Global Credit Crunch Research Articles

The End of Liberal Finance? The Changing Paradigm of Global Financial Governance

Has the global credit crunch shifted the foundations of global financial architecture away from the philosophy of ‘neoliberalism’? In this article, we argue that the neoliberal project is most probably dead and buried, despite the apparent commitment, which we detail in this article, to the spirit of neoliberal thinking in economic thought. By analysing three constitutive elements of neoliberalism (its public, private and regulatory components) before and after the credit crunch, we reveal important geopolitical shifts which are likely to prevent a return to ‘business as usual’ in the world of finance. We find that the defining trend among these changes is the global rise of the Eurozone. Specifically, we argue that the ideal, Anglo-Saxon model of neoliberalism was viable because it was heavily subsidised from around the world. Accordingly, the key to the future of Anglo-Saxon neoliberalism lies with the willingness of European, East Asian and Middle Eastern creditors to continue extending their financial support to the Anglo-Saxon model of finance. We believe that they are unlikely to do so in the future. Spurred by the magnitude of the credit crunch, the rise of Europe is progressively weakening each of the three dimensions of Anglo-Saxon neoliberalism we identify in this article.

Global financial crisis, liquidity pressure in stock markets and efficiency of central bank interventions

In this article, we investigate the hypothesis of efficiency of central bank intervention policies within the current global financial crisis. We firstly discuss the major existing interventions of central banks around the world to improve liquidity, restore investor confidence and avoid a global credit crunch. We then evaluate the short-term efficiency of these policies in the context of the UK, the US and the French financial markets using different modelling techniques. On the one hand, the impulse response functions in a Structural Vector Autoregressive (SVAR) model are used to apprehend stock market reactions to central bank policies. On the other hand, since these reactions are likely to be of an asymmetric and nonlinear nature, a two-regime Smooth Transition Regression-Generalized Autoregressive Conditional Heteroscedasticity (STR-GARCH) model is estimated to explore the complexity and nonlinear responses of stock markets to exogenous shifts in monetary policy shocks. As expected, our findings show...

The Listing of Chinese State-Owned Banks and their Path to Banking and Ownership Reform

AbstractChina's leading state-owned banks have undergone radical transformation in recent years, with six of the country's top seven players listed in both Hong Kong and Shanghai. We first consider how the banks were reorganized for initial public offering, in terms of the removal of non-performing loans and the massive recapitalization of their balance sheets. Second, and more importantly, we consider whether they have been able to retain market share, further commercialize and enhance overall financial positions post-listing. Through in-depth case analysis of the six state-owned banks, we show that post-initial public offering they have significantly improved profitability, loan book size, loan book quality and capital reserve protection. However, we caution that the debilitating effects of the global credit crunch may slow or even arrest further progress across these dimensions in the near term. We conclude that China's leading banks have benefited materially from their transition, and have accordingly developed a range of competitive and co-operative strategies not only to sustain domestic market advantage but also to penetrate overseas markets.

The International Monetary Fund, crisis management and the credit crunch

The International Monetary Fund (IMF) has become one of the most controversial international institutions in history. The IMF's crisis management responsibilities expanded via its involvement with a series of international economic crises during the last three decades, which led to widespread calls for radical reform of the organisation in the aftermath of the emerging market crises of the 1990s. This article examines the IMF's initial response to managing the effects of the global credit crunch, focusing on the new round of large IMF loans approved in late 2008 and early 2009, to assess how much IMF lending policies have changed in practice compared with earlier international crisis episodes. While the organisation has continued to promote conventional loan policy targets aimed at achieving low inflation, low budget deficits, and sustainable public debt, the preliminary evidence also suggests the IMF is developing a more flexible approach to crisis management in borrowing member states. Changes include a greater tolerance for unorthodox policies such as short-term capital controls, greater differentiation in the treatment of borrowers based on their economic circumstances, easier access to precautionary IMF financing for prime borrowers, and more flexibility in the use of loan conditionality.

The Crisis of Invented Money: Liquidity Illusion and the Global Credit Meltdown

In this Article I argue that the global credit crunch of 2007-2009 is the result of the multifaceted phenomenon of illusion. Fundamentally, the problem of illusion derives from the hollow conceptualization of liquidity in mainstream financial theory and practice. Represented most recently by the market completion theory, this paradigm has led to a widespread misunderstanding of the dynamics of the relationship between the process of financial innovation and the of the financial system. In order to unpack the political economy of illusion from other factors in the leadup to the global credit crunch, this Article builds upon Hyman Minsky’s vision of financial innovation and crisis. Challenging mainstream views of the liquidity-enhancing process of financial innovation, I identify the three pillars of illusion in the recent 2002-2007 bout of securitization: a) the paradigm of self-regulating finance; b) the role of Ponzi finance; and c) the function of private authority, namely credit rating agencies.

Class, Capital and Crisis: A Return to Fundamentals

The financial crisis that currently threatens the stability of global capitalism is the latest in a long line of similar episodes stretching back some 200 years. While many orthodox economists explain the crisis in terms of the failure of the proper operation of the market mechanism, radical accounts see crisis as an aspect of the constitution of capital and of the process of the accumulation of capital itself. This article explores the extent to which Marx's understanding of accumulation and crisis can provide the basis for a general theory of capitalist crisis. It concludes that the growing and chronic separation between financial (fictitious) accumulation and productive accumulation is the key to understanding the latest crisis of capital expressed as a global credit crunch. Furthermore, Marx opens the door to the development of an overtly ‘political’ theory of crisis stressing the ‘capitalist use of crisis’ as a means for the violent reassertion of the fundamental class relation.

The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets: Why Did Latin America Fare Better?

The recent global financial turmoil raised questions about the stability of foreign banks' financing to emerging market countries. While foreign banks' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks' lending to LAC countries-whether extended directly by their headquarters abroad or by their local affiliates in host countries-we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks' lending was channeled in domestic currency. We also show that foreign banks' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks' lending.

The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets: Why did Latin America Fare Better?

The recent global financial turmoil raised questions about the stability of foreign banks' financing to emerging market countries. While foreign banks' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks' lending to LAC countries - whether extended directly by their headquarters abroad or by their local affiliates in host countries - we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks' lending was channeled in domestic currency. We also show that foreign banks' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks' lending.

Risk measures in quantitative finance

The current ongoing global credit crunch has highlighted the importance of risk measurement in finance to companies and regulators alike. Despite risk measurement?s central importance to risk management, few papers exist reviewing them or following their evolution from its foremost beginnings up to the current day risk measures. This paper reviews the most important portfolio risk measures in financial mathematics, from Bernoulli to Markowitz?s portfolio theory, to the currently preferred risk measures such as conditional value at risk. We provide a chronological review of the risk measures and survey less commonly known risk measures (e.g. Treynor ratio).

The Politics of Ideologie-Kritik: Socialism in the Age of Neo/Post-Marxism

In significant ways globalization theory derives from and is dependent on ideas originating with Marx, Engels, and Marxism. However, there are important puzzles within the Marxist heritage that need resolving, before current assessments of the global economic situation post-2007 can proceed. This is because these puzzles—about the nature of critique, the appropriate understanding of ideology, and the political power of neo/post Marxism—are part of the situation itself. Only after this clarification do Neo-Marxism and Post-Marxism make contrasting, but consistent sense. In a new era of global depression, credit crunch, and overt class struggle the multi-polar realities of the G20 nations now openly challenge the traditional dichotomies that divided democratic from one-party states, “free market” from planned (socialist) economies, and developed from developing (capitalist) economies. Globalization theory will thus require revision, and international political economy will necessarily rely on Ideologie-Kritik.

Will ethical consumers sustain their values in the global credit crunch?

PurposeThe current global recession is presenting new and difficult challenges for those customers wishing to consume sustainably and ethically, and the marketers who seek to provide the goods that allow them to do so. The purpose of this paper is to explore to what extent international marketers can engage consumers with a social conscience and retain their loyalty both during and after the recession.Design/methodology/approachThis paper explores the impact the global recession is having upon consumers and marketers, and considers the evidence surrounding concerns that the demand for ethical products will decline across international markets as the recession deepens.FindingsThe discussion acknowledges that while discount retailers are thriving, and customers are trading down, evidence suggests that across international markets a significant number of socially conscious consumers are still exhibiting ethical consumption behaviour. Future marketing opportunities lie in providing consumers with products that will deliver value without compromising their ethical social values.Originality/valueThe paper offers a balanced perspective on the significance of ethical consumers to international marketers. The analysis highlights a number of threats and opportunities that exist in the current global recession, and the discussion is illustrated with several examples of successful marketing ethics in action.

Fool's gold

Why did the bankers, regulators and ratings agencies collaborate to build and run a system that was doomed to self-destruct? Did they fail to see the flaws, or deliberately ignore them? Unlike many banking crises, this one was not triggered by war, recession or external economic shock. All these questions and more are addressed in Gillian Tett's 'Fool's Gold', a fascinating inside story by a Financial Times journalist. It explores the shadowy world of complex finance and derivatives and how the business of slicing and dicing debt led to the global credit crunch. How, it asks, could a small group of talented bankers, linked to an iconic pillar of the banking world, dream up an innovative set of products such as 'credit default swaps' and others even more complex? It wasn't entirely the fault of a few greedy individuals. The entire financial system seemed to go wrong as a result of flawed incentives and lack of accountability.

Financialised Elites and the Changing Nature of Finance Capitalism: Investment Bankers in London's Financial District

This paper uses the financial and economic downturn widely dated back to summer 2007 to develop understandings of financial elites in London's international financial district. Drawing on empirical research conducted into fee earning investment bankers and social scientific research into elites and power relations, I focus on the different modalities of power associated with the changing nature of these ‘financialised elites’. I argue that in contrast to earlier generations of financiers, the power of contemporary investment bankers emerges through their role choreographing transnational networks of financial actors associated with securitised and structured products rather than being purely read off their social or education background. I suggest that these networked forms of power relation are significant because, on the one hand, they have prevented investment bankers distancing themselves from the ongoing turbulence and uncertainty within the international financial system. Meanwhile, on the other hand, the ability of investment bankers to (re)produce such networks indicates that suggestions of the demise of ‘financialised elites’ in the wake of the global credit crunch may be too hasty as previous financial crises demonstrate the considerable ability of ‘financialised elites’ to seize moments of conjunctural opportunity to reinvent themselves through new financial products and organisations.

Corporate governance: beyond convergence? A comparative analysis in the wake of the global credit crunch

The relative merits of shareholder versus stakeholder models of corporate governance have long been contested. Liberalisation and globalisation of financial markets resulted in the suggestion of potential convergence along shareholder principles. Research has attempted to justify the supremacy of one system over the other, however empirical evidence is weak. The culturally embedded nature of corporate governance within institutional frameworks suggests that transposition of single features may be inappropriate and may disrupt the overall efficiencies of a national system. The proportionality debate remains a key limiting factor in attempts at alignment. This paper will review the current state of the debate. It will employ comparative analysis to identify the path dependent evolution of corporate governance, contrasting differences within and between specific shareholder and stakeholder models. It will demonstrate alternative national responses to globalising pressures, to consider whether or not the contemporary situation can indeed, be regarded as one: beyond convergence?

Why Has Japan Been Hit So Hard by the Global Recession?

The Japanese economy has been hit hard by the slump in global demand for advanced manufacturing products such as cars, information technology, and machinery, which account for a larger share of production than in other G-7 economies. Most of the drop in Japan’s exports was caused by a sharp retrenchment in overseas demand for motor vehicles, information technology, and capital goods, as firms and consumers cut their investment and durable goods spending in response to the global credit crunch and extraordinary uncertainties about the outlook. Worsening domestic financial conditions deepened the current recession by reducing domestic demand, especially business investment. The short-term outlook is further clouded by the needed adjustment to inventories, which have accumulated well above normal levels in both Japan and its export markets. During the 2001 recession, industrial production started recovering about 5 months after the peak of the inventory cycle. By analogy, one could expect a bottom in industrial production around May 2009. However, since the global environment is expected to remain weak and the Japanese economy faces headwinds from tight domestic financial conditions, the production adjustment could take longer during this recession.

Credit ratings quality: The perceptions of market participants and other interested parties

The global credit crunch of 2008 and related sub-prime mortgage crisis of 2007 have made credit ratings agencies (CRAs) the focus of international attention. In particular, the quality of ratings information and the responsibilities CRAs owe to financial markets have come under intense scrutiny. Specifically, commentators, politicians, and regulators have expressed concern at the involvement CRAs might have had in creating global financial instability. However, the term ratings quality remains largely absent from the academic literature. This paper constructs a measurement instrument to capture ratings quality provided by CRAs, and assesses differences in perceptions of ratings quality amongst four stakeholder groups in public debt markets. Two macro-constructs of ratings quality are identified, labelled Technical Qualities and Relationship Qualities. The two macro-constructs are measured by ten micro-attributes, labelled: Cooperation; Independence; Internal Processes; Issuer Orientation; Methodology; Reputation; Service Quality; Shared Values and Norms; Transparency; and Trust. Each micro-attribute is operationalised into individual items, and then empirically tested using data obtained in the UK from 121 issuers, 75 non-debt issuing financial managers, 90 investors, and 120 other interested parties. The data suggest that ratings quality involves, in order of importance: the CRA's reputation; those values and norms of the CRA shared by users; the methodologies employed by the CRA; the independence of the CRA; and internal processes within the CRA. Multivariate analysis of variance finds no statistically significant variation between the groups for Technical Qualities factors. However, issuers rate Relationship Qualities and its micro-attributes of Trust, Issuer Orientation, and Service Quality higher than other market participants; a finding that reflects the dyadic relationship between the issuer's treasurer and lead analyst of the CRA. The paper concludes with a number of policy-relevant issues.

MORE CHEMICAL PLANTS ARE CLOSING

THE GLOBAL CREDIT CRUNCH is casting a growing shadow over the chemical industry. The latest bad news is a new round of plant shutdowns and earnings warnings. Nova Chemicals and Solutia are closing ...

The subprime solution: how today's global financial crisis happened, and what to do about it

The subprime mortgage crisis has already wreaked havoc on the lives of millions of people and now it threatens to derail the U.S. economy and economies around the world. In this trenchant book, best-selling economist Robert Shiller reveals the origins of this crisis and puts forward bold measures to solve it. He calls for an aggressive response--a restructuring of the institutional foundations of the financial system that will not only allow people once again to buy and sell homes with confidence, but will create the conditions for greater prosperity in America and throughout the deeply interconnected world economy. Shiller blames the subprime crisis on the irrational exuberance that drove the economy's two most recent bubbles--in stocks in the 1990s and in housing between 2000 and 2007. He shows how these bubbles led to the dangerous overextension of credit now resulting in foreclosures, bankruptcies, and write-offs, as well as a global credit crunch. To restore confidence in the markets, Shiller argues, bailouts are needed in the short run. But he insists that these bailouts must be targeted at low-income victims of subprime deals. In the longer term, the subprime solution will require leaders to revamp the financial framework by deploying an ambitious package of initiatives to inhibit the formation of bubbles and limit risks, including better financial information; simplified legal contracts and regulations; expanded markets for managing risks; home equity insurance policies; income-linked home loans; and new measures to protect consumers against hidden inflationary effects. This powerful book is essential reading for anyone who wants to understand how we got into the subprime mess--and how we can get out.

Comments: Rig Boom

Editor's column Despite the current global financial crisis and recent steep decline in commodity prices, the market outlook for drilling rigs remains strong. Demand for deepwater units, in particular, remains healthy. Even with a global recession, world energy demand is projected to rise in the medium term and companies are moving to deeper waters and frontier areas to secure new production. Mobile offshore drilling rig demand in almost all of the world's major drilling centers have been posting 90%-plus utilization rates, and strong demand and tight rig supply have contributed to strong dayrates. A rig that may have brought in USD 200,000/day a few years ago can now earn USD 500,000/day and recent contracts for deepwater rigs have topped USD 600,000/day. A surge of interest in new drillships, semisubmersibles, and high-end jackups has occurred the past several years and some of those are now entering the market. The best markets for floating rigs have been Brazil, west Africa, the US Gulf of Mexico, and southeast Asia. In addition, 181 rigs are currently being built or on order, including 85 jackups, 54 semisubmersibles, and 42 drillships, according to Citigroup energy analysts. Of these 181, more than half are currently under contract. While about 69% of the floaters (drillships and semisubmersibles) have contract commitments, only about a third of the newbuild jackups do, so it is unclear how many will become operational. Some of that newbuild interest is turning toward rigs that can operate in particularly harsh conditions, such as the Arctic, or in ultradeepwater. Rigs in the Barents Sea—where Gazprom, StatoilHydro, and Total are developing the world-class Shtokman gas field—will need to withstand unprecedented harsh climatic conditions and vast icebergs. Shtokman will require three of the largest platforms in the world, ice-resistant and capable of withstanding 25 m waves. Three seabed pipelines will carry the gas to shore to terminals in Teriberka in the Murmansk region, where an LNG plant will be located. Buoyed by recent discoveries and ambitious development plans, Brazil has emerged as the dominant leader in the drilling rig market. Utilization rates there are at 100% with 31 semisubmersibles and nine drillships in the region under contract. State oil company Petrobras is reportedly in the market for as many as 40 deepwater rigs, even though it has already contracted the majority of the existing ultradeepwater fleet. That indicates that there is still a shortage of deepwater rigs worldwide, even if the global economy and oil demand soften. West Africa rig utilization is nearly as strong, at 97%. And China's offshore deepwater oil and gas development has also set off rig construction activity. The global credit crunch is limiting the ability of companies to get financing and may slow the pace of newbuilds significantly, however. Higher steel and equipment prices combined with the tighter finance market already appear to have cooled off the speculative newbuild market.

Stacking up the woe [industrial economics

The continent's economy is in crisis but its manufacturing base was in decline long before the credit crunch. The article surveys America's blighted industrial landscape. American homeowners and financiers are feeling the brum of the global credit crunch, and some would say deservedly so. But well before the first signs of the sub-prime mortgage-fuelled crisis started to emerge in August 2007, it was already clear that the US was going through an industrial crisis of unprecedented proportions. The succession of massively negative trade balances, quarter after quarter, ended up contributing to the loss of over 3.6 million US manufacturing jobs since 2000, with tens of thousands of factories forced to shut down in the process. If anything, the current gloomy economic climate has served only to compound the sense of distress for the vast majority of sectors involved in American manufacturing. The recent surge in the price of key production commodities such as oil and steel, as well as falling domestic consumer demand, is forcing companies to adopt all sorts of downsizing, cost cutting and restructuring measures as they try to weather the storm.