week 5 financial crisis, capital mobility Flashcards
what types of crises are there?
- banking crisis
- sovereign crisis
- currency crisis
describe banking crisis
when a bank can’t pay and thus can’t meet their obligations. T
- snowball effect; Bank A can’t pay bank B, meaning that bank B does not get the profit it deserves, and bank B can’t pay bank C etc.
- can only be solved by bailing out banks
describe sovereign crisis
when a government can’t meet its debt service obligations. When a government borrows money from the bank to invest in other things like infrastructure, they pay interest over their bonds.
describe currency crisis
when there is a sudden large depreciation of own currency
- dependence on import of basic needs and those things become increasingly expensive
- you owe more than you expected
How can a banking crisis cause sovereign crisis?
if a government decides to bail out banks, its own solvency might be at stake.
- example: Ireland during Eurozone crisis; Irish banks were heavily indebted with other international banks, when those started to collapse, they asked for a bailout from the government. The costs of this was one year of country’s GDP and paid by taxpayers while a lot of state assets were privatized.
how can a sovereign crisis cause a banking crisis?
if a government doesn’t pay banks, banks don’t receive payment it expected which cause banking crisis = doom loop, which can be broken by encouraging banks to lend to foreign governments as well and not just domestic one, to spread the risks
how can a currency crisis cause a sovereign crisis?
currency crisis makes it harder for governments to repay their debts that is denominated in forex.
describe latin america debt crisis?
Latin America had a currency crisis. The creditors were international private banks and the IMF and WB encouraged the wrong things. The trigger was an external cut-off by bank creditors while the debtor countries had removed restrictions on capital flows to public and private agents. They got a high CA deficit because much reliance on imports. The true trigger then was a change in interest rates of US, which made that LA had to repay much more (appreciation of USD).
what habit makes that crisis can occur?
Charles Kindleberger and Hyman Minsky argued;
- suddenly more money is poured into stocks and/or real estate. This drives the value up, which leads to more investors being attracted. Investors become aware of the danger and want to get out before prices go down and investment becomes worthless.
- sudden stop: abrupt reduction of private capital flows into an economy. Market crashes happen when investors deliberately exit a market which leads to a sudden and collective rush to take money away from the market.
- But countries still want capital flow into their economies because it creates savings.
Eurozone crisis, what happened?
- Greece’s macroeconomic imbalances
- net exporters (like Germany) decided to lend some savings abroad, notably to periphery countries (like Greece) because of their high interest rates.
what issues that other countries have in the eurozone crisis?
- ireland: private and public sector.
- portugal: less severe version of Greece
- italy: political conflict and paralysis
- spain: debt used to finance construction instead of debt
what were the explanations for the politicians to help the periphery?
1.competitiveness: inflation in Greece was higher than Germany (not good explanation)
2. moral hazard: existing fear that if Germany decided to help Greece, it would have to do so again in the future
3. populism: prejudice in the core towards Southern Europe help/people
4. constitutional argument: German court was unlikely to interfere with single currency as long as German government maintained parliamentary support.
what are the main arguments of the sceptists and globalists on globalization?
sceptists:
- economic globalization is exaggerated and more an ideology. borders matter and so does home bias.
- world economy more integrated during belle époque (1870-1914), when interest rates, commodity prices and wages were converging
- main tendencies today are regionalization and internationalization, not globalization
- economic globalization has reversed (populism)
globalists:
- borders and distance matter, but less compared to past
- globalization and regionalization are mutually reinforcing, not excluding
- economic convergence is not only indicator of globalization.
what are the logics of globalization (3, Mcgrew)
- technics (technical change and social organization): transformations in communication and infrastructure have led to compression of space and time. they have facilitated liberalization of national economies, leading to globalization
- economics (markets and capitalism);
- orthodox economics: focuses on market dynamics such as comparative advantage and economic convergence. worldwide competition ensures that similar goods and services produces efficiently and at minimum cost.
- radical political economy (inspired marxism): emphasized that capitalism goes along with constant search for new markets, cheap labor and profit. this encourages globalization - politics (ideas, interests etc): western states key to globalization, especially US.
what does the structural theory of economic globalization entail (McGrew)?
causality: thick-causal; deterministic, explains the ‘why’ and ‘how’ of globalization
explanation:
- privileges technical factor: globalization is an inevitable consequence of technological development, which is assumed to be principle dynamic of social change.
- privileges economic factor: in marxist theory, it’s a structural necessary requirement of capitalism to constantly acquire new markets and produce more efficiently.
- privileges politics: hegemonic stability theory; emphasize role of hegemony in creating conditions for open world economy
