Globalization and Globalization and Financial CrisisFinancial Crisis

Impacts on Scale, Distribution, Impacts on Scale, Distribution, Efficiency and DemocracyEfficiency and Democracy

US Current account balanceUS Current account balance

Fixed and Floating Exchange Fixed and Floating Exchange RatesRates

Quantitative easingQuantitative easing FloatingFloating

Impact on exports?Impact on exports? FixedFixed

LiberalizationLiberalization

Theories about Financial Theories about Financial StabilityStability

EMHEMH FIHFIH

HedgeHedge SpeculativeSpeculative PonziPonzi

EMH or FIH?EMH or FIH?

How long is a stock held?How long is a stock held?

1970s and before1970s and before NowNow

High speed tradingHigh speed trading

Understanding the Risks of Understanding the Risks of Currency Speculation Currency Speculation (investorguide.com)(investorguide.com)

Currency speculation involves buying, Currency speculation involves buying, selling and holding currencies in order to selling and holding currencies in order to make a profit from favorable fluctuations make a profit from favorable fluctuations in exchange rates…. It is estimated that in exchange rates…. It is estimated that 95% of forex participants are currency 95% of forex participants are currency speculators, with players that include speculators, with players that include large multinationals, investment banks, large multinationals, investment banks, hedge funds and professional traders.hedge funds and professional traders.

$5 trillion per day$5 trillion per day

Financial LiberalizationFinancial Liberalization

What is it?What is it? Why did we pursue it?Why did we pursue it?

What is current status?What is current status?

Asian flu (1997)Asian flu (1997) Real estate bubbleReal estate bubble Financial speculation, Soros Financial speculation, Soros

and devaluationand devaluation Impacts of devaluation on Impacts of devaluation on

debtdebt Impacts on trade Impacts on trade

competitorscompetitors IMF role: interest rates, IMF role: interest rates,

taxes, government taxes, government spending, bailoutsspending, bailouts

Malaysia’s responseMalaysia’s response

Current CrisisCurrent Crisis

DeregulationDeregulation Increasingly concentrated wealthIncreasingly concentrated wealth Obscure financial instrumentsObscure financial instruments Biophysical limitsBiophysical limits Positive feedback loopsPositive feedback loops Profound failure of economic theoryProfound failure of economic theory

Contributing Factors to Contributing Factors to Financial CrisisFinancial Crisis

LeverageLeverage Moral HazardMoral Hazard Adverse selectionAdverse selection

Contributing Factors to Contributing Factors to Financial CrisisFinancial Crisis

SpeculationSpeculation Inelastic supplyInelastic supply Inelastic demandInelastic demand Concentrated wealthConcentrated wealth Full and unequal planetFull and unequal planet

‘‘Innovative’ financial instrumentsInnovative’ financial instruments Credit derivatives ($1.14 quadrillionCredit derivatives ($1.14 quadrillion$700 $700

trillion)trillion) Credit default swaps (naked) (~$25 trillion?)Credit default swaps (naked) (~$25 trillion?)

Mortgage backed securitiesMortgage backed securities Collateralized debt (mortgage) obligationsCollateralized debt (mortgage) obligations

Systemic risk and correlationSystemic risk and correlation

EE ExplanationsEE Explanations

Biophysical limitsBiophysical limits OilOil FoodFood

Positive and negative pigsPositive and negative pigs ““you cannot permanently pit an absurd you cannot permanently pit an absurd

human convention, such as the human convention, such as the spontaneous increment of debt [compound spontaneous increment of debt [compound interest] against the natural law of the interest] against the natural law of the spontaneous decrement of wealth spontaneous decrement of wealth [entropy]”[entropy]”

Energy and WorkEnergy and Work

Positive Feedback Loops and Positive Feedback Loops and Self-fulfilling PropheciesSelf-fulfilling Prophecies

Speculative bubbles and positive Speculative bubbles and positive feedback loopsfeedback loops

Pro-cyclical monetary systemsPro-cyclical monetary systems Is the global economy a complex Is the global economy a complex

system or equilibrium systme?system or equilibrium systme? Liberalization increases likelihood Liberalization increases likelihood

of FIHof FIH

Finance and DistributionFinance and Distribution

Concentrated wealth and speculationConcentrated wealth and speculation Too big to failToo big to fail Too big to jailToo big to jail Growth rates greater than economic Growth rates greater than economic

growthgrowth

Policy OptionsPolicy Options

Tobin TaxTobin Tax Speculation taxSpeculation tax Restricting capital flowsRestricting capital flows Forcing banks to hold more reservesForcing banks to hold more reserves Reducing leverageReducing leverage Higher marginal tax brackets and Higher marginal tax brackets and

more equitable distributionmore equitable distribution Problems with national approachesProblems with national approaches