  It is the evolution of employement.
• According to International Labor Organisation
  (ILO), the number of unemployed could raise in
  2009 (around 20 to 25 million)

18
(1, I,12)

• Signs of a recovery are there but, for the
  moment, in most of the western countries, the
  recovery does not concern wage earners.

19
(1, I,13)

• There is another big question How long the
  present recovery will last?
• CONCLUSION OF THIS FIRST SUB PART
• 1) A recovery bigger then expected
• 2) But a lack of employment
• 3) And a question concerning the solidity of this
  recovery

20
FIRST PART, SUB PART 2, page 1,(1, 2, 1)

• How to explain this recovery and what immediate
  consequences?

21
(1, 2, 2)

• The speed of the 2007 crisis recovery (around 2
  years after a very big earthquake of the
  capitalist system) can be mainly explained
  through 5 factors.
• The huge amount of the economic means
• The intervention of the different States
  concerned
• The concertation between these States
• The replacement of the G8 by the G20
• A strong will of the capitalist representative to
  preserve the capitalist system

22
(1, 2, 3)

• A) Huge amount of money
• In April 2008, FMI was estimating that the total
  cost of the 2007 crisis could be around 1.000
  billion .
• This estimation was under the real cost.

23
(1, 2, 4)

• However, the different States have not hesitated
  to spend the necessary amount of money.
• China was the first country to make the
  announcement of a 486 billion plan, at the
  Washington G20 (November 2008).
• The USA (Paulson Plan ), made the announcement of
  a 700 billion program to buy the rotten
  assets (end of 2008).

24
(1, 2, 5)

• At the end od 2008, French government says he is
  going to spend 360 billion euros.
• Equivalent amounts of money have been engaged by
  British or German governments.
• In August 2009, a CEE (Europe) report was
  estimating the different contributions equal to
  30 of the European GDP.

25
(1, 2, 6)

• Most of this money was attributed to the banks
  (to buy their rotten assets, to enter their
  capital, to give them liquidities and ease their
  credit operations).
• But some was given to industry, for example car
  industry (in France 7 billion given in February
  2009).

26
(1, 2, 7)

• B) Public Intervention
• It is a common place to observe that, to solve
  this crisis, capitalist governments have not
  hesitated to intervene heavily in economic
  structures.
• This is not a surprise for marxist, and for
  Chinese economic professors. So I dont go
  further on this point.

27
(1, 2, 8)

• I only remind that the theory of complete
  deregulation (Mac Kinnon E.S. Shaw) was rapidly
  adjusted by capitalist actors, in the countries
  which are in favour of free enterprise and of
  no State intervention.
• On the contrary, through the State Monopoly
  Capitalism Theory (marxism), or through the
  analysis of Karl Polanyi (The Big
  Transformation),

28
(1, 2, 9)

• or through the practice of the Chinese
  governments since the openess, for example, we
  know that State intervention is necessary to
  balance the limits and failures of market
  functionning.

29
(1, 2, 10)

• C) Concertation of States at a high level
• This feature is relatively new. State
  intervention without coordination would have
  probably be less efficient

30
(1, 2, 11)

• D) Enlargement of the countries concerned
• Capitalist leaders have understood that it was
  also necessary to enlarge the meetings. The G20
  comprise around 46 nations. Of course G20 is only
  a FORUM

31
(1, 2, 12)

• Anyway, this forum, which is replacing the G8
  Forum is certainly in better position to manage
  the world problems.
• It would be surprising, however, that the
  previous concentrated organisation desappear.
  Instead, we can expect that FORUMS are going to
  multiplicate (G2, G4 (BRIC), African and Latin
  America Forums.).

32
(1, 2, 13)

• E) A strong will of the capitalist leaders to
  preserve capitalism
• Capitalist countries are leaded by right
  conservative forces (for example France, Germany,
  Great Britain) or very moderate leaders (USA).
• All these people have shown a strong will to
  fight for the preservation of the capitalist
  system.
• SARKOZY, the French President, is saying
  everywhere that issues are going on thanks to
  him.

33
(1, 2, 14)

• Of course, this is ridiculous.
• It shows, anyway, that these people are ready to
  go backward, if necessary, with the strong will
  to protect capitalist system.
• Sarkozy, for example, said that we have to
  build an other capitalism.

34
(1, 2, 15)

• To a certain extent, China got the benefit of
  this will and is now recognised not only as a
  full member of the international community, but
  as one of the top countries.
• In 1978, China was representing 2 of the world
  growth.
• Nowdays, China explains 20 of the world growth.
  His GDP is 3860 billion (30 billion in 1952).

35
(1, 2, 16)

• Considering the peacefull behaviour of China in
  the world, an active participation of China in
  the present world crisis is certainly
  contributing to a peacefull solution of the
  problems.
• The present role of China, for example, to calm
  down North Corea is an illustration of this
  point.

36
(1, 2, 17)

• To conclude this second sub-part, we can say that
  the rapidity of the present recovery can be
  explained quite easily and makes the difference
  between the 1930 crisis and the 2007 crisis.
• There are losses (International commerce
  decreased of 13 billion ), but there is no will
  (and capacity) from countries to solve problems
  alone. There is a new consciousness of a global
  world.

37
(1, 2, 18)

• We have to ask, anyway, if things are as simple
  as that and what are the remaining problems, if
  any.

38
SECOND PART

• SUPPOSE CRISIS IS OVER, OK, BUT WHAT ARE THE
  REMAINING PROBLEMS?

39
Introduction (1)

• It is normal that governments say that crisis is
  over.
• First, it means that they are efficient.
• Second, they need that citizens be confident in
  the economic situation to start again spending.
• But it is normal that, in the same time we wonder
  if the recovery is solid.

40
Introduction (2)

• Of course, it is always easy to criticise. Due to
  the importance of this crisis, we cant
  underestimate the will of capitalist forces to
  change some parts of their system.
• After all, in the 19th century, there were
  already big banking crisis. They were solved
  successfully by new regulations. Why not to day?

41
Introduction (3)

• I agree with this approach and I am going to try
  to make a moderate and balanced analysis.
• Anyway, I cant help thinking of the following
  points
• 1) A global crisis needs global solutions. But
  today, solutions are not global. Most of African
  countries, for example, are out of the solutions.

42
Introduction (4)

• 2) In the recent past, there were new
  regulations concerning the need of bringing
  morality in capitalism (Sarbanes-Oxley Law, after
  the Enron failure, for example). These
  regulations have been rapidly forgotten. How can
  we consider that capitalist actors are able to
  behave with morality, if they dont do it
  usually?

43
Introduction (5)

• 3)There are contracdictions and conflicts of
  interest among the partners of the G20. These
  conflicts are, for the moment, put under the
  table. But they are not going to desappear like
  in a fairy tale (Cf problems of protectionnism,
  for example).
• 4) The partners dont obey the same rules. For
  example, China is a socialist country. USA are
  the leader country of capitalism. Are they going
  to be friends all the time?

44
Introduction (6)

• 5) In the recent past, some of the leaders
  presently involved in the solution of the crisis
  were figuring among the most convinced defenders
  of deregulation and of freedom of financial
  markets. How can they change so radically? How
  can they really fight against the social forces
  which have given to them the political power they
  have right now? (For example, how can we believe
  that Luxembourg or Swiss are really going to give
  up the secret of banking business?)

45
Introduction (7)

• All these reasons make me (and soe other people)
  suspicious concerning the quality of the
  solutions which are going to be experimented in
  the next future.
• Of course we can estimate that the presence of
  China limits the capability of the others
  countries to trick the solutions.

46
Introduction (8)

• But we can already observe such tricks. For
  example, it is clear that some banks and bank
  managers consider that the money they received
  was allowing them to get very high salaries or to
  speculate on the financial makets, instead of
  opening credits to firms.
• The French President is making big noise on this
  point. But in reality, he does nothing against
  the bank managers.

47
Introduction (9)

• In this second part of my expose, I am going to
  reflect on the future consequences of the present
  financial crisis, by distinguishing, in two
  sub-parts, the two following levels of time
• The short-middle term
• The middle-long-term

48
PART 2, SUB-PART 1, page 1

• SUB-PART 1 The short-middle term and its main
  desequilibria
• A) Global Money
• B) Wages and Profits
• C) Power of nations

49
(2, 1, 1)

• A) GLOBAL MONEY fuelling speculation
• The American money is still the money of the
  world. But 1) it looses value 2) The excess of
  , loosing value, is fuelling the speculation on
  financial markets. (China asked for a FMI money,
  but it is still a project)

50
(2, 1, 2)

• B) Wages and Profits
• In capitalist countries, leaders are considering
  that wages dont have to raise. According to
  them, crisis is only financial and is not
  connected to demand. It is why present recovery
  is going on with increasing unemployment.

51
(2, 1, 3)

• C) Desequilibrium of Power among nations
• As we already noticed, 172 little and generally
  poor nations are not participating to the G20
  Forum. They dont have more power inside the
  United Nations.
• However, we can advance some considerations.
• 1) these poor nations are rich of natural
  ressources which are not yet exploited.

52
(2, 1, 4)

• 2) Because they are poor, their population
  emigrates towards rich capitalist countries.Which
  generates high desequilibria inside these
  countries.
• 3) From a moral point of view, we cant say that
  world is now global and let a large part of the
  world outside.
• 4) When people are poor, they are easy to be
  pushed to war.

53
(2, 1, 5)

• Considering these reasons and desequilibria of
  the present world, it can make us feeling that
  the solutions brought to the financial crisis are
  not solid.
• We can think like this, especially if we
  understand that financial crisis is only one
  crisis among others, like food crisis, energy
  crisis, climate crisis, employment crisis,
  inequality crisis.

54
(2, 1, 6)

• To conclude this first sub-part of the second
  part, I would say that present financial crisis
  doesnt need only new controls, it need
  alternatives.

55
(2, 2, 1)

• Second Part, second Sub-Part
• To be able to handle the revolution of our time.

56
(2, 2, 2)

• To my opinion, the main revolutionary
  characteristic of our time is the passge from a
  material production time to a mixed material and
  non material time.

57
(2, 2, 3)

• Capitalism is good at producing material
  production (goods).
• But it is far less good at producing non
  material production. I already studied this
  point, but using the concept of services. I
  think that the concept non material production
  is, perhaps, better than the concept of services.

58
(2, 2, 4)

• Among Non material production, I suppose that
  production of scientific results is the most
  important, because this kind of production
• Can raise the productivity of material
  production.
• Is necessary to solve the climate and pollution
  problems.
• Can raise the efficiency of labor in all the
  fields (for example health care labor,
  administration labor).
• Helps for management and Business affairs?

59
(2, 2, 5)

• What is the connection between this and the
  financial crisis? My answer is the following
• Capitalist firms have gone to countries like
  China because their rate of profit was falling in
  western countries (years1970). Doing this, they
  were wanting to develop their material
  production. China was, for them, a good market
  and a good place for this type of production.
• And they know how to do material production.

60
(2, 2, 6)

• 2) But, for producing in emerging countries, they
  have to invest and make their capital very
  fluent. Financial markets are the way to get this
  features. Financial markets allow big firms
  (theoretically) to invest everywhere and to quit
  the places of investments when they want.
• 3) Excessive development of financial markets is
  therefore directly connected to the crisis of
  profit in western material production.

61
(2, 2, 7)

• 5) But material production has got a so high
  level of quality and problems, nowdays, that it
  needs non material production to develop.
• 6) The problem for western firms is that they
  dont know how to develop non material
  production (and first of all, scientific
  activities) as easily as material production.

62
(2, 2, 8)

• Private firms have difficulties to manage
  scientific research, which is probably the most
  important non material production.
• They need to cooperate with other private firms,
  which is a big problem for them(how to share the
  spendings, how to share the results?).
• Private firms dont want to spread out the
  results of the researches they have financed.
• When there is economic crisis, research funds are
  the first to be cut.

63
(2, 2, 9)

• When China was welcoming western firms, Chinese
  authorities were thinking that Chinese firms
  could have the benefit of scientific researches
  made in western firms.
• In fact, western firms try to get the most from
  China and to give the less to China. Transfers of
  technologies have been few

64
(2, 2, 10)

• One of the questions raised, concerning China,
  can therefore be formulated as follows
• Is the global financial market able to bring new
  technologies to China through foreign
  investments?

65
(2, 2, 11)

• Suppose the answer is NO.
• In that case, in my opinion, China has to be in
  favor
• 1) of its own scientific research
• 2) of foreign investments tightly connected with
  agreements on research and transfers of know how.

66
(2, 2, 12)

• Which means that China is not going to want the
  development of global finance and her deeper
  entry in the global financial system.
• Indeed, what interest for her, for firms and for
  Chinese people to do this?

67
(2, 2, 13)

• It seems clear that, presently, Chinese
  authorities are trying to develop their own
  market, and to contribute at the development of
  an Asian market.
• Nanning is probably taking advantage of this
  situation, considering the place of this city in
  the south of China and near countries developping.

68
(2, 2, 14)

• But western interest would like China enter more
  deeply in the Global financial system (to make
  easier the use of her saving by western firms)
  and would like to enter more deeply in China to
  get the benefit of her market without bringing
  new technologies.

69
(2, 2, 14)

• This means that, in the near, or in a not so
  far future, big conflicts or interest can appear
  among the friendly partners of to-day, and first
  of all between USA and China.
• If I am right, it means that present solutions to
  the financial crisis are already weakened by
  these expectable conflicts of interest.

70
(2, 2, 15)

• Under this assumption, China would have the
  double duty to participate actively at the
  solutions of the present crisis and, in the same
  time, to prepare an alternative economic policy.

71
CONCLUSION

• There is a recovery
• But may be it is a weak one because of the still
  remaining big desequilibria (dollar, wages
  compared to profits, differences in power of
  nations).
• One of the most important consequence of this
  financial crisis is that China is now recognised
  as a global partner of the USA.
• But probably for this same reason, high degrees
  of conflicts and contradictions are still there.

72

• Dear Professors, dear students, Dear Professor
  Fan Fan, I thank you very much for your
  attention. I can insure you that it was it was a
  great pleasure for me to talk with you on such an
  important topic.