THE FINANCIAL CRISIS OF : WHY AND WHAT NEXT? COSTAS LAPAVITSAS OCTOBER 2008

A crisis of financialisation Financialisation is, in the first instance, a process internal to developed countries

a)Corporations become distant from banks Gearing (D/E %) USA UK Ger Jap

b)Banks turn to individuals. Both financial assets and debts rise relative to gdp Individual indebtedness as % of disposable income USA UK Ger Jap

c)Banks also turn to financial market mediation Commissions, fees, proprietary trading

Financialisation is sustained by withdrawal of public provision from housing, pensions, health education. Finance has become the mechanism for satisfying basic welfare needs. But real incomes have not risen systematically. Bubbles inevitable, particularly in housing

US Mortgages Origination %Subpr%SubSec 2001$2.2tr $2.9tr $3.9tr $2.9tr $3.1tr $3.0tr

Financialisation is also a global process involving developing countries Liberalisation of K account and capital flows as FDI and portfolio Inflation targeting to secure the process

Key flows Excess of S over I as % of GDP USA UK Ger Jap Asia

Net capital flows have been negative, due to reserve accumulation China Russia Mid. East Africa

Two reasons for reserve accumulation: a)Sterilisation to defend the peg b)Building up defences against outflow

Implications for developing countries Increased short-term borrowing abroad at great cost Increased domestic indebtedness and financial deepening Foreign banks promoting individual borrowing domestically The crisis has become global as short-term borrowing has dried up

A regime break? The crisis has some to go and its effects will become more general It could lead to generalised stagnation for years to come It also represents a decisive blow for neo- liberalism

What to do? Reform in developed countries: private finance to be detached from provision of basic needs; regulation of prices and quantities Reform globally: Capital account controls, centralised support for exchange rates, a new means of payment. Finance for development.