Tag Archives: Financial crisis

Yes, someone is to blame

A pandemic may be represented as a ‘natural disaster’. A global depression is however the product of ideology and powerful political actors.
By James K Galbraith and Albena Azmanova – An unprecedented economic crisis is descending on Europe. It is, the president of the European Central Bank, Christine Lagarde, declared recently to the European Parliament, the worst in peacetime.

In the United States, the Federal Reserve Bank reports the worst decline in output and employment in 90 years. The World Bank warns that the world is on the precipice of the deepest slump since 1945—with up to 60 million people pauperized, many in countries already poor.

Lagarde hurried to clarify that this vast human tragedy was, in her view, ‘of no one’s fault or making’—as if a medical crisis could metamorphose into a social crisis all by itself. The catastrophe is however the work of ideas, of politics and of policies.

In the US, testing was botched, delayed and is still not available on demand. In France, vast stocks of personal protective equipment, accumulated for the H1N1 epidemic, had been sold off, stored badly and ruined. In the United Kingdom and Sweden, the authorities thought first to let the virus run free, seeking ‘herd immunity’ at the implicit price of many thousands dead.

These were not mere mistakes or simple accidents: they were political decisions. They were consequences of an ideology built over decades. There were sins of commission and sins of omission—to invoke a pair of concepts developed by Hannah Arendt—their result a fragile economic structure, marked by precarity and primed for collapse.

The sins of commission came first. From the late 1970s, political leaders throughout the west embarked on the formidable project which came to be known as neoliberal capitalism. Deregulation, decentralization, privatization, balanced budgets and tight money were key elements of the ‘Washington consensus’ advanced by national elites and the international financial institutions, especially the International Monetary Fund. Public services and welfare programs were slashed, including critical expenditures on public health.

The initial goals were to break trade unions and curtail inflation, albeit at the expense of core manufacturing capability. more>

Updates from Chicago Booth

US small businesses have little cushion against prolonged disruptions
By Michael Maiello – Even in a growing economy, most small businesses in the United States lack sufficient reserve capital to endure a prolonged business interruption, so a natural disaster, pandemic, or any condition that interrupts normal operations can quickly lead to job cuts and business failures. If the government wants to keep small businesses afloat, its support must be enacted quickly and generously and be easy to access, according to a survey of 5,800 small businesses conducted early during the COVID-19 outbreak in the US.

University of Illinois’s Alexander W. Bartik, Chicago Booth’s Marianne Bertrand, and Harvard’s Zoë Cullen, Edward Glaeser, Michael Luca, and Christopher Stanton have been studying small-business behaviors, decision-making, and attitudes. Their research provides a detailed look at the financial health of small businesses heading into COVID-19 and underscores the need for fast and easy-to-access government interventions when businesses are interrupted.

The researchers conducted their survey as the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in late March and implemented in April. By then, small-business owners, who employ 48 percent of American workers, had already cut their workforces massively, a sign of their precarious finances even ahead of the outbreak. Three quarters of survey respondents, who are all members of Alignable, a small-business network, reported they had cash on hand to cover expenses for no more than two months.

Survey respondents who believed the pandemic would last longer were more pessimistic about their companies’ chances of surviving. The researchers estimated that business closures could lead to almost 33 million job losses if the pandemic were to last four months, 35 million if it were to extend six months. more>

Related>

Protection against hostile takeovers: rethinking the free movement of capital

Should free movement of capital any longer be sacrosanct when it leads to predatory takeovers and regional inequalities in a globalized economy?
By Susanne Wixforth and John Weeks – ‘Is China buying up Europe’s south?’ Such headlines have become frequent since the 2008 financial crisis. The Chinese takeovers include Greece’s biggest harbor in Piraeus, companies operating terminals in Romanian and Spanish harbors and the airport in Frankfurt-Hahn. And bear in mind that the United States accounts for 38 per cent of global foreign direct investment (FDI), Chinese capital just 2.2 per cent—though its share is increasing, especially via investments in strategic infrastructure as part of its ‘belt and road’ initiative.

European infrastructure and companies operating in the single market are open to the world because of perhaps the foremost of the famous ‘four freedoms’—the free movement of capital. The orthodox-economics claim is that free movement ensures the optimal allocation of capital.

The globalization of capital flows, in combination with digital communication, enables capital markets to be in motion around the clock. The result is an unprecedented market interdependency, with a simultaneous loss of state regulation and increased vulnerability to crises. The second global crisis of the 21st century caused by the Covid-19 pandemic has led to a dramatic drop in share prices and company valuations.

This collapse facilitates takeovers by foreign companies. Does the European Union need a different interpretation of free movement of capital, to protect European key technologies and strategic infrastructure?

Fourteen EU member states have adopted regulation to control FDI. The German government is considering use of its coronavirus-linked Economic Stabilization Fund for company ownership to protect against hostile takeovers, while the French government has created an investment fund (Lac d’argent) for that purpose. more>

Could “banksters” become bankers again?

By Lena Deros – The term “bankster” has become trendy recently due to the various financial problems governments and economies are facing. Problems arise and somehow get resolved, but only through financial ruses.

In the 1980s, I was working with one of the world top Investment Banks in Europe. At that time hedge funds, derivatives and all kind of paper products were traded through the capital markets and were the top theme for any sophisticated investor.

One of the most legendary traders in the bank at that time was recruiting the best minds in math and physics from the top schools in the UK to train them and create financial products (derivatives).

The profits that the boys were accumulating were out of proportion to what a normal business person or executive could earn in a normal business, especially as they were just coming out of the university.

Of course, they were all ecstatic. The simplified procedure was based on the real economy. They were creating products 3 or 4 levels over the real assets and these were bought and traded by hedge and pension funds. Since trading was done in big amounts, and on a daily basis, the profits were excellent, but the result when viewed from the perspective of the economy, was that strong minds were deprived from producing real services and products. Instead, profit was created through paper trading. This generated claims to real wealth without creating one potato.

This enhanced inflation and created bubbles. Of course, no banker, financial consultant, or investor wanted to use their logic at the time as they were all plunging into the flood of increased profits without thinking of the immediate future.

It took some years until the surprised sector began to see what it knew all-to-well to be wrong as it was going bankrupt. Everyone was looking for a scapegoat, and most of the solutions were, again, based on 2+2=5 logic. more>

Why Society’s Biggest Freeloaders are at the Top

No, wealth isn’t created at the top. It is merely devoured there.
By Rutger Bregman – This piece is about one of the biggest taboos of our times. About a truth that is seldom acknowledged, and yet – on reflection – cannot be denied. The truth that we are living in an inverse welfare state.

These days, politicians from the left to the right assume that most wealth is created at the top. By the visionaries, by the job creators, and by the people who have “made it”. By the go-getters oozing talent and entrepreneurialism that are helping to advance the whole world.

Now, we may disagree about the extent to which success deserves to be rewarded – the philosophy of the left is that the strongest shoulders should bear the heaviest burden, while the right fears high taxes will blunt enterprise – but across the spectrum virtually all agree that wealth is created primarily at the top.

So entrenched is this assumption that it’s even embedded in our language. When economists talk about “productivity”, what they really mean is the size of your paycheck. And when we use terms like “welfare state”, “redistribution” and “solidarity”, we’re implicitly subscribing to the view that there are two strata: the makers and the takers, the producers and the couch potatoes, the hardworking citizens – and everybody else.

In reality, it is precisely the other way around. In reality, it is the waste collectors, the nurses, and the cleaners whose shoulders are supporting the apex of the pyramid. They are the true mechanism of social solidarity. Meanwhile, a growing share of those we hail as “successful” and “innovative” are earning their wealth at the expense of others. The people getting the biggest handouts are not down around the bottom, but at the very top. Yet their perilous dependence on others goes unseen. Almost no one talks about it. Even for politicians on the left, it’s a non-issue.

To understand why, we need to recognize that there are two ways of making money. The first is what most of us do: work. That means tapping into our knowledge and know-how (our “human capital” in economic terms) to create something new, whether that’s a takeout app, a wedding cake, a stylish updo, or a perfectly poured pint. To work is to create. Ergo, to work is to create new wealth.

But there is also a second way to make money. That’s the rentier way: by leveraging control over something that already exists, such as land, knowledge, or money, to increase your wealth. You produce nothing, yet profit nonetheless. By definition, the rentier makes his living at others’ expense, using his power to claim economic benefit. more>

Updates from Chicago Booth

How leaders can rise to the challenge of COVID-19
By Daniel Diermeier – As cases of COVID-19 continue to grow across the world, leaders in business, government, and other spheres face unprecedented challenges. The disease has encroached not only on public health but on global economic well-being and on some of the most fundamental practices of modern society. It has generated great anxiety and exacted an enormous and growing human toll. And it has required virtually every organization to reinvent its processes to cope with a world in which many people simply don’t feel safe being in the same room together.

Crisis situations can overwhelm even the most experienced leaders, presenting unexpected, complex scenarios that evolve at a fast pace and in several directions. Even in cases in which contingency plans have been prepared, those plans need to be adjusted to respond to rapidly changing circumstances. Fortunately, there are tools and perspectives leaders can use to help their organizations weather difficult times. By building trust, managing fear, and encouraging a sense of duty and community orientation, any leader—whether in business, government, or the nonprofit sector, and in organizations big and small—can better navigate the difficult path of crisis management.

Crises frequently happen without warning and require a response under extreme time pressure. Decision makers often find themselves drowning in data, yet truly vital information is not available. During these situations, leaders must continue to build trust, both internally and externally. Doing so generates much-needed room to maneuver and the goodwill that leaders will need to rely on when tough decisions have to be made.

Even though the desirability of trust is obvious, leaders often struggle with building and maintaining it, especially during high-stakes crises. Research has identified four major factors that influence the level of trust among stakeholders involved in a crisis, summarized in what I’ve called the Trust Radar:

Full transparency is reached when, in the mind of your audience, all relevant questions have been addressed. Your audience—not you—will determine what information is considered relevant. What is relevant will also vary for different audiences. more>

Related>

The Coronavirus Crisis in the U.S. Is a Failure of Democracy

By David Litt – It’s become commonplace to refer to COVID-19 as “the worst public health crisis of our lifetimes.” But what has cost the United States so many lives and jobs during the pandemic is not, at root, a failure of public health. It’s a failure of democracy.

Despite our political polarization, and in the face of an unprecedented threat, the American people have been in remarkable agreement about what they expect from their government. From the time the virus was discovered, our scientists and public health officials urged aggressive action and put forward plans to save lives. Poll after poll has shown that a clear majority of Americans trust want our leaders to heed the experts’ advice. Yet that hasn’t happened. We were far too slow to implement social-distancing guidelines – a delay epidemiologists found is responsible for 90% of U.S. coronavirus deaths – and now we’re acting far too quickly to reopen the economy.

In other words, with lives on the line, our elected leaders are ignoring the people’s will, and Americans are dying as a result. In our shining city on a hill – the global model for representative government – how could this possibly happen? more>

Updates from Chicago Booth

How the Fed plans to pay the country’s bills
By John H. Cochrane – Public attention in the United States during the first phase of the COVID-19 crisis has been largely on the disease itself, the massive social and economic shock of the shutdown, and how we can orchestrate a safe reopening. But we also need to pay some attention to the financial side of the current situation, and the Federal Reserve’s immense reaction to it. Whatever one thinks of that reaction, it’s important to understand what the bank did, what beneficial and adverse consequences there are, and how our financial and economic system and policies might be set up better in the future.

We face a severe economic downturn of unknown duration. If it is something other than a V-shaped downturn spanning months rather than years, there will be a wave of bankruptcies, from individuals to corporations, and huge losses all over the financial system. “Well, earn returns in good times and take losses in bad times,” you may say, and I do, more often than the Fed does, but for now this is simply a fact.

Our government’s basic economic plan to confront this situation is simple: the Federal Reserve will print money to pay every bill, and guarantee every debt, for the duration. And, to a somewhat lesser approximation, the plan is also to ensure that no fixed-income investor loses money.

To be clear, my intention here is not to criticize this plan. From a combination of voluntary and imposed social distancing, the economy is collapsing. Twenty million people, more than 1 in 10 US workers, lost their jobs in the first month of the COVID-19 shutdowns. That’s more than the entire 2008–09 recession, all in the course of three weeks. A third of US apartment renters didn’t pay April rent. Run that up through the financial system: most guesses say that companies have one to three months of cash on hand, and then fail.

If you want to know why the Fed hit the panic button, it’s because every alarm went off.

Is the plan really to try to pay every bill?

Yes, pretty much. This is not stimulus. It is “get-through-it-us.” People who lost jobs and businesses that have no income can’t pay their bills. When people run out of cash, they stop paying rent, mortgages, utilities, and consumer debts. In turn, the people who lent them money are in trouble. Businesses with zero income can’t pay debts, employees, rent, mortgages, or utilities either. When they stop paying, they go through bankruptcy, and their creditors get into trouble. If you want to stop a financial crisis, you have to pay all the bills, not just hand out some cash so people can buy food.

And that’s more or less the plan. more>

Related>

Challenges for international institutions during COVID 19

By Erol User – International institutions still represent a compromise between the power capabilities of their participants and the need for relative civilizational interaction between them. Institutions cannot be effective or on their own. It always depends on the ability of states to agree and the presence of objective structural prerequisites.

In the latter half of April, disputes between China and the United States led to the disruption of a tele-meeting by the G20 countries.

Due to the fact that this grouping is considered the most representative and, at the same time, the least binding in terms of decision-making, until recently it was considered the most promising in the context of a crumbling world order and the growth of national egoism.

However, the first round of the most important interstate confrontation of the new era already called into question the very possibility of discussions between the leaders of the 20 most economically and politically important countries of the world. Somewhat earlier, the US government announced that it plans to stop funding the World Health Organisation, where it is the main donor. Washington does not like much at the WHO. But the main thing is that China has so far been able to exert more influence on its work than the United States itself. Donald Trump is trying to correct this imbalance in the ways characteristic of his policymaking. The result is not yet obvious.

Such course of events makes more than relevant the question of the future of international institutions, the most important achievement of international politics in the 20th century.

Mankind went without constant norms and rules for most of its political history. Since the formation of the first states, collectives of individuals have reflected nothing but their own conscience and the strength of other collectives in their actions. In Europe, the role of arbiter was for a short time, less than 1,000 years, played by the Catholic potentate in Rome. The church did not have its own armies, but it did have moral authority. Moreover, the popes’ lack of their own military power, as well as their claim to the universality of spiritual power, did not allow the Holy See to become one of the ordinary states.

Accordingly, the values ​​and rules that Rome tried to impose during the Middle Ages did not directly express anyone’s values ​​or interests. Therefore, they were relatively fair, for the most part. At the beginning of the 16th century, European states became so strong that they became nonplussed with the power of Rome. Over the next 400 years, they lived practically without any institutions embodying the need to follow the rules. As a result of the Thirty Years’ War of 1618 – 1648, at least general rules of conduct appeared, therefore Kissinger in his book World Order defined the Westphalian system as “having not a substantive, but a procedural character.” This was a great achievement for its time, but it was far from an attempt to establish genuine, civilized relations between peoples. more>

Updates from McKinsey

A CEO’s guide to reenergizing the senior team
In today’s tough and fast-changing environment, CEOs must help their top leaders to work through fear and denial and to learn new rules.
By Derek Dean – When business conditions change as dramatically as they have in the past year, CEOs need to be able to rely on their best leaders to adapt quickly. But what should they do when their strongest executives seem unable to play a new game? The costs—organizational drift, missed opportunities, unaddressed threats—are so big that it’s tempting to replace leaders who are suffering from paralysis. But this is a mistake when, as is often the case, these executives possess valuable assets, such as superior market knowledge, relationships, and organizational savvy, that are difficult to replace.

Before sending promising executives off the field, CEOs should try to help them learn to play by new rules. While part of the task—making a compelling case for change, helping him or her meet new job demands—involves appealing to an executive’s rational side, there’s also frequently an emotional element that is at least as important. Empathizing with the complex emotions executives may be feeling as the assumptions underlying their business approach unravel can be a critical part of overcoming the fear, denial, and learning blocks keeping them stuck.

Helping senior managers swim through this thick stew of challenges is a perennial problem that has become more acute for many organizations over the last year. The credit crunch and global economic slowdown didn’t just cause the unraveling of many business models. They also unsettled the assumptions and confidence of many senior managers. Mopping up the collateral damage in the executive suite is now a mission-critical task for many CEOs and is likely to remain one even when business conditions begin to recover.

Among the many emotions that can influence how executives interpret and respond to events, there’s one worth addressing on its own: plain old white-knuckled fear. In times of rapid change, when the actions that used to lead to success don’t any more, even strong leaders can experience intense, unproductive levels of fear caused by threats to their identity, their reputations, their social standing, and even their basic survival needs of a job and a paycheck. Ironically, leaders with the strongest track records are often more susceptible to fear during tumultuous periods because they have less experience facing adversity than their colleagues with more checkered pasts do. more>

Related>