TOP10 Financial Crisis

Main trigger Real Estates crisis in 2007 due to

• liquidity surplus and low interest rates on the financial market

  • balance of payment deficit due to u.a. 9/11= for a stable exchange rate, America had to take foreign debt ro rebalance its deficit mainly from China

  • + Expansive monetary policy = increases money amonut = decreasing interest rate

  • = high liquidity in the capital market + low Fed interst rates = high demand for investments facilities

  • failure of monetary politics (setting wrong stimuli)

• Growing demand and New Business Models on the Real Estate Market

  • Increased demand were met through investment in common facilities, later in technology AND

    • Recognition of real estates as a safe + margin promising investment facility

      • Banks extended loans for real estate

    • political motivation especially for those at the bottom of the pyramide

      • low-threshold access

      • overestimating prices of Real Estates

      • Real Estate boom

    • Due to the high-liquidity, opportunities of high-margin financial products decreased = New business modelle: 'securitized' pools of loans = subprime packages= traded on the exchange in high amount (due to high ratings)

• Failure in the banking system

  • Managers ignored risks as their bonuses were linked to short-term returns

  • credit worthiness of consumer less important (credit lending with variable interest rates) subprime + credit lending included variable interest rates

  • “New business modell”

• Rating Agencies and Regulatory System

  • high demand for new financial products (subprime packages) rating firms (often linked to the developer (bank) of those products) were motivated to top rate (AAA) those facilities to illustrate them as safe products

    • complexity due to cumulation overcharged rating agencies and made it kind of impossible to expose bad “credits”

    • “fair value” accounting stresses that changes in the economic track have to be reported immediately in the books

    • Banks were selling those investments to ship a round a correction downwards in their books

      • As many institutions sold those inestments the prices sank

• Economic stabilisation -> Fed increased the interest rate

  • Variable interest rates: Lender couldn’t pay the increased loan claims

    • sold there houses but on decreased prices due to the massive selling of houses so they weren’t able to refinance their credit

  • Banks got those downgraded houses back

    • increased supply of houses while decreased demand = decreased prices of Real Estates

    • + subprime packages + high rated = sold a lot of domestic and foreign banks, insurances and other FIs BUT also decreased in deman due to decreased margins

    • banks, insurances, FIs lost their liquidity + banks didn’t trust each other anymore so they didn’t lend each other money

  • banks lost their liquidity: Lehmann Brothers as the first bank that were insolvent

  • bank runs as the consumer recognized that the bank cannot serve all deposits!

• liquidity surplus and low interest rates on the financial market

• Leistungsbilanzdefizit wurde durch ausl. Kreditaufnahme geregelt, um die Bankreserven auszugleichen um den Wechselkurs stabil zu halten

• Expansive Geldpolitik = Erhöhung der Geldmenge

• Sinkender Leitzins der FED

• Growing demand and New Business Models on the Real Estate Market

• = Steigende Nachfrage nach Anlagemöglichkeiten

• Housing als sichere Anlage

• Politik motiviert zum Häuser Kauf

• Niedrige Zinsen = niedrigschwelliger Zugang zu Immobilienkrediten

• Zur Bedienung der Nachfrage Schaffung von neuen Fianzprodukten: subpreme-packages = kumulierte verbriefte Kreditpläne

• werden an der Börse gehandelt

• Steigende Nachfrage = steigende Häuserpreise = “doppelt” steigende Nachfrage nach Immobilieninvestitionen

• Failure in the banking system

• Banken kontrollieren die Kreditwürdigkeit der Nehmer nicht ausreichend, da sich bei Kreditausfall der Kredit durch einen high-margin exit refinanzieren lässt

• Variable Zinsen

• Bonus Manger bspw. Fond-Manger orientiert sich an kurzfristigen Gewinnen, risikofreudig

• Rating-Agenturen können aufgrund der Komplexität und der Kommulation nicht genau durchsteigen, welche Kreditpläne genau beinhaltet sind

• Immobilien gängig als sicheres Produkt

• Rating Agencies and Regulatory System

• Rating-Agenturen verbunden mit Entwicklern der neuen Produkte + hohe Margen = hohes Interesse, diese loszuwerden

• AAA rating

• Folgen:

• Wirtschaftliche Erholung = Erhöhung des Leitzins

• Bei variablen Tilgungszinsen erhöhen diese sich mit dem Leitzins

• Eigentlich nicht-kreditwürdige Haushalte können nicht tilgen

• Immobilie geht an die Bank

• Kann nicht verkaufen, da Immobilienpreise gesunken sind

• Subpreme packages verlieren an Wert, da Immobilienpreise sinken

• Banken verlierel Liquidität

• leihen sich aufgrund von Unsicherheit kein Geld

• gehen Insolvenz

Moral-hazard als Folge von Bankenrettung

• Created by high liquidity in the global financial system due to payment imbalances

  • e.g. America large account deficits were rebalanced by foreign debt mainly from China

• High liquidity decreases interest rates and increases demand for investment facilities = tigger for creating innovative investment facilities

  • leads to a credit boom and exaggerated asset values particularly in the house market as it is understood as a safe investment

  • e.g. America: high liquidity + decreased interest rate + political motivation = low-threshold access to credits for houses = high-deman especially at the bottom of the pyramide + subprime-packages as new investment facilities = increasing house prices = double increased demand for investments linked to houses

• Bubble breaks as soon as prices decreases and the interest rates are rising

  • It’s a bubble “nothing is real anymore”: individual borrower can’t pay their credit requirements + subpreme packages are nothing worth can’t be sold + even the money that is given the borrower isn’t state’s property

• Banks should have a fixed share of the total assets e.g. 8% reserved by cash or equity

• Earlier gold-standard; Bretton-Woods died because they didn’t increase their gold according the global money stock in USD

• Led to a decreasing concensus on neoliberal concepts

• “legitimacy crisis”

• Neoliberal concepts believe in a seperation of politics and economics = economic realism

• As Polanyi, as a prominent critical voice towards neoliberal practice especially the self-regulating market, has stated: the social sphere es embadded in the market! The market is shaping the social sphere, so everything has to become market-like (Kommodifizierung)

  • neoliberal concepts treat humans as market goods which will destroy the basis of living

  • Neoliberal practices have negative externalities that affect humans and their environment

• neoliberal concepts are modells and can’t illustrate the real world and are not designed to see the bigger picture

• The world changed since their development, they are not according to it anymore

• As GFC showed the market is not the most effective tool!

  • Humans have to be protected as we can see from the GFC as it had cost states a lot of PUBLIC money which could have been invested way better

  • In the and the end the state had to intervent! State as the corrective of the market and the assumption that a totalls selfregulated market is possible can be rejected

=> still the crisis didn’t really threatened the primacy of neoliberal principles

=> Huge governmental activities sent also wrong signals, as risky behaviour is not directly sanctioned

=> kind of strengthened its predominant position

massive state interventions were made to rescue this failed system

• hegemonic incorporation

  • informal forum of the 19 largest world economies and the EU

  • crisis commitee

  • as a response to the unequal economic governance, many emerging countries took a more importnat global role

• Institutionalisation of dialogue between developed and emerging economies with an aim on stable economic development and growth

Especially after Global Financial Crisis 2008 the G20 achieved greater importance

• diverging positions due to global imbalances have split the G20 in Soutern powers acting against US-hegemony

The incorporation of emerging countries as basis to introduce/onboard them to the hegemonic world order

• Adjusting them into line with Western models and neoliberal practices

• capital opening

• flexible exhcange rates

• monetary stability

• transperency

Despite kind of undermining them, a collectivist cooperation was created by including them in the decisionmaking process

• possibility for a more representative and ccoperative global governance (shaped by US-hegemony)

  • weren’t at the peak/lead of power but they had the opportunity to raise their voice (especially South-Korea & Australia used this tool)

• Creating stronger legitimacy!!

  • greater opportunity for cooperation and to embedd the developing for calming down the market and regulate financialisation

concert-like mechanism at the first stage of G-20 as crisis commitee

• G-20 is highly selective

  • Announced them by themselves

  • Excluded countires felt stigmatised and left out

  • During GFC strong degree of privileging of core stats particularly targeting US and UK (hosts of the summit)

    • = concerted interests of leading powers

  • Interaktion of similar units

  • delegation of tasks and responsibilities to working groups = lead the whole agenda and outcome

    • “new forum of old voices”, not changing

    • Serving the American interests

• BUT G20 is not a static thing it changed fundamentally according to the changes in global power into a plurilateral mechanism

  • Interaction of differential units leads to a plural exchange

  • decentralisation and erosion of hierarchy

  • Former secondary powers become an opportunity to race their voice that is used to create a stabilisation voice in the increasing tension between great powers

  • Southcorea as host for summit

    • turning away from the core agenda and shifting to development dimension of the G20

    • Emerging countries didn’t want the IMF as a rescure from crisis (stigma) they wanted IMF rather as help for crisis-prevention

• Significant responsibilities on the heads of government, though

• IcebergTheory of Global Governance’reflects the enormous work of ministers, working groups,advisors, officials from the Bretton Woods institutions and other institutions such as theOECD and the FSB