Globalization & Financial Crises Flashcards
Benefits of Globalization (4)
- Increase in overall wealth
- Decrease in overall poverty
- Ease of travel, communication, info, exchange of cultures
- International democratization
Drawbacks of Globalization (6)
- Growing Inequalities
- Loss of Sovereignty
- Neocolonialism
- Financial Crises
- Backlash against/within west
- Environmental impact
Definition of Globalization
The development of social, cultural, technological, or economic networks that transcend national boundaries; globalization
Interdependence
Many companies are economically dependent upon each other.
- Each nation and their economies are dependent on other nations for products and goods.
(Ex :United States today depends on China to provide it with many goods)
The Bretton Woods System (3)
- IMF - economic stability by regulating international monetary system based on convertible currencies
- World Bank - development bank: basic needs of developing countries
- GATT/WTO - liberalization of trade (reduce barriers to trade)
John Maynard Keynes versus Frederich Hayek
In 1929, there was the Wall St. Crash and Depression and the Global Economic System Crashes
There were Two Theories on the solution
John Maynard Keynes: The state
Frederich Hayek: The market
GATT/WTO
GATT : An international multilateral treaty, signed by 23 nations to promote international trade and remove cross-country trade barriers.
WTO : A global body, which superseded GATT and deals with the rules of international trade between member nations
Dealt with Free Trade in Goods and Services
- Goods were traded virtually tariff free (notable
exceptions
International Monetary Fund (IMF) (3)
United Nations (UN) specialized agency, founded at the Bretton Woods Conference in 1944 to
- secure international monetary cooperation
- to stabilize currency exchange rates
- to expand international liquidity (access to hard currencies)
World Bank
Founded in 1944, the International Bank for Reconstruction and Development (soon called the World Bank) has expanded to a closely associated group of five development institutions.
- Originally, its loans helped rebuild countries devastated by World War II
Capital Market Liberalization (7)
Last phase of globalization (1990’s-2000’s)
Beyond free trade in goods and services
Factors leading to liberalization:
- Baby boom Generation
- Power of Market Managed Funds: Trillions $
- Growth of Different Funds (RRSP’s)
- Search for new investment possibilities
- Emerging Markets (1990’s)
- IT Bubble (2000’s)
- Sub-prime Mortgages (2000’s)
Globalism
Nye and Keohane
-A state of the world involving networks of interdependence at multi continental distances, with linkages occurring through flows and influences of capital and goods, information and ideas, people and forces, environmental and biological substances.
A type of globalism with two special characteristics:
- Refers to the networks of connections (multiple relationships) rather than single linkages
- Must include multi continental distances NOT regional networks
Complex Interdependence & Concepts (3)
The idea that states and their fortunes are inextricably tied together put forth by nye and keohane
Concept requires hypothetical world with 3 characteristics:
- Multiple channels between societies with multiple actors
- Multiple issues with no clear hierarchy
- Irrelevance of the threat or use of force among states linked by complex interdependence = assumes high levels of economic, environmental, and social globalism but low military globalism
Decline of military force as a policy tool and the increase in economic and other forms of interdependence should increase the probability of cooperation among states
Toxic Assets
A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market.
- Cannot be sold at a price satisfactory to the holder
Subprime Mortgage
Little or no regulation on mortgages
- No down payment, back loaded (initial low interest) & long amortization
- Eventually large numbers of defaults
International Credit Freeze (2008)
Began after the subprime meltdown of late 2007.
High-risk loans on banks’ balance sheets became almost worthless, and as banks were forced to take write-downs on toxic assets
For much of the year, financial institutions were in a quandary. They had difficulty acquiring loans and at the same time resisted issuing loans. The credit crunch made everything difficult for businesses and borrowers.
- Then, after the credit situation started to improve the Lehman Brothers’ epic collapse on Sept. 15 marked a stunning turning point in the financial markets
Moral Hazard vs. Systemic Risk
Moral Hazard : Arises when people behave recklessly because they know they will be saved if things go wrong (someone else will take the fall instead of them)
Systemic Risk The likelihood of damage being done to the health of the system as a whole
Liberalization Benefits (2)
- Capitalize new economies,
2. Open up Markets to West
Mercantilism
Theory of international political economy based on balance-of-trade principles ( they obtains large amounts of wealth -> government to promote exports and restrict imports)
Contains nationalist, imperialist and realist elements
Opposes the ideology of the free market, promotes protectionist measures
Critical IPE
Emphasizes the class struggle, exploitation, and imperialism that plays out in International Political Economy. Questions how the global economy came into being what interests support/supported by it and how might be transformed.
Asian Financial Crisis
1980’s Capital Market Liberalization in SE Asia
1990’s Enormous Increase in foreign investment (debt overload)
1997-98, Asian countries with collapsing economies creating a ‘contagion’ of weak economies due to interconnectedness of systems, once again creating the ‘moral hazard’ and systematic risk problem
- Thai economy in free fall and the US refuses bail out
Spreading Crisis (Contagion), interconnected
International Credit Crisis (4)
2000-2008:
- Decreased Regulation on US Financial Institutions
- building up of ‘Toxic Assets’ (subprime mortgages)
- Mortgage securities: Bundled together by investment banks and sold as securities
- Credit-Default Swaps: Investment banks provide insurance on bonds in exchange for premium
Ben Bernanke
Chair Federal Reserve Board
-Economist -
- Researched the Depression
Believed that the Systematic Risk was the key concern
Henry Paulson
-Treasury Secretary
-Republican
Believed that the Moral Hazard was a key concern
Liberalization Drawbacks (4)
- Risk of Financial Crisis
- Too much debt
- Market unstable or weak
- Economic and social costs
Phase 1 (Bear Stearns)
- Massive Investment in Mortgage Equity
- Investment in Credit-Default swaps
- March 2008; loss in confidence
- Shares drop from $171-$60
- Appeal for cash to Federal Reserve Board
- FRB guarantees loan but at $2 share
Bear Stearns survives
Systemic Risk Wins
Phase 2 (Lehman Brothers)
- Invested in Mortgage Market
- Summer 2008: price share falls
- Sept. 2008: Share value plunges & Run on the bank (Lehman brothers files for bankruptcy)
Moral Hazard Wins
Phase 3 (AIG)
- Largest Insurance Company in world (trillions of dollars in credit-default swaps)
- Looking for money to cover debts, fear for whole financial system
- US FRB bails out AIG: 80% of shares: $85 billion
Systematic Risk now real
Phase 4; (Bail out whole Financial System)
First stage: Congress (buy toxic assets)
- Paulson and Bernanke call congress together, full scale bail out of system $700 billion –> stock market crashes
Second stage: Treasury Board (Capital Injection) : Credit Crisis Goes Global
- Treasury buys billions of $ of toxic assets from 9
banks
Francis Fukuyama
Author of “End of History and the Last Man”
Thomas Friedman
Author of The Flat Earth, 2005
Creator of Globalization theory that : “Globalization is good and all have benefited”
David Korten
Author of When Corporations Rule the World, 1995.
Creator of Globalization theory that : “Globalization is generally bad and has caused…”
- Poverty
- Social disintegration
- Environmental Destruction
Kenichi Ohmae
Author of The End of the Nation State: The Rise of
Regional Economics 1996
Creator of Globalization theory that : “Globalization is the end of the nation state”
Joseph Stiglitz
Author of Globalization and Its Discontents (2003 & 2018)
Creator of Globalization theory that : “Globalization benefits some more than others”
