Oh to have been a mouse in the corner last Friday morning in the World Bank’s Finance and Private Sector research department! In a guest article for this week’s The Economist, World Bank chief economist Justin Yifu Lin argued that “small, local banks” are the best entities for providing financial services in developing countries where SMEs are critical to growth.
Not ground-breaking stuff you might say. Heterodox economists have been making this point for years. Developing both relations with local businesspeople and project assessment skills are critical if local banks are to support the development process. Big international banks tend to cherry pick large corporate clients, and use their technological advantage in credit scoring to rapidly increase household indebtedness (witness Mexico).
But the Lin article takes on more importance in the context of nearly two decades of Bank research and policy advice which has advocated a position contrary to his own. From Clarke et al. (2001) (‘Foreign bank penetration improves financing conditions for enterprises of all sizes’) to the much-cited Claessens et al. (2001) to Beck et al. (2003) (‘a larger share of foreign-owned banks removes financing obstacles’), and much more beyond, the Bank has been a cheerleader for the benefits of big banks in little countries.
Moreover, the Bank’s private sector arm, the IFC, has eagerly supported the development of loan securitisation, mortgage-backed securities, collateralised debt obligations and originate-and-distribute banking models (dos Santos, 2008) - hardly the “simple banking systems” whose merits Lin extols.
(Lin also praises Japan, South Korea and China for resisting the rush to prematurely develop stock markets or integrate into international financial networks. Again, not new (Ajit Singh has made this case for over two decades), but decidedly against the World Bank flow.)
Could this be a portent of good things to come at the Bank? Or will Lin be slapped down by Wall Street via the US Treasury (a la Stiglitz) or quietly sidelined (cf. Bourguignon’s inequality agenda)? Perhaps Lin’s carefully chosen words later in the article (‘small, private domestic banks’) will have been just enough to avoid rocking the boat. After all, HSBC is the ‘world’s local bank’…
(nb. I’m not the only one to be struck by Lin’s editorial – a vigorous debate of the great and the good, including several former Bank economists, has broken out on The Economist)
Thursday, November 10, 2011
Wednesday, November 9, 2011
Head and Shoulders Update: Could this be a new definition of Financialisation?
So as I type the S&P is up around 2.5%, and the puts I was talking about earlier are now trading at .28 / 1.28 - so a massive loss so far if you bought them this afternoon... dooh.
And to what do we owe this remarkable rally? Well no-one knows but the press are co-joining the rally and the news that a famous analyst is predicting massive profits for Goldman Sachs when they announce tomorrow.
So financial markets are up because Goldman Sachs took enourmous profits from trading in financial markets.... THIS is financialisation!
Sunday, October 9, 2011
Head and Shoulders
Lots of talk in the last week or so of “head and shoulders”. Many markets are forming this legendary trading pattern and several mature markets have “broken the neckline” – meaning this could be the moment for the fall in equities that many predict. Moreover as this piece points out, the Vix is doing strange things with it’s moving averages.
It might be thought that this is the equivalent of reading coffee grains but if the game is to guess what everyone else is guessing about everyone else’s guesses … then why the hell not!
If we follow this then the stock market is not the result of an objective random news generator, the process of which analysts set out to discover, but rather an exercise in group psychology! If only it were that simple.
Talk has also re-surfaced of the dark forces of the Plunge Protection Team. This is the White House appointed team has the right to intervene and support US stock indices. Widely assumed to have been very active at the start of the crisis in an attempt to prevent the stock and housing bubble bursting at the same time. Their presence is most often invoked when quiet end of day trading on down days gets sudden boost, usually when Europe and Asia have gone home and volumes are thin. Wilder rumours also hint that certain insiders get tipped off, they presumably would then lend their weight to the rally and earn the profits of doing so. Who knows?! The political economy of the US certianly includes close ties between state and finance capital as the appointments and events of the crisis have shown.
In the coming week or so we have option expiries and earnings announcements. If financial proces are as arbitrary as the above isn’t it earnings that will bring them back in line with the forces of production? Well, not really when what really matters is i) where expectations have been managed to, and ii) what the companies tell us they are predicting for the future. So still a decent amount of guess work in there.
Once you start seeing head and shoulders it seems it’s rather catching and you start to see them everywhere... MacroMan sees one in the MSCI today although the neckline isn’t broken yet.
Today you could buy 850 strike, July expiry, S&P puts for $2.8 on igindex. This is a statement of fact not investment advice. As discussed, prices might go up, might go down, might be politically influenced, might not. Pretty arbitrary actually.
Monday, August 15, 2011
How the dead live...
You thought it was dead but it seems it's having another go-around. Securitisation is back, only this time it's better, smarter, safer... honestly! Barclays Capital are calling it "smart securitisation", Goldmans "Insurance". From what we can see it seems to follow the complicated formula: diversify, improve rating. Apparently this time it's ok though as the instruments are taking existing assets from bank's balance sheets not generating new ones. Well, my friends that's how securitisation started the first time around.
It seems similar moves are afoot in the market for Commercial Real estate Mortgage Backed Securities (CMBS). Here the incentive seems to be from S&P who are to downgrade a load of bonds such that they will no longer qualify for the FED's TALF liquidity facility. Not that anyone went anywhere near it the first time around - the banks need capital not liquidity. Instead the private side is constructing what they are calling "re-Remics". I quote Risk Magazine: "This involves splitting existing CMBS into new tranches with fresh ratings." (Who is buying this stuff?!). Crucially this "might also provide regulatory capital relief for banks and insurance companies". Well they won't be doing otherwise!! Groundhog day anyone? Let's go round again?
Lack of meaningful action by regulaltors is leading to private side innovation to fill the space they are creating, be it Sovereign CDS indices, re-Remics or whatever. The financial press at least this time around can see that this is somewhat peculiar, and understand the instruments better than previously (note the altered the phrasing around "ratings instability"). But on it goes never-the-less. Do we really want another go-around?
It seems similar moves are afoot in the market for Commercial Real estate Mortgage Backed Securities (CMBS). Here the incentive seems to be from S&P who are to downgrade a load of bonds such that they will no longer qualify for the FED's TALF liquidity facility. Not that anyone went anywhere near it the first time around - the banks need capital not liquidity. Instead the private side is constructing what they are calling "re-Remics". I quote Risk Magazine: "This involves splitting existing CMBS into new tranches with fresh ratings." (Who is buying this stuff?!). Crucially this "might also provide regulatory capital relief for banks and insurance companies". Well they won't be doing otherwise!! Groundhog day anyone? Let's go round again?
Lack of meaningful action by regulaltors is leading to private side innovation to fill the space they are creating, be it Sovereign CDS indices, re-Remics or whatever. The financial press at least this time around can see that this is somewhat peculiar, and understand the instruments better than previously (note the altered the phrasing around "ratings instability"). But on it goes never-the-less. Do we really want another go-around?
Tuesday, July 12, 2011
Aspects of Financialisation in Greece: what’s next? by George Lambrinidis
In 2008, there were 360.000 unemployed workers, 350.000 in temporary employment, 270.000 part-time workers, 400.000 in employment with very low, if any, rights and 600.000 were working without insurance. At the same time, 400.000 workers have to have a second job or cover basic needs through borrowing under burdensome terms[1]. Just for the record, the labor force of the country is no more than 3.9 million.
Following the gist of our previous posts, the unemployment situation sketched above can be partly attributed to the capitalist restructure and reformation of the 1990s, as well as to the political dominance of the social democrats. Both processes tipped the scales in the interests of the bourgeoisie. Nevertheless, this would not be possible had it not been for an underlying ideological process. This is no other than the process of destroying ideologically the belief that solutions for the working class can come about only through collective action. It cannot be ascribed solely to the social democratic party, but the latter undertook successfully its political realization and overview. This very process is quite significant for financialisation.
Still, a major break was needed for any savings of the wage earners to be swept up and to damage seriously the ability of the social network to provide solutions at times of difficulty. Operation “stock market”, orchestrated by the social democrats, sold by them as the arrival of “popular capitalism” climaxed in 1999 and channeled savings of over one million people to the pockets of the capitalists. Apart from the direct effect on the latter’s profitability, the operation exposed workers, mostly, and low income self employed to the grip of the banks.
The entering of Greece in the EMU accelerated these processes. Capitalist restructuring was driven now through integrated competition and new opportunities. As for the latter, one has only to take a look at the position of Greek investments in the newcomers of the EU, and especially those in the neighborhood. In the same spirit, one may understand Greek foreign policy toward the entering of Turkey in the EU. Further, the EMU provided the framework as well as the political alibi for those ventures to flourish.
It is now evident that the individual seeking of solutions is a dead end. The alternative though is still misty. It seems that there is a turn to collective action, while the bourgeoisie is turning to the militarization of everyday life. This is also one of the major pillars of the political crisis that accompanies the economic one and the events of December should be understood under this light.
I would risk arguing that processes in Greece were not slow, its not logn since the early 1990s when most banks were unable to accomplish their role in the era of financialisation and under state – although never public – ownership. Greece had to run through all the evolution of financialisation in much less than half the time of the leading capitalist countries. This hardly implies that Greek capitalists didn’t do well, it’s just that the situation is now very complicated and not easy for them to manage politically, let alone economically.
To return to where we started and the events of December, it is evident that these scenes will be repeated: the time for elections is approaching, with the ability of the two identical parties – the social democrats and the new liberals – to switch government strongly contested and the workers movement is rising, despite its recent weakness.. Another December will inevitably be provoked to justify the violent imposition of the political power of the bourgeoisie. The ground is ready for the next round, the margins are much tighter and each will be ready for the fight.
[1] Interest rates for credit cards are no less than 17% and, recently,banks were obliged to stop charging interest on a loan when customers have been paid 3 times the value of original loan.
Following the gist of our previous posts, the unemployment situation sketched above can be partly attributed to the capitalist restructure and reformation of the 1990s, as well as to the political dominance of the social democrats. Both processes tipped the scales in the interests of the bourgeoisie. Nevertheless, this would not be possible had it not been for an underlying ideological process. This is no other than the process of destroying ideologically the belief that solutions for the working class can come about only through collective action. It cannot be ascribed solely to the social democratic party, but the latter undertook successfully its political realization and overview. This very process is quite significant for financialisation.
Still, a major break was needed for any savings of the wage earners to be swept up and to damage seriously the ability of the social network to provide solutions at times of difficulty. Operation “stock market”, orchestrated by the social democrats, sold by them as the arrival of “popular capitalism” climaxed in 1999 and channeled savings of over one million people to the pockets of the capitalists. Apart from the direct effect on the latter’s profitability, the operation exposed workers, mostly, and low income self employed to the grip of the banks.
The entering of Greece in the EMU accelerated these processes. Capitalist restructuring was driven now through integrated competition and new opportunities. As for the latter, one has only to take a look at the position of Greek investments in the newcomers of the EU, and especially those in the neighborhood. In the same spirit, one may understand Greek foreign policy toward the entering of Turkey in the EU. Further, the EMU provided the framework as well as the political alibi for those ventures to flourish.
It is now evident that the individual seeking of solutions is a dead end. The alternative though is still misty. It seems that there is a turn to collective action, while the bourgeoisie is turning to the militarization of everyday life. This is also one of the major pillars of the political crisis that accompanies the economic one and the events of December should be understood under this light.
I would risk arguing that processes in Greece were not slow, its not logn since the early 1990s when most banks were unable to accomplish their role in the era of financialisation and under state – although never public – ownership. Greece had to run through all the evolution of financialisation in much less than half the time of the leading capitalist countries. This hardly implies that Greek capitalists didn’t do well, it’s just that the situation is now very complicated and not easy for them to manage politically, let alone economically.
To return to where we started and the events of December, it is evident that these scenes will be repeated: the time for elections is approaching, with the ability of the two identical parties – the social democrats and the new liberals – to switch government strongly contested and the workers movement is rising, despite its recent weakness.. Another December will inevitably be provoked to justify the violent imposition of the political power of the bourgeoisie. The ground is ready for the next round, the margins are much tighter and each will be ready for the fight.
[1] Interest rates for credit cards are no less than 17% and, recently,banks were obliged to stop charging interest on a loan when customers have been paid 3 times the value of original loan.
Friday, June 10, 2011
The SDR by IMF: could it become a new World Money?
by Juan Pablo Painceira
The size and spread of present financial crisis has shown to analysts and public alike how important the dynamic of world money is to the global economy. Surely this crisis would not have the same magnitude if the heart of crisis was not the US economy, the issuer of world money. The importance of international money in the unfolding of financial crisis was addresses by this author in an earlier RMF discussion paper (http://www.soas.ac.uk/rmf/papers/).
It is well know that the Federal Reserve has taken conventional and extraordinary measures to tackle the 2007-08 financial crisis in order to rescue/recover the financial system’s ability to perform their normal functions, and in particular banks,. Among the FED’s measures, the swap currency lines, initially offered to the major central banks and extended to the key developing countries after September 2008, are directly related to the role of dollar as world money. Basically, the Federal Reserve has offered credit lines in dollars around the global economy.
The spread of those swap lines and the monetisation of US public debt have raised questions about the functionality and stability of international money, ie the US dollar. Recently, the China’s central bank chief and the Russian government have proposed a bigger role for the IMF’s SDR in global financial operations in order to achieve a supra-national reserve currency to replace the dollar as world money. The Special Drawing Rights (SDR) created by IMF in the 1970s is a basket of major currencies traded in the international financial and commercial operations. The value of SDRs daily is determined by summing, in US dollars, the values of a weighted basket of currencies and used as monetary reference to the IMF’s operations. So, the SDR are reserve assets.
The emergence of new world money and the reform of international financial system has been widely discussed in the last weeks e.g. G. Soros addressed the need for the IMF to take care of some developing countries external financing immediately in order to avoid a Great Depression; the increase of issuance of SDR would be the instrument to use. Some analysts are arguing that a new global reserve currency would lead also to changes in the process of reserve accumulation and exchange rate regimes among the major countries. A UN commission lead by J. Stiglitz advocates that to deal properly with the consequences of global imbalances it is necessary to have a new global reserve system based on the expansion of the SDR.
It seems that this new world money would lead a more stable and equitable global financial system.
However, some questions are still remained…Would China be really interested in walking away from dollar denomination, considering that its foreign exchange portfolio is highly concentrated in dollar? The same question could be asked for Japan. If the IMF becomes the global lender of last resort, who would be the Treasury of last resort? Who will control the political decisions to lend or not lend? I recognise that those questions are hard but we know from the economic history that a change in the global monetary standard can be painful and that effects can last many years as did the change from the gold standard to the dollar-gold standard. Lastly, a currency has a political force behind it, even when it is a supra-national currency, are the conditions ripe for the IMF / World Bank to take on such a role?
The size and spread of present financial crisis has shown to analysts and public alike how important the dynamic of world money is to the global economy. Surely this crisis would not have the same magnitude if the heart of crisis was not the US economy, the issuer of world money. The importance of international money in the unfolding of financial crisis was addresses by this author in an earlier RMF discussion paper (http://www.soas.ac.uk/rmf/papers/).
It is well know that the Federal Reserve has taken conventional and extraordinary measures to tackle the 2007-08 financial crisis in order to rescue/recover the financial system’s ability to perform their normal functions, and in particular banks,. Among the FED’s measures, the swap currency lines, initially offered to the major central banks and extended to the key developing countries after September 2008, are directly related to the role of dollar as world money. Basically, the Federal Reserve has offered credit lines in dollars around the global economy.
The spread of those swap lines and the monetisation of US public debt have raised questions about the functionality and stability of international money, ie the US dollar. Recently, the China’s central bank chief and the Russian government have proposed a bigger role for the IMF’s SDR in global financial operations in order to achieve a supra-national reserve currency to replace the dollar as world money. The Special Drawing Rights (SDR) created by IMF in the 1970s is a basket of major currencies traded in the international financial and commercial operations. The value of SDRs daily is determined by summing, in US dollars, the values of a weighted basket of currencies and used as monetary reference to the IMF’s operations. So, the SDR are reserve assets.
The emergence of new world money and the reform of international financial system has been widely discussed in the last weeks e.g. G. Soros addressed the need for the IMF to take care of some developing countries external financing immediately in order to avoid a Great Depression; the increase of issuance of SDR would be the instrument to use. Some analysts are arguing that a new global reserve currency would lead also to changes in the process of reserve accumulation and exchange rate regimes among the major countries. A UN commission lead by J. Stiglitz advocates that to deal properly with the consequences of global imbalances it is necessary to have a new global reserve system based on the expansion of the SDR.
It seems that this new world money would lead a more stable and equitable global financial system.
However, some questions are still remained…Would China be really interested in walking away from dollar denomination, considering that its foreign exchange portfolio is highly concentrated in dollar? The same question could be asked for Japan. If the IMF becomes the global lender of last resort, who would be the Treasury of last resort? Who will control the political decisions to lend or not lend? I recognise that those questions are hard but we know from the economic history that a change in the global monetary standard can be painful and that effects can last many years as did the change from the gold standard to the dollar-gold standard. Lastly, a currency has a political force behind it, even when it is a supra-national currency, are the conditions ripe for the IMF / World Bank to take on such a role?
Financial Literacy - important points to think about
by Christina Laskaridis
Provision of services to enable consumers to handle money, debt and their overall finances better has expanded considerably in recent years. In the UK the FSA are leading initiatives in financial capability and literacy e.g. spending £90m on it’s National Financial Capability Strategy, in conjunction with government, the financial sector and a multitude of non-profit organisations. This follows the discovery that the UK’s population has a low level of financial literacy, manifested as money and debt mismanagement, little planning, limited shopping around for alternative financial products and low product awareness. In 2006 an estimated 10.5 million people around the UK were experiencing difficulties in at least one of these areas, a figure which has probably risen since. The campaigns aim to improve personal financial administration through better budgeting and debt prioritisation and improved maths’ skills.
Despite the belated effort to address a serious problem by introducing such support, the strategy raises a few points of contention. Firstly, it focuses on debt prioritisation but leaves unaddressed the choice this will leave for the most vulnerable between rent and food. The National Strategy does not encompass food support for those in such a position, as has been proposed for example in Canada’s financial capability raising programmes.
Secondly, if the National Financial Capability Strategy is taking the form of a larger scale social welfare programme should the responsibility of leading it lie with the FSA – the financial services ‘regulator’, a body that is not subject to the public’s scrutiny, or should it lie with the government – through the Departments with the capability in providing social and education services? Given the experience and access to provision channels would it make more sense for this to be publicly provided?
Thirdly such a strategy implicitly accepts without argument that households have and should accept these responsibilities. Arguments focusing on the recklessness of consumers and home-buyers evade the discussion about the structures that cause oppression through finance. Households are now burdened with a much greater individual responsibility of financial risk management as finance has expanded into ever more areas of everyday life, e.g. the decline in public welfare policies and wide-spread privatisations, which means a precarious balance of risks are transferred and borne by the household.
The debate on raising financial literacy and capability – the crux of this financial education approach - does not ask what the institutional factors that have led people to find themselves in the situation they do and, as corollary why others do not. Without addressing the inequality within the financial system, the whole debate on financial capability resigns those deemed financially incapable to being seen as irresponsible and out of date – quite ironic as concurrently masses of analysts highly specialised in finance are also defamed for irresponsibility. Should we all be learning the theories which have guided us into the current crisis?! The focus of the National Financial Capability Strategy is in educating the innumerate, financially incapable segments of the population, rather than identifying let alone re-arranging the provision of financial services as a cause of the problem to start with. It orientates itself around educating the public about becoming better consumers, evading altogether the content of economic and financial relations that people are in.
Lastly, an entirely different model of education about finance and economics could be put in place, in which adult education is not used as a disciplinary mechanism to assist conforming and adapting to society. Community-wide education in economics and finance can be work by looking at one's own position and linking it to others; by connecting knowledge and action, education can lead to a critical assessment of one’s situation. Education fostering critical thought in the sphere of economics and finance can lead to comprehending a historical specific situation which is susceptible to change. Financial capability need not be only about better budgeting support but a wider and deeper awareness raising programme to assist people in demanding more equal treatment in the sphere of finance.
Provision of services to enable consumers to handle money, debt and their overall finances better has expanded considerably in recent years. In the UK the FSA are leading initiatives in financial capability and literacy e.g. spending £90m on it’s National Financial Capability Strategy, in conjunction with government, the financial sector and a multitude of non-profit organisations. This follows the discovery that the UK’s population has a low level of financial literacy, manifested as money and debt mismanagement, little planning, limited shopping around for alternative financial products and low product awareness. In 2006 an estimated 10.5 million people around the UK were experiencing difficulties in at least one of these areas, a figure which has probably risen since. The campaigns aim to improve personal financial administration through better budgeting and debt prioritisation and improved maths’ skills.
Despite the belated effort to address a serious problem by introducing such support, the strategy raises a few points of contention. Firstly, it focuses on debt prioritisation but leaves unaddressed the choice this will leave for the most vulnerable between rent and food. The National Strategy does not encompass food support for those in such a position, as has been proposed for example in Canada’s financial capability raising programmes.
Secondly, if the National Financial Capability Strategy is taking the form of a larger scale social welfare programme should the responsibility of leading it lie with the FSA – the financial services ‘regulator’, a body that is not subject to the public’s scrutiny, or should it lie with the government – through the Departments with the capability in providing social and education services? Given the experience and access to provision channels would it make more sense for this to be publicly provided?
Thirdly such a strategy implicitly accepts without argument that households have and should accept these responsibilities. Arguments focusing on the recklessness of consumers and home-buyers evade the discussion about the structures that cause oppression through finance. Households are now burdened with a much greater individual responsibility of financial risk management as finance has expanded into ever more areas of everyday life, e.g. the decline in public welfare policies and wide-spread privatisations, which means a precarious balance of risks are transferred and borne by the household.
The debate on raising financial literacy and capability – the crux of this financial education approach - does not ask what the institutional factors that have led people to find themselves in the situation they do and, as corollary why others do not. Without addressing the inequality within the financial system, the whole debate on financial capability resigns those deemed financially incapable to being seen as irresponsible and out of date – quite ironic as concurrently masses of analysts highly specialised in finance are also defamed for irresponsibility. Should we all be learning the theories which have guided us into the current crisis?! The focus of the National Financial Capability Strategy is in educating the innumerate, financially incapable segments of the population, rather than identifying let alone re-arranging the provision of financial services as a cause of the problem to start with. It orientates itself around educating the public about becoming better consumers, evading altogether the content of economic and financial relations that people are in.
Lastly, an entirely different model of education about finance and economics could be put in place, in which adult education is not used as a disciplinary mechanism to assist conforming and adapting to society. Community-wide education in economics and finance can be work by looking at one's own position and linking it to others; by connecting knowledge and action, education can lead to a critical assessment of one’s situation. Education fostering critical thought in the sphere of economics and finance can lead to comprehending a historical specific situation which is susceptible to change. Financial capability need not be only about better budgeting support but a wider and deeper awareness raising programme to assist people in demanding more equal treatment in the sphere of finance.
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