Papers – The 2008 Economic Crisis Ten Years On

Pension funds: key issues after the global crisis

weaadmin — Sat, 13 Oct 2018 15:43:25 +0000

Pension funds have been playing and will play an outstanding role in the global saving and investment process. However, in spite of the pension funds’ power to centralize huge amount of “savings from workers”, workers do not seem to have a strong defense against the contemporary worldwide trends. By analyzing the impacts of the global scenario on the savings of workers and the future flows of workers’ income, this paper aims to favor a reflection on the pension funds ́ challenges after the 2008 global crisis. Unlike the main discussions on the dynamics of pension funds – that considers short-term market performance – our perspective privileges a long-run perspective. The cutting questions proposed are: How could the low interest rate and austerity policies affect the evolution of the workers ́ savings? How could the pension funds ́ allocation strategies give support to the new short-term business practices of private equity funds? How could the informal economy and youth unemployment affect the future pension funds ́ inflows? The paper addresses that it is crucial not only to re-shape the pension funds ́ regulation in terms of asset allocation but also to re-think public polices related to job creation. Besides, it is urgent to consider pension funds as a public good to create new conventions and institutional set ups that could cope with solutions focused on sustainable livelihoods.

Impact of Financialization: View from India

weaadmin — Sat, 13 Oct 2018 15:41:42 +0000

The 2007-08 crisis happened in spite of the theoretical knowledge and understanding of events that could potentially lead to such a crisis. Financialization, the trend arguably behind the crisis, has been prevalent in the advanced economies since the 1970s. Many policies, activities and players related to financialization have led to the crisis. These include accommodating monetary policies by various governments, looser lending norms practiced by international banks, shifts in corporate financing, excessive borrowings by virtually all segments of society, debt fuelled consumption, financial engineering, investments in complex financial market products, regulatory lapses, etc., and they all have contributed to the crisis in varying degrees.

India was unaffected in the 1929 crisis as it was a colony then, relatively unconnected to the world. But not so in 2007-08 crisis, by when it was a part of the globalized world. Like the financialization story, the post-independence Indian economic growth story can be categorised broadly into two phases, one prior to 1980, and the one after. In the early decades, India’s financial structure was dominated by debt, and government controlled most of the corporate equity capital. The price at which new public equity offers could be made by private firms had to be approved by the government. Blue chip companies therefore preferred raising debt rather than diluting their equity stake at prices below their intrinsic value. Commercial Banks, which had an upper hand in the Indian financial system, were not allowed to take equity stake in private companies. The largest 14 Indian banks were nationalised in 1969, and as a consequence, remaining banks decided not to grow big, for fear of nationalization. A combination of all these factors led to a slower growth of private corporate sector in India and allowed the state to have a commanding role in the economy and its resource allocation process.

India’s major set of financial reforms introduced in 1991, were triggered by a Balance of Payments (BOP) crisis in the early 1990s. These set of reforms, widely seen as a combination of liberalization, globalization and privatization, are also perceived as a shift away from import substitution to export promotion. The financial reforms created a whole new set of financial institutions in the private sector in India.

Going forward, India has few lessons to learn from the crisis and from the emerging, acceptable models of financialization. The article tries to capture some of these.

General Comments

mariaalejandramadi — Sat, 13 Oct 2018 15:30:05 +0000

Please leave comments here on groups of papers, the organisation of the sessions, or on the conference as a whole.

The Transformational Role of the Great Recession for Economic Governance

mariaalejandramadi — Sat, 13 Oct 2018 15:28:13 +0000

The financial crisis of 2008 and its aftermath in the form of the Great Recession have precipitated the need for redesigning economic governance. The severity of the economic governance fault lines that were created by the Great Recession are comparable to those of the Great Depression of the 1930s. Both events underlined the ineffectiveness of the scope and substance of economic policy to address the contemporary economic challenges.

The operational definition of economic governance that will be used in this paper encompasses the institutional economic governance architecture, the machinery of economic governance and the scope and substance of economic policy.

This paper provides an anatomy of the financial crisis of 2008 and describes the fault lines in economic governance that appeared subsequent to the Great Recession. It concludes with a modern template for economic governance that is congruent with the new global economy of the 21st century.

Institutional challenges and alternatives: Revision of fiscal rules in the EU

mariaalejandramadi — Sat, 13 Oct 2018 15:26:03 +0000

Fiscal policy in the EU crisis management has been given an overly restrictive role. Even the fact that the ECB has, at its own discretion, launched a QE policy – to notice after the fiscal tightening – has not had the expected impact on investment activity or inflation rate in Europe. Similarly, public investment has not been used sufficiently as an anti-cyclic instrument. Financial policy must be given a greater role in EU cooperation.

Alternative institutional frameworks at national and supranational level

mariaalejandramadi — Sat, 13 Oct 2018 15:25:11 +0000

National economies of different countries faced a set of new challenges due to global crisis. Such a significant financial problem in history like the one in 2008 occurred only in the case of Great Depression in1930. Back then President Franklin D. Roosevelt and his professional experts developed “New Deal”. It helped frozen financial markets in the USA get going. The main point of the scheme was to carry out Works Progress Administration by state orders. People managed to earn and spend money. Financial market slowly started operating again, money gained its former purchasing power. The problem is that the above mentioned system worked properly only in case of a closed economy, like the one in the USA in those years. Since then 90 years passed by, and the world has changed. We are living in the era of globalization. National economies are not separated but interoperable. Any firm can move its production, logistics, etc. into other countries. This is the reason why successful companies often establish subsidiary companies and creates jobs in other countries. It creates two problems: i) It generates tension in the voters of the motherland of the company, voters may drift apart from the political parties, ii) The system (i.e. the budget of the motherland) may not be financed. Taxpayers pour their money into a bottomless pit. Profit of the companies flow into other countries, and strengthens their economy.

To find a solution, allocation of financial assets will appear as an activity in the new economic structure. It is an important task to regain trust of the investors. Investors want to reach security with the biggest possible profit. I believe that the investor of the 3rd millennium prefers security to quick profit, as this security will be the token of future profit. In the language of the stock-market: The stock dog has to stay next to the legs of the keeper. It cannot run forward, cannot overtake the keeper. Indeed, international financial markets, even if temporarily, must be taken under a common regulation, meaning financial markets must be closed. By regulatory factors money flow can and must be controlled.

The European Monetary Union failed because of misunderstood macroeconomics

mariaalejandramadi — Sat, 13 Oct 2018 15:22:24 +0000

The European Monetary Union and by that the Euro has failed because of not fulfilled expectations related to economic growth and prosperity for the participating countries. The glittering promises were expressed when the idea of a common European currency was launched back in 1989 and repeated frequently until the (misunderstood) macroeconomic realities hit back from 2008 and onwards.Even before 2008 it became a constant battle to counterbalance some of the negative consequences of a prematurely introduced common currency. A process, which has absorbed a large part of the time and decision power of the European council ever since the euro was made real. Instead of enforcing an integrative process, the increasing economic diversion have caused disruption inside euro-countries and tensions among the EU-member states. The macroeconomic performance has been within the euro-zone significantly below the non-euro countries with regard to unemployment, growth and public debt. On top of that, there has been ever since 2010 an ongoing and increasingly intense political debate (outside the corridors of Brussel, Berlin and Paris) about the scraping of the common currency and by that to break the downward spiral of low growth and high unemployment. This paper will conclude with a strong recommendation that monetary and fiscal policies should be coordinated and directed towards a reduction of the private sector structural excess savings and hereby, to avoid low growth and persistently high unemployment. As long as the private sector is not self-adjusting to full employment, the public sector budget should mirror the private structural surplus. Unfortunately, a policy which the fiscal compact is preventing.

The impact of excess capacity over the investment falloff

mariaalejandramadi — Sat, 13 Oct 2018 15:21:22 +0000

A widespread decline in the rate of capacity utilization in the US manufacturing industry during the last decades is documented, which parallels a worsening trend of gross capital formation. Several exploratory exercises are conducted to investigate whether utilization rates were actually related to the investment performance during 1952-2014. Vector auto-regressive estimates imply a non-trivial quantitative relationship between utilization rates and investment, which accounts for a decline equivalent to more than 30% of average investment decline over the whole period considered. Finally, firm-level data is used to control for other investment determinants. The relationship remains statistically and economically relevant. In addition, a relationship between past accumulated utilization variation and current investment is found, suggesting that excess capacity might be a relevant force behind current investment weakness.

Marx on Credit, Agency Problems, and Crises

mariaalejandramadi — Sat, 13 Oct 2018 15:20:01 +0000

As a journalist in the 1850s, Marx studied and wrote on recessions associated with financial crises, focusing on the panics of 1847 and 1857. In later work, Marx pursed the topic. First, in the three volumes of Capital and part II of Theories of Surplus Value, Marx used his circuits to analyze the role of credit in the accumulation process and crisis. Then in part V of volume 3 of Capital, Marx added a novel approach to analyzing credit crises. Marx argued that a banking system “subordinated” to capital accumulation would produce more robust, though fragile, expansions, by exacerbating the problems of “over-speculation” and “credit swindles.” The reasons for the “purest and most colossal form of gambling and swindling” found in a modern credit system were the agency problems between rentiers and bankers, and bankers and capitalists. These agency problems arose because a “large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner.” In the recession phase of the cycle, these agency problems can erupt, causing runs on the banking system by panicked rentiers, credit stops by nervous bankers, and a scramble for liquidity by those with debts coming due.

The Economic Imbalances of our Time and the Perspective of Circular Economy

mariaalejandramadi — Sat, 13 Oct 2018 15:18:14 +0000

The main aim of this work is to make a step in identifying the theories more adequate to understand the economic imbalances of our time, and more conducive to realise the objectives of a “circular economy”. These objectives can be articulated in progress (scientific and social), sustainability and social justice (PSS).
One reason for this exercise lies in the circumstance that there seems to be little synergic employ of the theories that can help explain the imbalances of our economies and the possible ways to overcome them. This is a typical problem of economics and other social sciences, which often tend to be rather fragmented.
In this regard, we have tried to build a stronger bridge between environmental economics, and a number of heterodox theories of economic imbalances that can make headway to devise a more effective and coordinated policy strategy. In particular, we employ these theories for analysing how to render more and more compatible the objectives of (i) full employment (however defined) and decent work; (ii) sustainable use of resources in all its forms; (iii) substantial reduction of economic and social inequalities; (iv) human, scientific and technological progress.

In the first chapter we analyse the systemic tendency of effective demand to lag behind the supply of full employment. The analysis of these aspects, we believe, is pivotal also for a better integration between environmental and macroeconomic objectives.

In the second chapter we address the main strands of environmental economics. We consider in particular the perspective of bioeconomy, the theories of “commons” and of “appropriate technologies”, and the various forms of ecosocialism, with an eye to their policy implications.

In the third chapter we appraise the contribution of institutional economics to the clarification of (i) the institutional and evolutionary nature of economic action; (ii) the need of an interdisciplinary approach for a better understanding of these phenomena; (iii) the potential of democratic planning for overcoming the failures of the state and of the market; and (iv) the role of social valuing for promoting an effective policy action.

In the final part we consider how these theories can jointly be employed for addressing in theory and policy action the objectives indicate above.
We underscore that such theories, however different in many respects, present notable complementarities, in the sense that the aspects more overlooked by some are more completely considered by the others.
As observed by the famous sociologist Karl Mannheim, a landscape can be seen only from a determined perspective and without perspective there is no landscape. Hence, observing a landscape (or phenomenon) from different angles (or disciplines) can help to acquire a much clearer insight into the features of the various perspectives. Hence these theories, by helping identify the manifold aspects of economic system, can make headway towards a more effective policy coordination. This would involve a horizontal level, between policies: in particular macroeconomic (fiscal and monetary) and structural (in particular, environmental, industrial, research and innovation, social). And a vertical level, between institutions (supranational, national, sub-national, local).
Such coordination would be greatly fostered by a process of social valuation involving all the considered dimensions of policy action.