1. THE FINANCIAL CRISIS OF 2007-8: WHY AND WHAT NEXT? COSTAS LAPAVITSAS OCTOBER 2008

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

3. a)Corporations become distant from banks Gearing (D/E %) 2001 2002 2003 2004 2005 2006 2007 USA 51.9 50.9 48.8 45.8 43.7 42.8 42.9 UK 61 86.6 80.5 80.2 79.7 82 82.2 Ger 106.5 153.6 131.6 121.8 111.6 103.2 96.5 Jap 155 174.4 107.4 97.1 59.6 56.3 76.8

4. b)Banks turn to individuals. Both financial assets and debts rise relative to gdp Individual indebtedness as % of disposable income 2001 2002 2003 2004 2005 2006 2007 USA 96.4 102.6 110.2 115.9 123.5 127.5 128.8 UK 104.7 114.8 125.5 138.8 143.5 151.5 161.2 Ger 109.5 109.7 108.5 107.1 105 102.8 100 Jap 86.3 84.9 84.7 82.6 81.2 79.8

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

6. 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

7. US Mortgages Origination %Subpr%SubSec 2001$2.2tr8.650.4 2002$2.9tr8.052.3 2003$3.9tr8.560.5 2004$2.9tr 18.574.3 2005$3.1tr 20.081.2 2006 $3.0tr 20.180.5

8. 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

9. Key flows Excess of S over I as % of GDP 2002 2003 2004 2005 2006 2007 USA -4.2 -5.1 -5.5 -6.0 -5.9 -5.1 UK -1.6 -1.3 -1.6 -2.5 -3.9 -4.9 Ger 2.0 1.9 4.3 4.6 5.0 5.6 Jap 2.9 3.2 3.7 3.6 3.9 4.8 Asia 2.4 2.8 2.6 4.1 5.9 6.8

10. Net capital flows have been negative, due to reserve accumulation 2002 2003 2004 2005 2006 2007 China 292 409 615.5 822.5 1069.5 1531.4 Russia 44.6 73.8 121.5 156.5 296.2 445.3 Mid. East 163.9 198.3 246.7 351.6 477.1 638.1 Africa 36 39.9 62.3 83 115.9 144.9

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

12. 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

13. 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

14. 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.