Lecture 4 - Disorganised Capital Flashcards
When was the breakdown of Keynesianism
1960-1970s
Following the breakdown of Keynesianism what rose
Enabled the rise of new political-economic ‘ideologies’
Heralded in the most recent phases of the world economy
3 triggers that led to the collapse of organised capitalism
- Eurocurrency market
- Collapse of BWS
- Oil price shock
Who talked about the 3 triggers that led to the collapse of organised capitalism
Held et al 1999
What is the eurocurrency market
USSR depositing money in Europe
EU banks realised they could lend this money
This boomed
US companies invested all their earnings in these banks
Strain on exchange market systems
What is the collapse of the BWS
- Strained by emergence of EC markets
- $ speculation grew due to declining confidence
- Domestic inflation fuelled this
What was the oil price shock
- OPEC increased the price of oil by 400%
- Huge international transfers of funds followed
- Increased liquidity of banks
What did the boom lead to
Increased speculative trading of US dollar in money market – declining confidence in dollar (inflation and growing trade deficit).
^ This is problematic if every currency is attached to it
Pressures on global financial system and institutions following 2nd world war
What were the 5 pressures on BWS
Pressure 1 – Eurodollar boom
Pressure 2 – Increasing speculative trading of the dollar due to…
Pressure 3 – Declining confidence in the value of the dollar because of…
Pressure 4 – High rates of inflation in the USA and…
Pressure 5 – Growing trade deficit
What happened following the collapse of BWS
- Nixon removed the USA from Bretton-Woods
- New floating exchange rates globally
- Increased competition
- Value of currencies shaped by the invisible hand of ‘the market’
- All major currencies devalued
- Ushered in a new era of deregulation…
What happened in the oil crisis
Main problem = oil at the time priced in dollars (following the devaluation of other currencies = big problem = weakening in confidence = uncertainty in oil market)
Who set the price of oil
OPEC
Impacts of the recession on the USA
- Crisis in production (overseas [NIC] competition)
- Stock market crash
- High inflation
- Rising unemployment
Impacts of the recession on the UK
- The ‘3-Day Week’ – oil rationing (1973)
- Inflation reached 20%
- Widespread strikes by miners
- Culminated in the Winter of Discontent in 1978
What happened in the 1970s across the country
Riots
People wanted to liberalised and change things
What had happened by the mid 1970s
Global financial system had collapsed
A lot of economic problems / issues
Mass production couldn’t work efficiently
Becoming more and more about the consumer and their needs
Markets saturated with low quality, poor choice products. – but consumers wanted more
Not enough money to run the country
Global competition
BWS collapsed
When was unemployment high in the UK
80s - still felling the ripples of crisis from 1973 (similar patterns to the USA)
What % of employment was manufacturing in the UK in 2011
5%
What did Nation States still try and act like
Their economies were organised and managed
Who emerged to erode the organisation autonomy of the nation state
Thatcher and Reagan (both in 1970-1990s)
When did Thatcher come into place
After peak crisis period happened and had to sort things out
(same with Reagan)
Why did it seem like there was no alternative
Leading industrial nations were in a situation of CRISIS
Change was therefore seen not as merely DESIRABLE but NECESSARY
What approach did Thatcher and Reagan promote
Neo-liberalism
The state and disorganised capitalism
The state has less power as production, consumption, employment and welfare are reliant on the markets to (re) distribute wealth and stimulate development
Where did neoliberalism emerge
Emerged in South America in the 1980s to describe Augusto Pinochet’s economic reforms.
What is neoliberalism described as
‘Market fundamentalism’ – no state control in anything, just the market
What are the three legs to neoliberalism
- Liberalise
- Deregulate
- Privatise
What is privatisation
Selling off (or giving away) of state owned assets to private companies
Example of privatisation
E.g. post office, British steel and coal. They were inefficient in market terms so had to be gone from the state - market meant to make them more efficient.
List of key theorists
- Adam Smith
- David Ricardo
- Hayek and Friedman
Who as Adam Smith as a theorist
Social prosperity as a result of the market being self-regulating
Who was Ricardo as a theorist
Encouraged free movement and trade (increase volume of trade and spatial extent of it)
Who was Hayek and Friedman
Translated old 18th century ideas into a modern context; used by policy makers and government to bring down Keynesian system of managed capitalism
Link between neoliberalism and globalisation
Often seen as one and the same thing
Liberalism and global markets self perpetuate and reinforce each other
(but they aren’t the same thing)
What kind of strategy is neoliberalism seen as
A hegemonic strategy
Define hegemonic
The one thing every national government will engage in as it places responsibility away from the state and onto the market (it is now everywhere globally – one of the most important global economic policies)
10 characteristics of neoliberalism
- Free trade
- Privatisation
- Deregulate businesses + finance
- Decrease corporation tax
- Encourage FDI
- Trade unions
- Decrease inflation
- Property rights
- Expand exports
What did Thatcher think the main barrier was
Organised capitalism
Situation in 2007
-Leading industrial nations (e.g. the USA and UK) were increasingly becoming reliant on credit (e.g. mortgages)
-The USA was flooded with money following Russian and East Asian crises of the late 1990s
-Housing construction boomed, as did prices, as did the amount of money being lent as mortgages
-Thus, a bubble formed in the USA…
…as is usual, bubbles cannot keep growing
How is debt secured
- Individual mortgage debts are bundled together
- They are then assigned a ‘riskiness’
- Sold to institutional investors
- Often banks, investment funds or other institutions
- Interest on debt is paid to investors
Problems of securing debt
- Overextension can happen
- System not resilient to shocks
- System is not transparent
- Leveraging of debt is not transparent
Least risky debt
AAA debt
Most risky debt
BB
When does the debt system fail
When people stop paying money back there are problems – system fails
What was underpinning the extension of debt
- House prices rise
- Lenders don’t do as many checks
- Then people started defaulting on mortgages, house prices dropped as well meaning investors in MBSs lost vast amounts of money
What does it mean when lenders cant do as many checks
Many people with mortgages could never realistically repay them
Who were people who cant repay debt popular to
Investors because of their high risk
What happened before housing prices rose
House price boom forced people to take out bigger mortgages.
Therefore a lot of banks got rid of credit scores – meant people who took out mortgages could never realistically repay them. Investors liked the high risk of these.
House price slump as a result, people who invested lost a lot of money. Banks ran out of money reserves – couldn’t lend out any more money. Credit dried up.
Consequences of the recession
Specialised mortgage lenders and banks were left holding loans they could not sell.
This inhibited their ability to lend (so they didn’t)
Hence the term ‘credit crunch’ and ‘liquidity freeze’
The capillaric structure of the global financial system spread the crisis globally
Global impacts of the recession
-Lack of confidence in banks and FIs by investors
-Lack of credit availability
-Lack of capital holdings/asset to back the loans that had been taken out
-
How did national banks become involved in the recession
National banks as lenders of last resort bailed out failing private banks
Bailout fund for recession
ECB and the Fed (an other CBs) announced a bailout fund of $2.5trillion
How did they survive the recession
Printing of new money – into privately owned and run banks
Only survived by the bailout of money from the state – which is what they were trying to avoid in the first place
What happened after the recession - did neoliberalism come back?
The long-termism of the ‘organised economy’ had disintegrated entirely
What did they have to do to banks following the recession
Had to separate banks - between investment banking and consumer banking – to make sure this doesn’t all happen again.
Currently in the UK - debt
Still a high level of consumer debt in the UK – could happen again possibly
Currently in the UK - what is the next possible crisis
Economic uncertainty, big organizations and investors can panic – move staff into offices into mainland Europe away from London (London may not have access to European market) e.g. Frankfurt and Paris – so they continue to have a sort of access to these markets.
Currently in the UK - Brexit and manufacturing
Uncertainty in manufacturing – need to get parts from all over (inefficiency there is now large tariffs – people may remove their investments from manufacturing)
Currently in the UK - pound
The Pound is trading at it’s lowest level for years
- Great for export
- Not so great for consumers
