Reflections after the 2008 Financial Crisis Professor Hannes H Gissurarson Vilnius 12 September 2013 Topics to Be Discussed The Big News in beginning of 21 st Century Causes of international financial crisis ID: 927562
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Europe, Iceland and the Four FreedomsReflections after the 2008 Financial Crisis
Professor Hannes H. GissurarsonVilnius 12 September 2013
Slide2Topics to Be DiscussedThe Big News in beginning of 21st CenturyCauses of international financial crisisThree fallacious explanations for Icelandic collapse: Overgrown banks; reckless bankers; failed neo-liberal experimentMore plausible explanations systemic and historicWhich model: Nordic or Anglo-Saxon?
Slide3What is the Big News?Section 1
Slide4Capitalism Still Alive and Kicking!Big News: not financial crisis since 2008Rather: BRIC countries, comprising almost half the earth’s population, joined the world economy, participating in international capitalism With economic growth, hundreds of millions migrating into middle classEconomic freedom on average not decreased, after a rapid earlier increase
Slide5Untimely Death Announcement
Slide6Economic Freedom in China and India
Slide7Four Chinese Economies 2011
Slide8The Big Challenge
Slide9Main Causes of financial crisisSection 2
Slide10Causes of Financial Crisis (1)Capitalism not “depression-proof” (pace Friedman); subject to economic fluctuationsHowever, more stable, on the whole, than the political environmentGovernment made it worse: subprime loans in US; misguided monetary policy after 2002Basel rules: risk harmonised; government bonds and real estate regarded as not risky
Slide11Causes of Financial Crisis (2)Main cause: moral hazard of “Too Big to Fail”In prosperity, bankers pocket the gain; in adversity, they pass the bill on to taxpayersRecklessness systematic, rather than special to bankersMoreover: new financial techniques were supposed to spread risk, but instead obscured it
Slide12Moral Hazard of Banking
Slide13Seven EU Countries Hit Harder
Slide14Three fallacious explanationsSection 3
Slide15No more “Oversized” than others
Slide16Size of Banking Sector, 1992–2007
Slide17Icelandic banks not too bigLondon banks would be too big for CoventryBut not too big for the UK, backed by EuropeSystemic error: fields of operations, under EEA agreement, whole of Europe, whereas field of insurance or back-up Iceland aloneWhen all refused to help, the banks collapsedBanks not too big; Iceland alone too small
Slide18Bankers Elsewhere No Less RecklessIf Icelandic bankers reckless, why did they obtain credit abroad? Were their creditors then as reckless?Danske Bank: biggest owner also biggest debtor (A.P. Møller); would have failed in 2008 without government aid; 1998–2008 balance sheet increased sixfold, equity only threefold Royal Bank of Scotland 2007–2011, £256 billion in aid from British government
Slide19Icelandic and Foreign BankersBarclays fined £290 million June 2012 for fixing libor rates; CEO and chairman resigned, nothing else happened HSBC fined $1.9 billion, £1.2 billion, December 2012 for money laundering; CEO apologised, nothing else happenedDeutsche Bank under investigation for having manipulated books Icelandic bankers arrested, and prosecuted for manipulating share prices
Slide20Greed and Self-loveGreed, or avarice, one of the seven deadly sinsNothing however wrong with self-love, or the rational pursuit of self-chosen aimsIt matters which self one lovesAlso, to love one’s neighbour doesn’t mean that you have to love him as much as yourselfHow is that love practised? By obeying the market signals, loss and profit, on how to serve others, satisfy their needs
Slide21Ha-Joon Chang:“Between 1998 and 2003, the country [Iceland] privatized state-owned banks and investment funds, while abolishing even the most basic regulations on their activities, such as reserve requirements for the banks.”23 Things They Don’t Tell You About Capitalism, p. 233
Slide22Chang is WrongIceland joined EEA in 1994 and operated under the same financial regulation as other member-states (including the 27 EU countries)Reserve requirements were the same as in the other EEA member-states; they were reduced, only to make them equal to those of competing European banksDid not, anyway, make any difference about the collapse of the banks
Slide23First day: 30 April 1991
Slide24Liberal Reforms 1991–2004Not a “Neo-Liberal” experiment, but moving economy in the direction of neighboursMember of EEA since 1994Liberalisation and deregulation, adaptation of European legal frameworkPrivatisation and reduction of taxesSuccessful system of fisheries managementSustainable and strong pension system
Slide25Economic Freedom in Iceland
Slide26More Revenue with Lower Rate
Slide27Iceland in 2004Relative poverty negligible (only Sweden with lower poverty rate)Absolute poverty probably smallest in worldUnemployment much less than in other OECD countries; more opportunity to leave povertyFirst on happiness index, one of highest on human development indexFiscal and monetary stability
Slide28Last day: 15 September 2004
Slide29External Debt: After 2004
Slide30From Market to Crony Capitalism1991–2004 market capitalism: competition, independent judiciary, free media, economic power separate from political power2004 David was beaten by Goliath, in the battle about media law 2004–2008 crony capitalism: oligopoly, oligarchs own media, supported by politicans (and supporting them), cooperative judiciary
Slide31101: Private Jet of Main Oligarch
Slide32101: Private Yacht of Main Oligarch
Slide33It was a Baugur Bubble
Slide34Real explanations of CollapseSection 4
Slide35Three Systemic RisksThe general international risk: moral hazard because of the “Too Big to Fail” ideaAdditional risk for Iceland: field of operations all of EEA; field of institutional support Iceland aloneAdditional risk for Iceland: too much cross-ownership, overvalued assets, Jon Asgeir Johannesson and his cronies
Slide36Three crucial decisions, historicThe Fed refused to make currency swap agreements with Iceland, at the same time as it did it with Nordic countriesThe British Labour government closed the two Icelandic-owned banks in England, at the same time as it bailed out all othersThe British Labour government used anti-terrorism law against Icelandic companies
Slide37The British as Bullies FSA closed down Singer&Friedlander (Kaupthing) and Heritable Bank (Landsbanki) and froze Icelandic assets in the UKPut Landsbanki, and Ministry of Finance and Central Bank on list of terrorist organisationsAll transfers to and from Iceland stopped immediately, creating an emergencyAs a result, bank assets fell in value, the situation became unmanageable
Slide38Why?The British falsely thought that an illegitimate money transfer had been made from Kaupthing London to Kaupthing IcelandThey also confused different deposit accounts operated by Icelandic banks:Kaupthing had affiliates, supervised by financial agencies in host countries Landsbanki had branches, supervised by Icelandic Financial Supervisory Agency
Slide39Unnecessary lossesAsset management section of Singer & Friedlander sold for £5 million, real value sixfold (£30 million)Glitnir Norway sold for NOK 300 million, had been bought year before for 3.1 billionFinn Haugan, chairman of Norwegian Guarantee Fund, also leader of savings banks buying Glitnir Norway!Glitnir Sweden sold for SEK 60 million, had been bought 4 years before for 380 million
Slide40Iceland Taken Down?Icesave and Edge accounts could offer better rates, because cheaper to operateIcelandic banks flexible and efficient, but reckless (even more than others)New kids on the block, antipathy from old players, unpopular with other banksGovernments did not like the idea of tax competition: a new Luxembourg, Liechtenstein, Isle of Man or Guernsey
Slide41Others Helped: Currency swap linesAggregate transactions with CBs: $10,057 bnECB $8,011 (79.7% of total)CB of the UK $919 bnCB of Switzerland $466 bnCB of Denmark $73 bnCB of Sweden $67 bnCB of Norway $30 bnAlso CBs of Japan, Korea and Mexico
Slide42Transactions, 2007–10, in $ billionsCitigroup 2,513Morgan Stanley 2,041Merrill Lynch 1,949Bank of America 1,344Barclays 868Bear Stearns 853Goldman Sachs 814RBS 541 Deutsche Bank 354UBS 287
JP Morgan Chase 391Credit Suisse 262Lehman Brothers 183Bank of Scotland 181BNP Paribas 175Wells Fargo 159
Slide43Nordic or anglo-saxon?Section 5
Slide44Challenges Facing the EUEU a continental, rather than European, projectTo be applauded: French and Germans abandon their wars; Central and Eastern Europeans enjoy increased securityBut whither? Open market or closed state?Challenges from North America and the BRICsTwo models: Nordic and Anglo-Saxon
Slide45Seven Nordic economies 2010
Slide46Swedes in Different Economies
Slide47Less, Not More RegulationExtensive regulation did not hinder the financial crisisRegulation of financial markets create false securityHarmonisation of financial companies create an additional systemic risk, all eggs in the same basketThe only realistic strategy: economic growth
Slide48Parting Ways: Australia and Argentina
Slide49Laffer Curve: Useful Simplification
Slide50Switzerland, Sweden: Laffer Curve
Slide51Slow Growth, Low Income
Slide52Maximize Growth, not Revenue
Slide53Final commentsWas the revival of economic freedom a return to the pre-1914 world?Two causes for optimism: new technology repeatedly proves pessimists wrong; more world trade, with the BRICs, creates wealthTwo causes for pessimism: the pre-1914 world did’nt have extensive welfare obligations (to those who do not create or contribute), and it had sound money, based on the gold standard
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