Thursday, October 4, 2018

The Casino Global Financial System

Picking up on a phrase in the post before the previous one on Letelier, I copy below an interesting article from the Swiss daily paper Le Temps about the Casino Global Financial System. In addition to what you can read below, I'd like to stress that the casino character of the global financial system has been caused by policymakers when they decided in the early 1970s to not reform the international monetary system and, instead, give full power and freedom to the commercial banks. Well, initially they maintained some controls over the financial sector (banks, investment funds and insurance companies) but when they adopted neoliberal policies in the 1980s they gave the banks the enormous power they still have. 
The phrase in the before last post I am picking up is: "The events [credit crisis of 2007-08] exposed the extent of finance-led global economic integration, making countries highly vulnerable to financial contagions, policy ‘spillovers’ and economic imbalances."

La faillite de Lehman Brothers est celle d’un système

11 septembre 2018
OPINION. Marc Chesney, professeur de finance à l’Université de Zurich, dénonce, dix ans après la crise, «un système de finance casino dans lequel les dettes, les paris et le cynisme ont pris le pas sur l’épargne, l’investissement et la confiance»
Le 15 septembre 2008, Lehman Brothers Holdings Inc. se plaçait sous la protection du chapitre 11 du Code fédéral américain des faillites. Cet événement marquait le début d’un processus long et complexe, accompagné de poursuites et de procédures pour un montant colossal de près de 1200 milliards de dollars.
Le compte-rendu du Temps en 2008: Les dernières heures de Lehman
Marc Chesney



Lorsque le vol LB2008 s’écrasa après avoir subitement disparu du radar des banques systémiques, il s’agissait apparemment d’un coup de tonnerre dans un ciel bleu, d’une catastrophe aussi accidentelle qu’imprévisible. Certaines données de la boîte noire permettent cependant, en dépit de leur complexité, de comprendre les facteurs à l’origine du crash, et de mettre en lumière les contre-vérités ayant permis de masquer la situation catastrophique dans laquelle Lehman Brothers se trouvait, déjà bien avant sa disparition.

L’autosatisfaction de 2007

Le dernier rapport annuel de Lehman Brothers, datant de 2007, est à ce titre riche d’enseignements. Dithyrambique, il constitue un modèle d’autosatisfaction, les «performances record» et les «résultats fantastiques» succédant aux «efforts de management talentueux», à «l’excellence» de l’institution et à la «focalisation sur la gestion des risques». L’établissement se félicite d’avoir été classé premier en termes de «trading algorithmique» et d’avoir été primé 42 fois dans divers domaines bancaires et financiers. Cerise sur le gâteau, la banque déclare faire siennes les valeurs de durabilité et de responsabilité, tant sociétales qu’environnementales. Rétrospectivement, ce rapport annuel apparaît pour ce qu’il est: un monument de propagande.
Les dettes des grands établissements bancaires restent disproportionnées, leurs positions en produits dérivés colossales et les rémunérations des dirigeants tout aussi scandaleusement élevées qu’économiquement injustifiables
Les grandes agences de notations que sont Moody’s, Standard & Poor’s et Fitch Ratings ne sont pas demeurées en reste: toutes ont attribué à Lehman Brothers en 2007, encore quelques jours avant sa banqueroute, des notes au moins égales à A. Richard Fuld, ex-directeur général de Lehman Brothers, a, quant à lui, reçu près d’un demi-milliard de dollars entre 2000 et 2007, en dépit de sa responsabilité dans la stratégie qui mènera la banque à la faillite.

La fête continue pour l’oligarchie financière

On peut rétrospectivement s’interroger sur la cécité volontaire dont ont fait preuve les analystes d’alors à la lecture de ce rapport. Ils n’ont à l’évidence pas relevé les conflits d’intérêts patents entre les agences de notations et leurs clients, les grandes banques. L’alerte aurait dû être sonnée face à un hors-bilan truffé de montages douteux, ainsi que de produits dérivés complexes et de taille disproportionnée: avec 35 000 milliards de dollars, la valeur nominale de ces produits représentait 50 fois le bilan de la banque et près de 1500 fois ses capitaux propres! Que ces derniers aient été ridiculement faibles, à savoir 3,25% du bilan, ne semblait pas être pertinent, pas plus d’ailleurs que le montant dérisoire qu’ils représentaient en regard de l’ensemble de ses engagements, y compris hors bilan. Les analystes financiers n’ont pas daigné soulever le voile du mensonge.
Lire aussi: Dix ans après, les leçons de la crise
Qu’en est-il aujourd’hui? Les leçons de la chute de Lehman Brothers ont-elles été tirées? Les capitaux propres des grandes banques en proportion de leur bilan sont désormais certes un peu plus importants, mais demeurent bien trop faibles. En dépit de rapports annuels flatteurs, de déclarations rassurantes de la part des autorités du domaine, des bonnes notes octroyées par les agences de notations et des milliers de pages de régulations, les dettes des grands établissements bancaires restent disproportionnées, leurs positions en produits dérivés demeurent colossales et les rémunérations des dirigeants tout aussi scandaleusement élevées qu’économiquement injustifiables. La fête continue donc pour l’oligarchie financière.

Le poids considérable des dérivés

A titre d’exemple, les 48 900 milliards de dollars de valeur nominale des produits dérivés de Goldman Sachs représentaient en 2017 environ 53 fois le total de son bilan, 568 fois le montant de ses capitaux propres et 2,5 fois le produit intérieur brut (PIB) des Etats-Unis.
En 2017, le total du bilan d’UBS et de Credit Suisse correspondait respectivement à 119% et à 137% du PIB suisse. La valeur nominale des produits dérivés traités par Credit Suisse était de 28 800 milliards de francs, et correspondait ainsi à 36 fois le total du bilan et à 687 fois le montant de ses capitaux propres, soit 41,9 milliards de francs. Cet encours est aussi 43 fois plus grand que le PIB suisse et correspondait à 37,3% du PIB mondial.
Le volume d’activité de l’UBS sur les produits dérivés correspondait en 2017 à 18 500 milliards de francs, c’est-à-dire à 20 fois le total de son bilan, à 361 fois ses capitaux propres, qui se montaient à 51,2 milliards de francs, à environ 28 fois le PIB suisse et à 24% du PIB mondial.

Les risques de la finance de l’ombre

Entre 2008 et 2018, la finance de l’ombre, le «Shadow Banking sector», s’est par ailleurs abondamment développée, à l’image de la multinationale de gestion d’actifs BlackRock, de fait too big too fail, qui gère aujourd’hui plus de 6000 milliards de dollars d’actifs. Ce secteur est particulièrement opaque et revêt une puissance aussi inquiétante que dangereuse.
Au-delà de la faillite de Lehman Brothers, il s’agit en réalité de celle d’un système de finance casino dans lequel les dettes, les paris et le cynisme ont pris le pas sur l’épargne, l’investissement et la confiance. Ce processus plonge la société dans une crise permanente. Les grandes banques bénéficient de très nombreux avantages et garanties contraires aux principes fondateurs du libéralisme, dans lesquels elles ne manquent toutefois pas une occasion de se draper. Cette situation engendre un risque systémique dont pâtit l’économie tout entière. Fermer les yeux, nier l’évidence, ne peut que déboucher sur de futures catastrophes.

A Lire:

La crise permanente - L'oligarchie financière et l'échec de la démocratie, de Marc Chesney, Editions Quanto.

Saturday, September 22, 2018

The killing of Orlando Letelier

Orlando Letelier was killed in Washington by the Chilean regime on September 21, 1976.
Below I go back to the moment I received the bad news. I was a friend of Orlando. The story is published in Politika: http://www.politika.cl/2018/09/21/orlando-letelier-una-semblanza/


Sunday, July 29, 2018

Global economy more vulnerable a decade on - Robert Triffin

Global economy more vulnerable a decade on

Anis Chowdhury | Published: 00:00, Jul 30,2018 | Updated: 00:41, Jul 30,2018
TEN years ago the world awakened about the reality of a financial crisis, rapidly engulfing the world, and turning into a ‘Great Recession’. In July–August 2008, a loss of confidence in the value of sub-prime mortgages in the US caused a liquidity crisis and forced the US Federal Reserve to inject a large sum of capital into the financial market. A month later in September 2008, the Lehman Brothers went belly up.
The events exposed the extent of finance-led global economic integration, making countries highly vulnerable to financial contagions, policy ‘spillovers’ and economic imbalances. It also revealed critical vulnerabilities of the post-World War II US-centric international financial architecture — the Bretton Woods system — modified after its breakdown in the early 1970s.
The Bretton Woods system had been under increasing strains since the late 1960s because of higher US inflation rates with president Johnson’s decision not to fund the unpopular Vietnam War through higher taxes, but by issuing debt. The post-WW II system finally collapsed when the Nixon administration unilaterally decided to withdraw US commitment to gold convertibility of the US dollar in August 1971. Since then, the US dollar has become a paper currency, flooding the world, and what emerged was a ‘non-system’, according to Robert Triffin, a foremost international monetary economist.
Jan Joost Teunissen interviewing Robert Triffin in Louvain-la-Neuve
Flaws in the current ‘non-system’
ROBERT Triffin pointed out three systemic flaws of the non-system in the wake of the 1980s global debt crisis causing ‘lost decades’ for developing countries. First, ‘its fantastic inflationary proclivities, leading to world reserve increases eight times as large over a brief span of fifteen years’ (1970–1985). Second, ‘skewed investment pattern of world reserves, making the poorer and less capitalized countries of the third world the main reserve lenders, and the richer and more capitalized industrial countries the main reserve borrowers of the system’. Third, ‘crisis-prone propensities reflected in the amplitude of the present world debt problem’.
Critics have identified further flaws. The first is the ‘recessionary bias’, arising from the asymmetric burden of adjustment to payment imbalances. While the deficit countries must adjust, especially when financing dries out during crises, surplus countries do not face a similar pressure to correct their imbalances. The second is the ‘Triffin dilemma’, arising from the use of a national currency (in this case the US dollar) as a major reserve or global currency. The provision of international liquidity requires that the country (the US) supplying the reserve currency run balance-of-payments deficits. While this may erode the confidence in that currency, it also ensures spillovers from the US monetary policy on other countries. The third is the the ‘inequity bias’, generated by the need of emerging and developing countries to ‘self-insure’ against strong boom–bust cycles of global finance by building up large foreign exchange reserves, as demonstrated since the 1997–98 Asian financial crisis.
Such precautionary measures enabled the emerging economies to undertake counter-cyclical measures during 2008–2009 Great Recession. But they have huge ‘social opportunity cost’ as these reserves are generally kept in low interest perceived safe assets, such as the US treasury bonds, instead of investing to improve socio-economic conditions. Triffin felt very strongly, complaining, ‘the richest, most developed, and most heavily capitalised country in the world should not import, but export, capital, in order to increase productive investment in poorer, less developed, and less capitalised countries… [The] international monetary system is at the root of this absurdity’.

Calls for reforms
THERE have been renewed calls for reforms of the global economic governance architecture in the wake of the global financial crisis, especially from the 2009 UN Conference on the World Financial and Economic Crisis and Its Impact on Development. This included reform of the governance of the International Monetary Fund and the World Bank, on the basis of fair and equitable representations of developing countries to improve the credibility and accountability of these institutions and to reflect current realities of emerging economies in the global economy. Developing countries also called for a ‘multilateral legal framework for sovereign debt restructuring’ through a UNGA resolution (A/68/L.57/Rev2).
There was also a promise to keep the international trading system as open as possible, with the G20 leaders committing to avoid protectionist measures. There was a renewed hope for trade multilateralism and an early successful completion of the Doha Development Round of the World Trade Organisation, giving developing countries better access to developed country markets. This was seen as vital for balanced global recovery and development.

Complacency
EVERY financial crisis in the past was followed by calls for reforms, but complacency setting in with the green-shoot of recovery. This time, it is not different. Policymakers in virtually every major country turned focus on domestic issues despite their rhetoric of international cooperation for reforms and policy coordination.
Even though the prospects for global financial governance reform seemed promising following the first G20 summit in November 2008, the developed world dragged on and the US Congress was unwilling to approve the agreed limited quota reform of the IMF until very recently. The promises made in 2008 were repeated at successive G20 summits and in other international forums. Yet, the promised reforms have only been partially implemented, resulting in limited changes in global financial governance architecture, still dominated by advanced countries, in particular the G7, thus undermining its legitimacy.
In the absence of a legally binding multilateral, fair, sovereign debt work-out mechanism, developing countries remain targets of private creditors and vulture funds. While creeping protectionist measures are strangling global trade, developed countries have effectively killed the Doha Development Round by insisting to renegotiate settled matters and opting for bilateral and regional free trade deals, the most prominent of which is the Trans-Pacific Partnership. These are weak substitutes for multilateral deals, not least because they are often one-sided agreements written by the strongest signatory.
Ahead of the 2016 annual spring meetings of the IMF and the World Bank, US Treasury secretary Jacob Lew said that it was necessary to have reforms to modernise the international economic architecture set up after World War II. But the aim, in his opinion, is to preserve and strengthen his country’s position and secure benefits for the United States. While not surprising, it ignores the fact that the emerging economies and developing countries are still under-represented in the global financial architecture, even after the US Congress finally approved a much delayed set of limited reforms in 2015 and the IMF has recently agreed to include the Chinese renminbi in the SDR basket.

Increased vulnerability
MEANWHILE, the global economy has become more vulnerable on a number of fronts. First, the unabating rise in income inequality and wealth concentration due to failure to regulate executive salaries while wage growth remains stagnant or falling, exacerbated by perverse fiscal measures involving cuts in top tax rates and welfare programmes — ‘reverse Robin Hood’, and non-conventional monetary policy disproportionately benefiting the owners of financial assets. The econd is the unchecked rise in household debts, partly because of no or little real wage growth. The third is the increased integration of developing countries through global value chains, opening to foreign financial institutions and short-term capital flows (debts) induced by unconventional monetary policies of the US Fed, ECB and the Bank of Japan. These vulnerabilities are compounded in the face of devastating protectionist trade wars looming large.

Less capable of handling
ALAS, 10 years after the worst economic downturn since the ‘Great Depression’ of the 1930s, the global economy is in a much weaker position to handle even a minor crisis. Most developed country governments are now more heavily indebted than they were in 2008–2009 as they bailed out large financial institutions, but failed to jump-start the economy in a robust way. Major monetary authorities are over-burdened and do not have much policy space left after pursuing extra-ordinary expansionary policies for so long. The emerging economies’ precautionary holdings of reserves have also dwindled as the global trade slowed almost to a halt while the concern for debt-sustainability of a number of developing countries is growing. President Trump’s preference for bilateral agreements benefiting the US is unlikely to provide the boost to multilateralism so badly needed now. Consolidating US dominance can only worsen the situation.

Anis Chowdhury, an adjunct professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.

Friday, July 27, 2018

Chinese invest in Greek real estate

Chinese investors line up to take advantage of cheap Greek real estate

July 18, 2018
Chinese investors are lining up to take advantage of cheap real estate in Greece where prices hit bottom during the economic crisis. For Chinese buying property in Greece is of high interest due to the Golden Visa program that grants them a 5-year residence permit for them and their family.
Foreign buyers are lining up to invest in real estate in Greece, a market that crashed during the country’s economic crisis and has yet to fully recover. Prices dropped by around 45 percent though real estate agents say in some areas of Athens the real drop reached close to 60 percent. Prices hit rock-bottom with some apartments in the center of Athens selling for as low as 10,000-15,000 euros.
But it’s not only the cheap prices that make Greek real estate appealing to foreign investors (much cheaper than other European countries like Portugal, Spain, Italy and Germany).
Greece’s residence-for-investment program, introduced in 2013 and one of the cheapest in Europe, has been luring thousands of foreign buyers who, when they buy real estate property worth at least 250,000 euros (292,625 US dollars), get a five-year residence permit that also allows them and their families to freely travel in most of Europe.
Chinese buyers are the top nationality applying for the so-called “Golden Visa Program.” According to data from Enterprise Greece, by the end of 2017 Greece had granted 2,305 “golden visas.” Chinese investors make up almost half of all investors having been granted 1,011 visas, followed by those from Russia (395 visas) and Turkey (222 visas).
(...)

Wednesday, February 14, 2018

Are the rich provoking a new cataclysm?

The rich have benefited from the last international "crisis" and increase their wealth. What about the poor and the middle classes? Here is an article from the French journal La Tribune about the happy 1% (if you cannot read French, google translation is pretty good):

Crises 1929, 1987, 2000, 2007 et 2018... n'avons-nous rien appris ?

 |  13/02/2018

Nonobstant la forte correction de l'ordre de 10 % survenue récemment sur les bourses, la première économie mondiale, celle qui précède toujours toutes les autres en termes de croissance comme de dépression, celle qui sert d'exemple ultime en matière de néo libéralisme, - l'économie américaine - s'est donc redressée de manière spectaculaire depuis la crise des années 2007 - 2008. Marché de l'immobilier en constante progression, chômage au plus bas depuis une génération et marchés boursiers euphoriques sont autant de preuves de ce redressement exemplaire d'une économie ayant néanmoins frôlé la catastrophe il y a dix ans.
La classe moyenne américaine est pourtant fort loin d'avoir retrouvé son niveau de vie précédent cette récession, et n'a pas non plus récupéré toutes ses richesses volatilisées à la faveur de la crise financière. En fait, tirés vers le bas par des revenus stagnants - en dépit d'une conjoncture économico-financière florissante - les salariés US sont aujourd'hui confrontés à une situation et acculés à des extrémités équivalentes à celles ayant prévalu au milieu des années 1990. C'est donc à un authentique retour vers le passé qu'est contrainte la classe moyenne américaine - naguère si enviée par les européens - car une étude de la Réserve Fédérale démontre une chute de 8% de sa richesse en vingt ans ! Cette rétrogradation se transforme cependant en une déchéance en bonne et due forme pour les moins bien nantis dont les maigres avoirs ont littéralement fondu de 22% durant la même période. Les plus pauvres sont effectivement les damnés d'un système qui fonctionne par les riches et pour les riches ayant, eux, augmenté leur fortune de 146% depuis 1998 ! Les disparités des revenus sont encore plus choquantes car, tandis que 90% des citoyens américains ont subi un effondrement de 50 % du fruit de leur travail, les 1% les plus riches d'Amérique ont pu jouir d'une flambée de 23 % de leurs revenus !
À présent que les bourses semblent décrocher ou, à tout le moins, devoir s'ajuster sur l'économie réelle que vivent au quotidien les vrais gens, tournons-nous vers les Gates, les Bezos, les Zuckerberg, les Musk et vers les frères Kock qui ont très certainement analysé et la Grande Dépression et les liquéfactions des années 2007 - 2008, car on peut légitimement douter qu'ils en aient tiré un quelconque enseignement. L'économie de ce début de XXIe siècle n'est effectivement en rien plus saine que celle de la fin des années 1990 car le capitalisme de 2018 est encore et toujours tiré par la seule locomotive de la finance.
Dans ce jeu de dupes à somme nulle pour la société civile, des géants comme Apple disposent d'une richesse aberrante évaluée à environ 375 milliards de dollars qui ne seront évidemment pas réinvestis sur leurs produits mais sur les marchés financiers et dans une ingénierie qui leur permettront de se soustraire autant que possible à l'impôt. Dans ce monde de 2018, les entités comme Apple et bien d'autres ne sont plus qu'un gigantesque fonds spéculatif dont seulement un wagon est dédié à l'innovation technologique, et dont la quasi-totalité des éléments constitutifs ne bénéficient donc ni à la consommation ni à la société.
Après la tragédie des années 2007 à 2010, et alors que les classes moyennes sont en plein déclassement au sein de toutes les nations occidentales, les heureux 1% doivent très sérieusement peser les conséquences de leurs actions et de leurs décisions, et surtout ne pas se cacher derrière le prétexte - usé jusqu'à la lie - selon lequel ils ne pouvaient prévoir un nouveau et inéluctable cataclysme accentué - sinon provoqué - par leur appât immodéré du gain. Alors que le monde de la finance semble parti pour de nouvelles secousses d'hyper volatilité et d'hyper instabilité - qui sont sa marque de fabrique- nul ne peut plus aujourd'hui se prévaloir d'ignorer les conséquences de ses actes.

Tuesday, February 6, 2018

Resetting the International Monetary (Non)System

José Antonio Ocampo, author of Resetting the International Monetary (Non)System
José Antonio Ocampo wrote an important book that you can read by clicking on the title: Resetting the International Monetary (Non)System.

Here is what the book is about:
International financial crises have plagued the world in recent decades, including the Latin American debt crisis of the 1980s, the East Asian crisis of the late twentieth century, and the global financial crisis of 2007-09. One of the basic problems faced during these crises is the lack of adequate preventive mechanisms, as well as insufficient instruments to finance countries in crisis and to overcome their over-indebtedness. Resetting the International Monetary (Non)System provides an analysis of the global monetary system and the necessary reforms that it should undergo to play an active role in the twenty-first century and proposes a comprehensive yet evolutionary reform of the system.
Criticising the ad hoc framework- a "(non)system"- that has evolved following the breakdown of the Bretton Woods arrangement in the early 1970's, Resetting the International Monetary (Non)System places a special focus on the asymmetries that emerging and developing countries face, analysing the controversial management of crises by the International Monetary Fund and proposing a consistent set of reform proposals to design a better system of international monetary cooperation. Policy orientated and structured to deal in a sequential way with the issues involved, it suggests provision of international liquidity through a system that mixes the multicurrency arrangement with a more active use of the IMF's Special Drawing Rights; stronger mechanisms of macroeconomic policy cooperation, including greater cooperation in exchange rate management and freedom to manage capital flows; additional automatic balance-of-payments financing facilities and the complementary use of swap and regional arrangements; a multilateral sovereign debt workout mechanism; and major reforms of the system's governance.
Table of contents
  1. 1. A brief history of the international monetary system since Bretton Woods
    José Antonio Ocampo
    More Working Paper | A brief history of the international monetary system since Bretton Woods
  2. 2. The provision of global liquidity: the global reserve system
    José Antonio Ocampo
    More Working Paper | The Provision of Global Liquidity
  3. 3. Global monetary co-operation and the exchange rate system
    José Antonio Ocampo
    More Working Paper | Global macroeconomic cooperation and the exchange rate system
  4. 4. Capital account liberalization and management
    José Antonio Ocampo
    More Working Paper | Capital Account Liberalization and Management
  5. 5. Resolution of balance of payments crises: emergency financing and debt workouts
    José Antonio Ocampo
    More Working Paper | Resolution of Balance of Payments Crises
    More Research Brief | Debt
  6. 6. The governance of the international monetary system
    José Antonio Ocampo
    More Working Paper | The Governance of the International Monetary System
  7. 7. Reforming the (non)system
    José Antonio Ocampo
    More Working Paper | Reforming the global monetary non-system

 

Sunday, January 21, 2018

Making Greece attractive to foreign capital

Protesters clash with riot police outside the parliament building during a demonstration against planned government reforms that will restrict workers right to strike in Athens, Greece, January 15, 2018. REUTERS/Costas Baltas
Protesters clash with riot police outside the parliament building during a demonstration against planned government reforms that will restrict workers right to strike in Athens, Greece, January 15, 2018. REUTERS/Costas Baltas

Reuters reported recently about protests in Greece against "reforms" demanded by the Troika of the European Commission, the European Central Bank, and the IMF:

"Greece’s parliament on Monday [January 15] passed a swathe of reforms demanded by international lenders in exchange for fresh bailout funds, a success for the government but a blow to thousands of people protesting outside.
The bill introduces a new electronic process for foreclosures on overdue loans and arrears to the state, opens up closed professions, restructures family benefits and makes it harder to call a strike.
About 20,000 people rallied outside parliament during the vote. Bus, subway and city rail services were disrupted and some flights were grounded as workers went on strike to protest against the bill."

My sister Barbara, who lives in Greece, commented in a letter to me:

"The consequences will be felt in the course of this year for many people in benefits, by auctions of houses, privatizations, restrictions on the right to strike, etc. The slogan of the government is: "just development ", which refers to making Greece attractive to foreign capital, the sale of ports, airports, railways, electricity, water, etc. while the population is kept alive by occasionally giving them some extra money in the form of a one-off benefit, alms, as it is called, but on the other hand to limit wages and benefits. And the brain drain still goes on ...."