Financial Crisis 101:Asia 1997-98

Global 2008-2009

Rene E. Ofreneo, Ph.D.Professor XII

Lesson 1

Crisis due to bubbles bursting 1997-98 Asian financial crisis

-- bubbles in currency, stock, real estate & money markets -- bubbles burst w/ herd-like withdrawal from the markets

by global financial speculators-- financial meltdown became industry meltdown

(Most affected: Thailand, SKorea, Indonesia, Malaysia & RP)-- spread to Russia, Latin America before reaching LTCM (immediately bailed out by US banking industry)

2007-2009 Global financial crisis-- bubbles in US sub-prime housing market, US & UK banking sector,

global commodity market -- bubbles burst w/ collapse of Lehman & Bear Stearns-- crisis spread quickly from a few banks to whole banking sector, from

Wall Street to Main Street, from New York to London, from OECD to developing world

The Subprime Bubble

Freddie Mac

Fannie Mae

Lehman Brothers

Bear Stearns

AIG

Washington Mutual

Wachovia

Morgan Stanley

Goldman Sachs

Citigroup

More Bubbles Surface

Freddie Mac

Fannie Mae

Lehman Brothers

Bear Stearns

AIG

Washington Mutual

Wachovia

Morgan Stanley

Goldman Sachs

Citigroup

PNC Financial Services

New York Life

Insurance

PrudentialFinancial

Metlife Inc

Automakers

State and Local

Governments

Other Corporates

Privately-held Banks

Lesson 2Reason for the crisis:

liberalization w/o regulation, direction 1997-98 Asian financial crisis – preceded by FDI liberalization, FOREX

liberalization, stock market liberalization

-- yet no prudential rules put in place, portfolio investors, e.g., hedge funds like Soros’ fund operated w/ impunity (short-selling speculative ventures, but WB-IMF initially blamed ‘moral hazards’ in SEA)

2007-2009 Global financial crisis -- preceded by slack in corporate and financial regulation & supervision (Alan Greenspan intoned on self-regulating markets, US repeal in ’99 of Glass-Steagal Act provision on separation of banking, insurance & investment activities [1933 law])

– Reckless financialization by big banks w/ connivance by global rating companies (US Congressional hearing disclosed an SMS exchange between two rating-agency executives that said: "We rate every deal. It could be structured by cows and we would (still) rate it."

Example of US Sub-prime business

• Photo of Arizona property mortgaged with Integrity Funding LLC for US$103,000 in 2006

• Borrower: Maureene Halterman, jobless for 13 yrs, junk collector, highly indebted, substance user, US$3,000/mo from welfare

• Loan sold to Wells Fargo, later sold to HSBC Holdings, then bundled with other mortgages and sold with triple A rating to investors.

• Sold for just US$18,000 in Dec. ’08 to neighbors who tore house down.

Strange-sounding financial products:

MBSs, CDOs, LBOs (bottom line: banks packaging & selling loans & speculating

on uncertain present & future values)

Lesson 3Gov’t intervention critical in ending crisis

1997-98 Asian financial crisis – Malaysia defied IMF & Soros: imposed capital controls, fixed ringgit at 3.8 to

US dollar, engaged in gov’t spending-- SKorea, Thailand & Indonesia surrendered to IMF diktat: painful economic

restructuring. Indonesia’s “krisis monetar” led to Suharto’s downfall.-- RP – saved by OFW remittances

Later, stricter financial rules put in in place, e.g., higher capital adequacy

2007-2009 Global financial crisis -- US, UK, OECD, BRIC & other countries reacted by uniformly reviving Keynesian-type stimulus spending.

Arguments: can not afford to let banking sector to collapse, esp. big ones (too big to fail); can not afford to have more unemployment

Lesson 4W/ financial recovery,

hard economic issues easily forgotten

Asian financial crisis, GFC

once financial recovery (esp. of banks) sets in, governments forget to address hard economic issues, specifically:

employment (US growing joblessness [9.8 per cent or 15M] means recovery is “phantom recovery”, Europe’s

unemployment rate about 9 per cent, Japan’s unemployment at post-WWII high, & global job growth generally flat except for a few countries, including China)

putting banking back to its original purpose – linking savers & investors, supporting big/medium/small/family

businesses

building balanced national, regional & global economy

In G20 meeting in London, April 2009, Gordon Brown intoned: “Washington Consensus is dead”.

Yet, G20 hardly altered existing model of neo-liberal, one-size-fits-all liberalization of trade in goods & services & agriculture, deregulation & privatization of economy & investment. Instead, only a G20 Consensus (April/September ’09 meetings) on timid measures such as:

-- monitoring tax havens in Switzerland & elsewhere-- limit to bankers’ pay/bonuses (problem: bailout w/o gov’t control)-- capital build-up for IMF, expanded role for China-- support for huge stimulus packages, now totalling $3T + -- call for WTO’s Doha Round completion (altho GATS-like financial

liberalization responsible for GFC)

There were no calls to reform WB-IMF, review development vision of WTO, APEC, bilats, RTAs (all promoting free trade in a narrow way)

Issues of financialization, speculative investments & global trade & dev’t & income imbalances not addressed or remain unaddressed.

Is Washington Consensus dead?

Lesson 5Deeper explanation for

Asian crisis & GFC missedGlobal & regional contradiction:

Overproduction vs. Underconsumption

Global overproduction, due to global supply chains (esp. in China & Asia) & new technology (ICT, transport, etc.) facilitated by free trade policy (IFIs, WTO, etc.). Rise of Factory Asia.

Yet global underconsumption, due to limited compensation to global mass producers (workers/farmers) – global RACE to the Bottom. Attacks on unionism, CB via EPZs, etc.

& Winners bring global profits to US/UK & invested on speculation, e.g., GE, Ford, Toyota going financial; even China invested $1trillion in US bonds & acquired Blackstone, a PE hedge company. SPECULATIVE FINANCE RULING OVER PRODUCTIVE INDUSTRIAL, AGRICULTURAL & EVEN BANKING CAPITAL & WORK!

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Globalization: finance dominating trade

Figure 1 Finance driven globalization

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Global financial assets Global merchandise tradeGlobal financial assets as a percentage of GDP (right axis) Global merchandise trade as a percentage of GDP (right axis)

US productivity/compensation gap – 1947-2008

ILO 2008-2009 Global Wage Report

1995-2007

global wages grew by 0.75 per cent annuallyvs.

GDP per capita growth of one (1) per cent annually

Moreover, -- share of wages in GDP going down-- share of profits in GDP going up-- gap between top wages and bottom wages widening-- wage gaps between genders remain high-- collective bargaining coverage going down

Highlights of ADB 07 Report on Inequality

-- Inequality growing Asia-wide, w/ China (a job gainer) registering highest growth of inequality after Nepal but ahead of Cambodia

-- Annual salary of top mgmt vs. ordinary staff widening (US$, 2004): Top mgmt Staff Production WorkerIndia 57,699 7,260 3,521Indonesia 56,756 5,443 2,182Thailand 77,557 7,661 3,528

-- RP’s labor share in national income, declining by 0.6 per cent/ year from the 1980s to 1996

------------------------------------In US – CEO pay rising faster vs average wage ($130,000 vs $40,000 in 2000)But US debates on financial sector indicate

average wage of employee in Goldman Sachs -- $777,000top executives 1,000,000top marketing people $10,000,000

Lesson 6Failure to learn from history

Labor rights helped solve Great Depression of 1930s!

1930s – Great Depression gave birth to-- Keynesian economics (gov’t has central role)-- institutional economics (instis matter)-- industrial relations discipline (L-M relations mgmt)-- stronger unions, collective bargaining, social security, etc. established-- strengthening of ILO (supported by the likes of John Rockefeller)

After WWII up to mid-1970s -- Above reforms deepened by Social Democrats/labor govts in Europe & Canada (Social Market Economy model in West Germany).Welfare states w/ strong unions & social security grew & competed w/ EEuropeUS tripartism (big government, industry, unions) led John Dunlop to theorize on IR system.Japan developed nenko, productivity gain sharing, lifetime employment.

Golden decades of Western capitalism – Aggregate Demand = Aggregate Supply

But in 1980s-present…

• Neo-liberal thinking prevailed & became a global Washington Consensus starting w/

privatization programs of Reagan & Thatcherand WB’s “structural adjustment programs” (SAP) for

indebted countries (preaching privatization, economic deregulation and trade liberalization)

Neo-liberalism spread in labor economicsProtective labor institutions seen by neo-liberal economists as “rigidities” in the labor market

In practice, neo-liberalism became a Global race to the bottom & gave rise to Factory Asia

Neo-liberal globalization meanscrisis of IR, unionism & employment

Erosion of post-WWar II Social Contract in OECD

Erosion of tripartism, w/ unionism steadily marginalized everywhere, labor market flexibility becoming the rule everywhere,

outsourcing (varied levels) subverting traditional concept of job security

Crisis of Industrial Relations

HRM overshadowing IR

In Asia: good jobs for a few, but many excluded (informals constitute 65 per cent of labor force!, large number of “informalized” formals)

Lesson 7 Challenge of transforming

Race 2 D Bottom to a Race 2 D Top

Character of globalization need to be changed, social & labor dimension need to be strengthened. Global architecture of economy need to be revisioned & changed.

ILO’s DWAgenda – good starting point for a debate:-- core labor standards-- job creation for men & women-- social dialogue-- social protection for all

However, ILO’s campaign clear only on core labor standards – how to address job creation, social dialogue & social protection unclear. G20 issues + rhetorics on above w/o any clear measures.

Policy Coherence a Must

• Coherence in economic, social and labor policies

Efforts to cast aside one-size-fits-all framework and mindless proliferation of bilaterals and regionals

Review of world’s experience with trade liberalization, w/ special focus on winners and losers

Revival of SDT principle in global trade talks (calibrating trade policies w/ development priorities)

An end to global/regional race to the bottom. Integrate w/ trade talks 6 guidelines identified by the 1999 HDR -- ethics, equity, inclusion, human security, sustainability, and development. And ADD: Climate Change!

Lesson 8 Social Protection for All

•

Asian crisis, GFC -- Shows many countries have no or underdeveloped safety nets, esp. for the displaced by economic crisis or restructuring

Yet, history also shows that No country is too poor not to be able to provide social protection for all (experience of post-war Germany, initiatives from India today).

ILO study shows less than 6 per cent of GDP is need to finance comprehensive social security, much less than country spending on military/defence. Global social security floor is a must & attainable.

Lesson 9Unions must have a voice in Development/Policy Forums

•

At 97-98 Asian crisis & GFC today, unions hardly consulted. G20 no inputs from the TU movement.This explains why labor and social dimension not addressed in these meetings.

Social Dialogue, to be meaningful, should also be sustained, continuous & substantial(not staged for shows or done occasionally like the institutionalization of CB & L-M Dialogue at Firm Level)

Eventually, unions should have a seat in the table – ASEAN, EAC, APEC, WTO, WB-IMF, ADB!

Lesson 10Unionism for All

•

To be an effective voice of society & roll back race to the bottom (national, regional & global), unions should become strong and united . This is the only way.

One way of forging unity and developing strength is

to renew trade unionism

– as organization of regular & non-regular, formal & informal-- as organization of women, youth-- as organization with shared values, shared sense of community & humanity, shared vision of the future-- as true organization of people in solidarity w/ one another