What do these authors add to understanding of the 2008 crisis and of financial capitalism in general?

The author provides insights into the 2008 crisis by highlighting the role of speculative capital flows, the
shift from foreign direct investment to portfolio investment, and the impact of deregulation on
financial stability. They emphasize how the crisis was not merely a result of isolated events but
symptomatic of broader weaknesses in global capital markets.

Regarding financial capitalism in general, the author underscores the structural causes of instability,
such as liberalized financial markets, technological advancements, and policy changes favoring short-
term gains over long-term stability. They also point out the influence of bad actors, including speculative
investors, unregulated financial institutions, and governments pursuing deregulation agendas.

Structural causes vs bad actors?

Structural Causes: ---- DTPG Deregulation-Tech-Portfolio-Gains IMF is a bad guy, poor countries which
were following the instructions of IMF came out to be the losers. Ellwood puts blame on IMF.

 Deregulation of financial markets.

 Technological advancements facilitating speculative trading.
 Shift from foreign direct investment to Portfolio investment.
 Policy changes promoting short-term Gains over long-term stability.

Bad Actors:

 Speculative Investors seeking immediate profits.

 Unregulated financial institutions engaging in risky practices.
 Governments pursuing deregulation agendas without considering long-term consequences.

Winners and losers?

Winners:

 Speculative investors profiting from short-term fluctuations.

 Financial institutions engaging in speculative trading.
 Governments advocating for deregulation to attract foreign investment.

Losers:

 Countries experiencing financial crises due to speculative capital flight.

 Workers facing job losses and reduced public services during economic downturns.
 Economies vulnerable to external shocks due to excessive reliance on speculative capital inflows.

Austerity is not the right policy. Squeezing an economy instead of bailing out as a policy has been
counter intuitive. Case in point – Greece.

Acceleration of Economic Globalization

 Economic globalization is rapidly changing lives worldwide.
 Wealth accumulation for a minority exacerbates rich-poor disparities.
 Global finance, especially foreign exchange trading, has surged over the past 30 years.
 Daily average foreign exchange trading increased from $80 billion in 1980 to over $3,000 billion
today.
 Most investments in global finance are disconnected from producing tangible goods or services.
 Speculative investment has surpassed productive investment in driving the global economy.
 There are minimal controls on international capital movement.
 Bretton Woods institutions advocate for more financial liberalization.
 Critics, echoing Keynes, warn about the dangers of speculation overtaking enterprise.
 Bretton Woods aimed to control finance capital within national borders.
 Since 1979, deregulation led to short-term speculation dominating international investment flows.
 Unregulated capital flows threaten global economic stability, creating a "global financial casino."
 Governments feel constrained by market forces, hesitant to introduce laws that might upset
investors.
 Financial deregulation in the early 1980s, combined with technological advancements, fueled
speculative investment.
 The "Wall Street/Treasury" complex pressured governments to dismantle capital controls in the
1980s.

Third world countries liberalized their countries out of market pressure or forced by financial institutions
like World Bank or IMF.

Hot money: large amount of money moving in and out very quickly.

Countries wanted to put some regularization back in place but as soon as they try to do that the money
would go out and bubble would burst.

FDI: People buy equity in local companies, purchase a company or set up new factory etc.

Foreign Portfolio Investment: People started investing in Bonds, stock markets, currencies.

Contagion Effect: When people in one market lose money due to bubble burst, other investors fear the
same about other markets (see it with skepticism). Sovereign debt crisis of Europe followed subprime
mortgage crisis. Property is the another form of speculative investment. The housing prices are delinked
from the real value of money (use value). Speculation create bubble, skepticism burst it.

First the countries eat up own foreign reserves (whatever is left after the flight of capital) – first line of
defense. Then they float the exchange rate of their currency causing more devaluation.

The Revolution in Financial Services and its Impact

1. Unprecedented Deregulation:
 - The financial services industry experienced a significant revolution, marked by mergers, acquisitions,
and overseas expansions.

- Banks, trust companies, insurance firms, and investment brokerages gained the ability to compete
internationally, leading to a level of deregulation not seen since the 1930s.

2. Link to Technological Advancements:

- The growth in the finance sector was closely tied to the micro-electronics revolution.

- Computerization enabled instant movement of millions of dollars globally, facilitating currency

trading and profit from minor price fluctuations.

3. Global Arbitrage:

- Filipino activist Walden Bello describes global arbitrage as a game where capital exploits interest-rate
differentials, currency value gaps, and stock short-selling.

- Volatility, driven by high-tech trading, has become a driving force in the global capitalist system.

4. Types of Investment:

- Money managers can invest in foreign direct investment (FDI) or foreign portfolio investment (FPI).

- FDI is stable and long-term, involving equity purchase in local companies, while FPI, more volatile,
includes buying shares in local stock markets.

5. **Shift Towards Portfolio Investment**:

- UNCTAD reports a shift from FDI to FPI during the 1990s in developing countries.

- Portfolio investment's attraction to immediate gains can lead to herd behavior and massive
withdrawals during crises.

6. **History of Financial Crises**:

- Financial crises have been frequent since the era of hyper-deregulation, with notable crises in Russia,
Brazil, Turkey, and Argentina, culminating in the 2007/08 global crash.
 - Governments intervened with massive bailouts and fiscal stimulus packages to prevent systemic
collapse.

7. **Impact of Southeast Asian Crisis**:

- The 1997 Southeast Asian crisis highlighted the vulnerability of economies to speculative capital
flows.

- Short-term investments flooded the region, causing devaluation, factory closures, job losses, and
severe cuts in public services.

8. **Policy Changes in Southeast Asia**:

- Southeast Asian countries embraced the 'Washington Consensus,' deregulating their capital accounts
to attract foreign investment.

- Policies included raising domestic interest rates, pegging currencies to the dollar, and opening doors
to foreign investment, leading to vulnerability to speculative capital inflows.

Impact of 'Hot Money' on National Economies:

- **Thailand's Case Study:**

- Initially lauded for its outward orientation and market-friendly policies, Thailand faced economic
turmoil due to speculative investments.

- Radical deregulation in the financial sector, including loosening rules on portfolio management and
dismantling of exchange controls, led to an influx of short-term capital.

- Most investment went into non-productive sectors like real estate and consumer credit, creating a
bubble.

- When investors panicked and withdrew funds, it triggered a contagion effect across the region,
leading to currency devaluations and economic crises.

- **Regional Crisis:**
 - South Korea, Indonesia, Malaysia, and the Philippines also faced escalating debt levels, predominantly
short-term, leading to financial disaster.

- Speculative attacks and devaluation of local currencies exacerbated the crisis, causing businesses to
default and unemployment to soar.

- IMF's intervention worsened the situation, imposing austerity measures and liberalizing capital
accounts, which deepened recessions.

Indonesia: 20 million laid off, 100 million below poverty line, racial scapegoating,

Malaysia: Pegged its currency to US dollar, portfolio investors had to keep the money in Malaysia for at-
least 1 year… that way it defeated the neoliberal policies. Also trade in Ringgit outside the country is not
recognized or foreign investment in stock exchange was reduced. These controls allowed Malaysia to
stimulate domestic economy. Other solutions to neoliberalism – some countries don’t allow buying
anything without the reference of a local citizen.

Argentina: 5 presidents resigned to escape the crisis since 2001; 1990s Carlos menem, IMF forced
neoliberal experiment, peg the peso to the US dollar, Default on $100 Bn, 21% un-employment, 17% fall
in GDP, Argentina reduce to barter, Overhauled exchange rates hurt exports, helped imports. 75% of
people debt right off.

- **Winners and Losers:**

- Western corporate interests capitalized on the crisis, acquiring assets at bargain prices, while Asian
economies suffered.

- Countries like China and Malaysia, with stricter controls on capital flows, fared comparatively better.

- **Latin American Experience:**

- Argentina and Brazil, embracing IMF-backed policies, faced severe economic downturns, defaulting on
debts and experiencing social unrest.

- Argentina's subsequent rejection of IMF policies led to a remarkable recovery, emphasizing domestic
control over economic policies.

- **Global Financial System:**

 - IMF's approach of liberalizing capital accounts and resisting capital controls has contributed to
recurring financial crises.

- Calls for greater regulation and national control over capital movements are mounting, as citizens
worldwide bear the brunt of speculative financial activities.