The End of Financial

Capitalism: What Now?

C.C Shroff Memorial Lecture
K.C College, Mumbai
Friday, 13 February, 2009

By:
Mukul G Asher
Professor of Public Policy
National University of Singapore
(sppasher@nus.edu.sg)
“The highest form a civilization
can reach is a seamless web
of deserved trust”
Charlie Munger
Dr Reddy’s Characterization of
financial capitalism
• The complexity, sophistication and
finesse associated with it gave the
financial sector a larger than life
profile. Lulled by the seemingly
benign economic environment, we
deluded ourselves into believing that
for every real life problem, no matter
how complex, there is a financial
sector solution
Source: RBI Governor speech, Dec 4, 2008

3
 Continued…

• Forgotten in the euphoria of financial

alchemy is the basic tenet that the
financial sector has no standing of its
own; it derives its strength and
resilience from the real economy. It is
the sector that should derive the
financial sector, not the other way
round

4
 Continued…

• So the issue for debate is, how do we

keep the real sector inline with the
real sector

5
The tail (financial sector) wagged
the dog (real economy)
4.0% 14.0%

3.5% 12.0%

3.0%
10.0%
2.5%
8.0%
2.0%
6.0%
1.5%
4.0%
1.0%

0.5% 2.0%

0.0% 0.0%
1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

Financial Sector Share of GDP (LHS) Non-financial sector share of GDP

Source: Bureau of Economic Analysis

6
Excesses of Financial Capitalism :
CEOs vs Average Worker

• USA - 344 times

• FTSE 350 boards - 39 times
• Japan - 3 times

7
 Size of financial assets as a share
of GDP (larger in UK as than in US)
Size of financial assets as share of GDP

Multiples of GDP
10 Why would you want to
own the pound?
8

0
87 97 07 87 97 07 99 07
US UK EMU
Others
Insurance and pension funds
Depository banks
Source: US board of Governors of the Federal Reserve System; ONS, ECB and IMF

8
Credit Exposure to Capital Ratio (in
Millions)
Bank Assets Derivatives Credit
Exposure to
Capital
Ratio
J.P.Morgan $1,768,657 $87,688,008 400.2
Chase
Citi $1,207,007 $35,645,429 259.5

Bank of $1,359,071 $38,673,967 177.6

America
HSBC $181,587 $4,133,712 664.2
Weapons of Obscurity

Source: “Alphabet soup of liquidity”, Serhan Cervik, Morgan Stanley Research

July 11, 2007
 Liquidity Pyramid

Source: David Roche, Independent Strategy in “New Monetarism”

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Why did financial capitalism end in global
economic crisis?

Two fundamental causes:

• Inconsistency between globalization of finance and
disproportionate role of the financial sector in the
major economies on the one hand and the limited
institutional and regulatory capacities of the
domestic agencies on the other have been
demonstrated to be unsustainable

• Large and unsustainable global macroeconomic

imbalances
China’s trade surplus jumped 10 times over
2003 - 2007

Source:http://www.rgemonitor.com/blog/setser/240454 cited in Nageswaran A (2008) ‘Trends and issues in capital Markets – India
in the regional and global context’. Presentation at the Lee Kuan Yew School of Public Policy, 16th September 2008.
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Structure of External Position of China,
Japan and US

Source: SAFE, BoJ 14

 Understanding the Credit
Squeeze

Source: Financial Times ft.com

15
 Understanding the Credit
Squeeze

Source: Prof. Jeffrey Frankel

http://www.rgemonitor.com/us-monitor/254697/origins_of_the_economic_crisis_-_in_one_chart
16
Banks Market Cap - Then and Now

Source: Bloomberg
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Steps to Deal With the Global Crisis

• The US Congress has agreed to inject US

$ 789bn to stimulate the economy
• While the details of the sources of money
are not available, it does appear that a
substantial proportion through
monetization of fiscal deficits
• Moreover there are indications that
political considerations in economic
nationalism may play disproportionate role
in their allocation 18
Implications of Crisis
• Monetization of fiscal deficit at such a
large scale could lead to high levels of
inflation

• The other concern is excessive economic

nationalism and protectionism which if
adopted widely could lead to downward
spiral in output and employment

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• Aggressive fiscal policies by the US is
already being reflected in increasing risk
of US Government defaulting has
increased as indicated by the insurance
market

• Thus the annual cost of insuring 10 mm 5

year Treasurys up from - $7,680 in 2008
to $66,000 in 2009

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Continued…

• This could threaten the

livelihoods and food security of
millions of people around the
world. If this happens the
economic will turn into a social
and political crisis

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 India’s Priority

• It is imperative that India manages the

current economic crisis in such a way that
it does not advance to being a social and
political crisis

• These are also the imperatives for Asia

and rest of the world

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