Vox Issue 8 - The Financial Crisis

VOX The STudenT JOurnal Of POliTicS, ecOnOmicS and PhilOSOPhyPublished termly by the club of PeP at the university of york

voxjournal.co.uk

The Financial CrisisIssue VIII - Spring 2009

A VOX Special Edition

Essays on:

The emerging new world order

Black SwanS, whiTe SwanS and The crunch

Sovereign wealTh FundS

The hedge Fund induSTry

The greaT depreSSion

The craSh in comparaTive perSpecTive

criSeS and poliTical philoSophy

ESSAY CREDIT CRUNCH AND A NEW WORLD ORDER By Dr Gulcin Ozkan

bLACk sWANs AND UNCERTAINTy By Thomas Cahill

sOvEREIgN WEALTH fUNDs IN THE CRIsIs By Jamie Manzer

bITINg bULLETs THROUgH bEAR mARkETs By Simeon Williams

THE gREAT DEpREssION AND TODAy’s CRIsIs By Charlotte Gaughan and Oliver Elliott

THE CRIsIs IN COmpARATIvE pERspECTIvE By Spencer Thompson

INTERvIEW WITH pROfEssOR sUE mENDUs By Magda Assanowicz and Ilaf Scheikh Elard

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14

18

22

27

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Photo credit: sxc.hu and Dorothea Lange.

VOX The STudenT JOurnalOf POliTicS, ecOnOmicS and PhilOSOPhy

The Club of PEP Journal

voxjournal.co.uk

ISSUE VIIISPrinG 2009

ThEfInancIal

crISIS

“The scale of this still-on-going crisis clearly indicates that the minimalist ap-proach to regulation of financial markets will be a thing of the past.”

Dr Gulcin Ozkan on what makes this crisis particular

and what we can learn from it (page 6).

VOX - The STudenT JOurnal Of POliTicS, ecOnOmicS and PhilOSOPhy iSSue Viii - SPring 2009

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Acrisis (κρίσις) in the originAl, greek sense of the word is not a hopeless situation but rather an opportunity

to make a decision in the face of fresh, unprecedented challeng-es. in his crisis, hercules, as the story goes, had to chose between virtue and vice. similarly, many individuals, families, societies, nations and the world at large are in a crisis today.

neither pessimism nor optimism is helpful. only realism com-bined with imagination will do. indeed, the events of our time constitute new, empirical cases that any budding scholar is set to fathom. the present VoX edition should be read in this skeptic spirit. there are no easy answers and probably the bravest and intellectually honest thing to say is: i don’t know yet.

there are articles highlighting the role of sovereign wealth funds (p. 1�) and hedge funds (p. 18). two essays are com-parative, with one examining the great Depression (p. 22) and spencer thompson analyzing parallels between today and the financial crisis that hit East Asia a decade ago (p. 27). Finally, we feature an interview with political philosopher sue Mendus.

this edition will be launched in conjunction with VoX’s host-ing of “the York economists’ Panel on the financial crisis”, on 12 february 2009, where three distinguished professors of York’s Economics Department present their views on the finan-cial crisis. (for more, see p. 13).

if you want to get involved with VoX, drop us a line at [email protected]. See the back inside cover to find out how to contribute to the next edition.

Ilaf Scheikh Elardeditor

eDitoriAl

Crises and deadlocks have at least this advantage:

they force us to think.Jawaharlal Nehru

Finance, like time, devours its own children.

Honore de Balzac

The Chinese use two brush strokes to write the word ‘crisis.’

One brush stroke stands for danger; the other for opportunity.

In a crisis, be aware of the danger - but recognize the opportunity.

John F. Kennedy

__________________

VOX is a student journal that serves as a plattform for insight into topics relating toPolitics, Economics

and Philosophy (PEP). The essence of VOX

is its interdisciplin-ary approach to each

edition’s issue.

VOX is published trian-nually by the Club of PEP at the University of York and distributed on York’s campus as

well as other universities in the UK.__________________

VOX committee:

Ilaf Scheikh ElardCameron Dwyer

Simon FuchsLuke Smalley

Marius KarabaczekAdam Czopp

Magda AssanowiczLila Tennent

Euan EdwardsMark Groh

Anfisa Chernishova __________________

Contact:[email protected]

VOX ThE STUDEnT JOUrnAL OF POLITICS, ECOnOMICS AnD PhILOSOPhY

THE fINANCIAL TURmOIL THAT HAs gRIppED THE WORLD ECON-

Omy since the summer of 2007 has been widely viewed as the worst since the Great Depression in the 1930s. We are nearly into the second year of troubles and there is still no end in sight. Hardly a day goes by without announcements of gloomy earnings and losses, new bankruptcies and ris-ing unemployment. And, forecasts of world economic outlook are getting more pessimistic by the day.

Financial crises are not rare events. Since the early 1990s a large number of countries both in the industrial and the developing world have been hit by crises across the globe. The currency

crises experienced by the members of the European Exchange Rate Mecha-nism during 1992-93 were followed by the Mexican crisis in 1994, the Asian crisis in 1997, the Russian crisis in 1998 and the currency-cum-financial crises experienced by Brazil, Argentina and Turkey at the start of the millennium. It has been commonly agreed that the wide-scale financial liberalization had played a major role in why so many countries have succumbed to crises over this period. However, although some of these countries have suffered serious consequences, recovery has been relatively smooth for others and, more importantly, without significant repercussions for the world economy.

ThE CREDIT CRUNCh AND ThE NEW WORLD ORDER

By Dr Gulcin Ozkan

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Why is the current crisis so differ-ent? This article argues that the com-bination of historic global imbalances, unprecedented global financial inte-gration and a minimalist approach to financial regulation has prepared the ground for the most serious financial crisis in the post-1930s era.

At the source of the global imbal-ances have been the Western econo-mies, particularly the US. They have been consuming more than they pro-duced, in contrast to the mostly Asian countries, particularly China. Put dif-ferently, people have been saving very little in the first group of countries, which meant that they have had to rely on the savings of citizens in other countries. So much so that, in 2006, the US current account deficit reached a record 6% of its gross Domestic Product (GDP), which turned the US into the biggest debtor in the world. Any other country facing the same problem would have had serious con-sequences, but the US, as the world’s reserve currency, has had a relatively easy time financing its current account deficits. Asian countries have been happy to lend to the Us, purchasing huge amounts of Us Treasury securi-ties as part of their foreign exchange reserves accumulation policy. Howev-er, the massive amount of capital flow-ing into the US had other less desirable consequences. As is known from other countries’ experiences, large scale capi-tal inflows put upward pressure on as-set prices including house prices and

stock market values. This is precisely what was observed in housing markets across the world but most notably in the US, the UK, Spain and Ireland.

What was the role of financial glo-balization in sustaining such enor-mous capital flows? Clearly, if it was not for the lack of capital controls and thus such freely flowing capital, the US would not have been able to run deficits of such magnitude. Thus, the ease with which capital has been moving across the national boundaries has enabled the US to finance the gap between what it produced and what it consumed, which allowed the imbal-ances to go on as long as they did.

One important question relates to why there was so much excess capital in the world economy during this time. It must be remembered that, through-out this period the emerging market countries had been growing at historic rates, which massively increased the world demand for oil and other energy products. This meant that demand for oil had been outstripping the supply, leading to substantial price increases. For example, the price of a barrel of oil rose to $60 in June 200� from its value at $16 in January 1999. The trend continued and hit an all time record at $147, in July 2008. Such sharp oil price rises brought about huge trade surpluses by oil exporting countries, which has greatly contributed to the excess liquidity in the global economy.

It now appears that the use of excess

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liquidity was not managed particularly well. And this is not totally surprising. It is a well-known fact that as credit ex-pansions get under way the quality of loans steadily deteriorates with declin-ing repayment prospects. In pursuit of profit maximization, lenders attempt to reach more and more borrowers, relax-ing credit conditions, extending lending to ever less deserving pool of borrow-ers. The emergence of the sub-prime market was just another example of this process. Excess liquidity had also brought about major changes in the financial system leading to increased risk appetite as well as substantial fi-nancial innovation in the form of new financial instruments with increasingly more sophisticated risk exposures. All these developments led the riskiness of the financial sector as a whole to rise throughout this period.

Why were central bankers not keep-ing a closer eye on these developments? The past ten years had been bliss for most central bankers. The inflation targeting regime that had been adopt-ed by many developed and develop-ing countries seemed to have worked wonders. After experimenting with nu-merous alternative policy strategies to control inflation since the high infla-tion episodes of 1970s and 1980s, low inflation, the elusive goal for so long, was finally in reach. The pre-occupa-tion with inflation under the inflation targeting regime, which took the form of indexing interest rate decisions to forecast inflation only, led to the finan-

cial stability objective having a much lower profile during this period. Also consistent with the moves towards un-fettered financial markets, regulation was taken out of the immediate con-trol of central banks as was the case with the Bank of England. That has further weakened the authorities’ grip over the financial sector’s risk manage-ment.

When the sub-prime related issues were exposed, troubles started to spread from sub-prime to other areas in the financial sector, culminating in the inter-bank lending virtually disap-pearing. The hugely globalized nature of financial markets meant that the crisis inflicted damage well beyond the national boundaries. The collapse of the banking system in Iceland leading to loss of savings accounts by indi-viduals and corporations throughout the UK, the collapse of a number of financial institutions in the US lead-ing to severe losses by many across the world, for example, clearly revealed the extent of international financial link-ages as never before.

How to get out of this conundrum? Policy-makers have been taking fairly bold steps on monetary policy. The US Federal Reserve Board has been easing

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monetary policy to the extent that the policy interest rates in the US are now down to nearly zero. The UK followed a similar stance and reduced the inter-est rates to 1.5 %, lowest in its history, with more cuts expected. The experi-ence of Japan that grappled with reces-sion during the 1��0s provides chilling lessons. Once interest rates are down to these levels, monetary policy sim-ply ceases to work. The next step may be what is called ‘quantitative easing’, which means injecting new money into the financial system to stimulate the economy. Many countries have also taken decisive fiscal policy actions announcing massive rescue packages. During the initial stage, this was mainly directed at bailing-out the banking sec-tor. Increasingly, fiscal policy has been directed at jump-starting the recovery on the face of sharp contractions in the world economy. Unsurprisingly, the countries that bore the brunt of the financial collapse, such as the US and the UK, appear to be the worst hit on the real side of the economy.1 Both economies are now expected to contract during 200�.2

It is clear that this experience will have a major impact on shaping the future of global financial architecture. The scale of this still-on-going crisis clearly indicates that the minimalist approach to regulation of financial markets will be a thing of the past, at least in the foreseeable future. In the more immediate future, as is common during post-crisis periods, there will be

an immense pressure for more inward looking and more protectionist poli-cies. A series of strikes throughout the UK this week, against foreign workers is one such example. Similarly, there have been ‘buy domestic’ provisions in some rescue packages. If the authori-ties are to succeed in dealing with the current crisis, they should do their best to resist the protectionist pressures. This is undoubtedly one of the main lessons from the 1�30s experience. Secondly, the global financial architec-ture should be made ‘less illegitimate’ than today to reflect the increasing weight of newly emerging countries such as China and India.3 To that end, the Group of Seven industrial coun-tries, known as G7, as a leading coor-dinating group for the world economy should give way to an alternative struc-ture to reflect the new world order. If a contract for the future is to be drawn up, then it can only be done with the presence of countries that are most likely to be part of that future. Endnotes:

1. See, C. Reinhart and K. Rogoff., (2008) for a systematic analysis of crisis-recovery providing evi-dence from past crises. The paper is available as ‘The Aftermath of Financial Crises’, NBER Working Pa-per Series, No.14587, December 2008.

2. According to the International Monetary Fund’s November report, the UK economy is forecast to shrink by nearly 3% during 200�.

3. The use of term ‘the current financial architec-ture being illegitimate’ is due to Martin Wolf, Finan-cial Times, 15 December 2008.

_____________________________Dr Gulcin Ozkan is a Reader in Macroeco-nomics, in the Department of Economics and Related Studies at the University of York.

If the authorities are to succeed in dealing with the current crisis, they should do their best to resist the protectionist pressures.

mUCH HAs bEEN WRITTEN RE-CENTLy AbOUT the reason-

ing behind the actions of financiers that led to the banking crisis of 2008. Commentators have attributed bank-ers’, what now seem ex post facto, un-wise investments in mortgage backed securities (MBS) and collateralised debt obligations (CDOs) variously to greed, deception, folly or all three. Banks and hedge funds look set to in-crease their recruitment of risk man-agement professionals in an attempt to minimise the likelihood of such a crisis in future. But many have begun to question whether the problem lies deeper, namely in our understanding or rather misunderstanding of risk.

“In this world”, Benjamin Franklin remarked, “there is nothing as cer-tain as death and taxes”. Life without uncertainty would, apart from any-thing else, be quite dull. Not least, the economy could never grow since investment, which pays a return on the risk-taking inherent in innovation, would cease. The number of genu-inely risk averse persons is negligibly small, most probably for evolutionary

reasons. A degree of risk, therefore, is certainly desirable. But, to restate the question, has the way we have custom-arily thought about risk impaired our understanding of what it really is?

At least since the work of Frank Knight (1921)1, economists have dis-tinguished between uncertainty, which cannot be computed, and risk, which apparently can and therefore admits of representation by a probability distribu-tion function (PDF). Nassim Nicholas Taleb is not the first but is certainly the most polemic critic of this distinction. In his book ‘The Black Swan’ (2007), Taleb thunders: “Had [Knight] taken economic or financial risks he would have realized that these ‘computable’ risks are largely absent from real life! They are laboratory contraptions!”2

BLACk SWANS AND ThE mISUNDER-STANDING Of UNCERTAINTY

By Thomas Cahill


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Yet humans tend to like the sort of risks that can be defined and given a PDF rather than those of which we cannot even conceive: Taleb’s ‘Black Swans’ or the US military ‘unknown unknowns’. What is more, for those risks of which they can conceive, in a given situation, humans prefer there to be fewer, rather than more, possible PDFs.

An example of the latter is given by Ellsberg’s Paradox3. Daniel Ellsberg suggests an experiment whereby an individual is confronted by two urns, Urn I and Urn II, both containing red and black balls. One is told that that Urn I contains 100 red and black balls in an unknown composition and that Urn II contains exactly 50 red balls and 50 black balls. The individual states a preference over colour and the

urn from which he will randomly pick a ball, so that, in Ellsberg’s terminol-ogy, a red ball choice from Urn I is “RedI”, a black ball choice from Urn II is “BlackII”, etc. Before doing so he is told that if he picks his chosen co-lour he wins a prize and that if he does not, he wins nothing. How does he rank the different colour/urn combi-nations?4

By far and away the most common (and interesting) answer is that the person tested should favour RedII over RedI and BlackII over BlackI. Obviously, they are indifferent between RedII and BlackII and between RedI and BlackI respectively. The former answer is surprising because the expected utility of choosing red or black across either urn sums to 0.5. In other words, an individual subjectively maximizing their

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Humans tend to like the sort of risks that can be defined rath-er than those of which we can-not even conceive: Taleb’s ‘Black Swans’ or the US military’s ‘un-

VOX - The STudenT JOurnal Of POliTicS, ecOnOmicS and PhilOSOPhy

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expected utility would be indifferent between Urn I and Urn II yet, faced with the choice of an ambiguous pDf in Urn I and a known pDf in Urn II, he seeks comfort in the known uncer-tainty of either BlackII or RedII.

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This type of behaviour is common-ly observed in the financial markets. At the turn of the century, as asset backed securities became more com-plex, the credit ratings agencies Fitch, standard & poor’s and moody’s con-tinued to apply the simple three letter bond rating for CDOs that they had traditionally used for relatively more sober instruments like municipal and corporate bonds. The ratings agency plays the role of the conductor of the experiment in Ellsberg’s Paradox - who informs the participant of the pDf of Urn II - by issuing an investment grade rating (e.g. AAA) for a CDO. When rating debt that is composed of, in some way, highly risky sub prime mortgages or credit card loans as well

as more reliable asset tranches, one might think it reasonable to provide a range of ratings instead of just three letters. Yet if the ratings agencies do this, Ellsberg’s Paradox suggests that, notwithstanding large banks’ consid-erable computer power, possibly get the author to add more here to explain what they mean by computer power and how this many prevent investors from abandoning them investors will flee to the known uncertainty of a tra-ditional, three letter grade.6

In some ways the rating acts like a good university degree from a declin-ing institution. The degree may well be an unreliable guide to the relative quality of the student, but at least it’s reliably unreliable! When all universities start to decline in quality, a new degree becomes totally unreliable. Banks, of course, continue to attribute massive write-downs to sub prime losses and credit ratings from 2004 to 2007, have likewise come to be seen as not worth

the paper on which they are written. Arguably the panic that has gripped the financial markets since the sum-mer of 2007 can be seen as a mass re-versal of Ellsberg’s Paradox: investors who would previously have snapped up CDOs because of their status as a ‘known quantity’ prefer to look beyond the pDf handed out a priori by the ex-perimenter. In so doing, doubt is cast on the ratings themselves, leading to further downgrades and a ‘firesale’ of what are now seen as risky assets.

Endnotes:(1.) Knight, Frank. 1921, 1965 (2nd ed.).

Risk, Uncertainty and Profit. New York: Harp-er and Row.

(2.) Taleb, Nassim Nicholas. 2008. The Black Swan: The Impact of the Highly Im-probable. London: Penguin.

(3.) Ellsberg, Daniel. 1961. ‘Risk, Ambiguity and the Savage Axioms’. 1961. The Quarterly Journal of Economics 75(4): 643-649, p.10. Incidentally, Dr Ellsberg would later become the infamous leaker of the ‘Pentagon Papers’.

(4.) By assumption we ignore trivial reasons for making bets, such as choosing red because one disliked the colour black etc.. (ibid.)

(5.) Gollier, Christian. 2001. ‘Should We Beware of the Precautionary Principle?’ Eco-nomic Policy 16(33): 303-327, p.310.

(6.) The argument breaks down in those cases where banks design the CDOs so as to deliberately achieve an investment grade rating from a rating agency. However, it still applies in the secondary market since the rating re-mains with the product until maturity. _____________________________Thomas Cahill is a third year undergraduate reading Economics and Politics at the Uni-versity of York.

The VOX york economists’ Panel on:The financial crisis

Thursday, february 12, 20096:30pm - 7:40pm

a/TB/056, alcuin college,University of York

What is the future of the global financial system? can the uK survive the implo-sion of the city? What can be done to get credit moving again? does china hold the key to financial security?

VOX is delighted to present this event. hear the views of three distinguished professors of York’s Economics De-partment on all these questions and more: Profs. PeTer n. SmiTh, PeTer SPen-cer and miKe WicKenS.

each member of the panel will speak for 10 minutes and then there will be approx. 30 minutes time for Q&a.

for more visit: www.voxjournal.co.uk

The Club of PEP Journal

VOX The STudenT JOurnal Of POliTicS, ecOnOmicS and PhilOSOPhy

IT’s bEEN A TOUgH yEAR and 2009 looks to have a fair amount of

hurdles. In 2007 liquidity dried up for firms and security markets. Contagion then spread throughout non-bank in-stitutions hitting everyone from mort-gage lenders to hedge funds, only to intensify in 2008 as fears mounted and sources of credit evaporated. This phenomenon called the ‘credit crunch’ left institutions floundering - strug-gling to meet existing financing com-mitments, to post additional collateral, and to cope with portfolio losses.

Ill prepared and unmotivated to jump headfirst into the bank-rescue business, governments forced financial institutions to flirt with other pools of liquidity in order to recapitalize. They did. Major companies courted vast stores of wealth from the Gulf and Asia known as sovereign wealth funds (SWFs). Put simply, SWFs are “large pools of capital controlled by a gov-ernment and invested in private mar-kets abroad.” In autumn 2007 and early 2008, the world held its breath as sovereign wealth funds recapital-

ized North American and European financial markets when governments balked at sponsoring premature, politi-cally contentious bailout packages and recoiled at the nationalization option.

Sovereign wealth funds have explod-ed onto the global economic scene in recent years and in 2007 it was clear that they were major players in the global financial mix. Met with intense political suspicion, the global credit crunch saw the Funds become go-to guys for financial heavyweights the world over. Shopping sprees by SWFs from the middle East and Asia, so vital to shoring up Us and European mar-kets, raised flags of suspicion in recipi-ent countries. The US Congress led the well-known charge against SWFs, calling for and eventually implement-ing robust additions to pre-existing legislation designed to monitor seem-ingly dodgy foreign investment. Euro-pean nations followed suit, instituting their own safeguards.

Then, the credit crunch came, ush-ering in a serious conflict of interest between national and economic secu-

SOvEREIGN WEALTh fUNDS IN ThE CRISIS: PRAYING TO PERCEIvED GODS

By Jamie Manzer


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rity. Politicians in the US and conti-nental Europe battled, in some cases bitterly, for unilateral and multilateral regulations to protect domestic inter-ests from dangerous investments by potentially hostile, undemocratic re-gimes. In response, SWFs publicly de-fended their clean investment histories and economists cautioned against rigid regulation.

Before things became too intense, SWFs teamed up with the Internation-al Monetary Fund (IMF) to design the santiago principles or the gApp – a set of generally Accepted principles and practices designed to provide guidance to sWfs regarding their management and investment strategies. This multi-

lateral approach helped quell political concerns, as did the deepening of the financial crisis.

Throughout the gApp process, a number of institutions and experts stood behind SWFs. A variety of re-ports and editorials praised the funds for their investment practices and wel-comed their taste in ailing US financial institutions. Late in the fall of 2007, SWFs were hailed as opportunistic, fi-nancial heavyweights – and rightly so.

As major banks faced challenges, SWFs such as the Qatar Investment Authority, with some $60 billion ready for investment, saw “tremendous op-portunities” to invest in faltering US financial firms. Even Europe, one of the most protectionist and defen-sive audiences for sWf investment, developed a taste for sWfs - though perhaps by necessity. It is argued that the crisis was big enough to encourage confidence in SWFs throughout conti-nental Europe. In July 2007, London’s Barclays bank needed billions in fast cash to shore up a bid for Dutch ri-val ABN Amro (ABN), but standard credit sources looked the other way. As the story goes, barclays president Bob Diamond jumped on a plane to Singapore and, within hours, Temasek, one of Singapore’s two SWFs, pledged $5 billion.

financial institutions and even gov-ernments were grateful for these finan-cial heavyweights. Their investments not only recapitalized the market, but also bought lawmakers a little time so

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they could avoid making immediate decisions regarding nationalization and bailout packages. November and December saw a continuation of the fall’s investment hustle and bustle. Abu Dhabi’s SWF announced, on 27 No-vember 2007, its intentions to invest billions in the distressed Citigroup, the largest US bank. The circumstances surrounding this investment solidi-fied the clear necessity of financing from opportunistic SWFs. Citigroup’s stocks lost 45 per cent of their value the ten months previously after losing approximately US$6.5 billion.

By mid December SWFs proved their willingness to continue taking risks when Morgan Stanley accept-ed a US$5 billion deal from China’s CIC, and UBS, a Swiss bank, drained US$11.5 billion from Singapore. Citi-group reached back into the pot, along with Merrill Lynch, UBS, and Morgan stanley again in January 2008 for rapid recapitalization, in order to stabilize their finances. This injection of funds was in addition to the $27 million pre-viously invested in merrill, Citi, Ubs and Morgan Stanley.

However, it was all nice while it lasted. Cash-rich SWFs have been generous, but since January 2008 a

number of factors have contributed to a noticeable decline in cash-injec-tions for major financial institutions. While investments of sWfs increased to record levels in 2008, sWfs also in-curred record losses. Reuters reported some SWFs losing between 30-50% of investments within six months time. Reuters also reported that Us dollar depreciation cost Funds billions of dol-lars. Singapore’s Temasek paid $4.4 bn for stocks later valued at $3.4 bn. This was not their only loss of the year. In fact, many stocks were trading at 50% of their original value. The manager of Norway’s Government Pension Fund-Global recently revealed that the fund has posted the worst results in its his-tory. Abu Dhabi’s SWF, ADIA’s, mod-est investment in Citigroup has proved disastrous, with the equity falling from $31 a share that it paid to a low of $13 a share. Kuwait’s SWF, another re-gional investor in Citigroup, suffered as well. Its investment in Merrill Lynch also proved unwise when that New York–based investment bank fell on bad times and was taken over by Bank of America.

SWFs, like any investor, look to turn a profit, not to achieve sainthood. They will not continue to incur heavy losses at the expense of their domestic con-stituency and as a result have largely ducked out of the US and European financial sector. Certainly, being of na-tional origins, SWFs and their board have a responsibility, nay obligation, to their domestic markets to make wise

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investment decisions. So, as the global economy enters a deep freeze, anyone wondering where SWFs are or to what extent they will factor into a miracu-lous recovery, should come to terms with their apparent withdrawal from the recovery mix.

Why is that? SWFs are not immortal. They need to take a step back and re-assess their options in order to create an optimal investment strategy. Like any rational investor, part of this strat-egy includes portfolio diversification after perhaps too much exposure to financial institutions. Temasek alone has 38% of its portfolio in financial institutions. Perhaps most significantly, SWF directors see the growth of their funds slowing. Global decreases in demand for oil, gas, and Asian prod-ucts derailed the Funds’ rapid growth and with less

_____________________________Jamie Manzer is a graduate student at the Hertie School of Governance and a research-er for the Global Public Policy Institute’s (GPPi) Global Energy Governance Pro-gram in Berlin, Germany.

Sovereign wealth funds have ex-ploded onto the global economic scene in recent years and in 2007 it was clear that they were major players in the global financial mix.

SWFs, like any investor, look to turn a profit, not to achieve sainthood.

to spend abroad and stabilization needed at home, it is likely that domestic spending will rise. So, while we should appreciate the help we got from SWFs in the past years, it is clear that they will not be the pot of gold some had prayed for.

HIsTORy sHOWs THAT DIsAsTERs COmE AND gO, with the events

of 2008 and their repercussions being those of what seems to be the biggest market crises ever. The Dow Jones has lost more than 30% of its value in a single year six times before. If your great-grandfather left the stock market for dead after the 38 % drop in 1907, he missed out on a 47 % gain in 1908. If his grandkids jumped off after a 28% drop in 1974, they missed the 38% bounce the next year.

given the fact that Wall street’s pri-mary function is to allocate capital, as the credit crisis drags on, the endless bailouts for major institutions come as quite a surprise to some in the finan-cial community who claim to possess the greatest expertise in managing our money. Bob Lenzener, National Editor of Forbes magazine characterized the credit crunch as an economic “boxing match” consisting of many rounds of financial failures beginning with the subprime market. It is then no wonder that these factors precipitated the fail-

BITING BULLETS ThROUGhBEAR mARkETS

By Simeon Williams


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ure of Merrill Lynch before its 100th birthday, and the collapse of Lehman Brothers and the insurance giant AIG. Indeed, other institutions have sought to blame each other. For example, Citi-group stated that the Bank of England had been too “self-congratulatory” about its efforts to ease the cash short-age in banking.

The spillover effects from mar-ket dislocation include the closure of many private equity and hedge fund companies as investors pull out from these assets (their assets?). Falling re-turns and cases of corruption increase the demand for a regulation of the hedge fund industry. Wall Street trad-ers worry that another big wave of re-demptions could further unsettle the markets. Over this decade, fewer than 15 % of hedge funds lost money. Even in the worst year, 2002, 31 % finished down. But according to estimates from HedgeFund.Net, 2008 saw some 70 % of hedge funds in the red.

Nevertheless, there are some mon-eymakers that are having the last laugh having bet against the subprime mort-gage market. A good year can vault a small player into the big leagues and thus these hedge-fund traders who make a killing are often lionized with-in the industry. All of which makes the big winners stand out even more. Hedge fund returns, on average, are down 20 % but one in fifty funds is up more than 30 % — a spectacular per-formance, considering overall stock market trends.

To a degree, hedge funds are hos-tage to their stated investment strat-egies, and the investors who shop to them accordingly. Funds that special-ize in convertible bonds and stocks, for example, are among the worst per-formers this year because those mar-kets have been hard hit in the financial crisis. Modern portfolio theory states that we can create any desired risk out-line by combining a risk free asset (the savings account), with a less risky as-set (the convertible bond fund), and a risky asset (the broad market fund), we can create portfolio with less total risk.

A brief elucidation of the concept of convertible bonds is in order. These bonds act as a hybrid instrument and a good way to reduce portfolio risk while still participating in the market. Yet they are also are the “things with feath-ers” - to paraphrase Emily Dickinson. They participate in the upward price movements of the obligor’s stock, and yet they cannot bury themselves be-low the ground of their intrinsic bond value. And while their value fluctuates above a floor value, the bonds are pay-ing interest. This risk/return profile is caused by the call option value of the bond’s conversion feature. They usu-ally gain most when the difference be-tween yields on corporate bonds and U.S. Treasuries is narrowing and the stock market is rallying.

2008 was their worst year, with Sep-tember being the worst month for convertible bonds since 2001. Major

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caused by the credit crunch who ap-pear to be thinking and behaving like their institutional counterparts. Online investors in particular are diversifying their investments away from equities, although a significant proportion are also trading more regularly in order to take advantage of opportunities, as high-quality securities have been sold indiscriminately and now potentially offer great value.

Nevertheless, surviving members of the financial community are keen to launch their wealth management busi-nesses in emerging markets. Since the rising asset prices and the credit binge that saw enormous potential returns over the last 25 years are now gone, the odds that China, a major driver of global economic growth this decade, will stumble seem extremely high. A Chinese downturn would send shock-waves through many economies that depend on its voracious demand for raw materials. While private clients have traditionally paid little attention to the custody of their assets, the fra-gility of many financial institutions, highlighted by the collapse of Lehman brothers, focused their attention on safekeeping their wealth. Citigroup’s wealth management business brought in $3bn in the third quarter after six months of outflows. Cash depos-its have been big business for banks regarded as being insulated from the worst of the crisis.

I would conclude that in attempt-ing to rebuild trust in an advisory

culture, new business often originates from internal referrals. As graduate recruiters are increasingly looking for BVAs—bright, verbal, and articulate people with great interpersonal skill, rebuilding trust in business needs to start from its employees. I would ar-gue that wealth management services need to shift away from merely doing transactions to embrace an integral advisory culture. Traditional deposit and loan products are commodities, allowing members and consumers to easily shop rates and terms. In con-trast, wealth management services and products are based on cultivating long-term relationships and trust. Al-though the rollercoaster markets have cooled investor appetites for equities and other assets, interest has risen in an emerging amount of less formal as-set classes, such as art and wine funds, which can consider investor’s fixes for high returns amounting to 20-40% a year. Institutional investors are switch-ing some of their assets from more expensive, specialized investment products to less expensive ones or even passive funds. The challenge is to thus improve that trust through a third-party partnership for the benefit of the credit union and the member.

Sources: http://is.gd/ighq, http://is.gd/ighG and http://is.gd/ighY/ Last accessed on 19 Jan 2009.

_____________________________Simeon Williams is a third year undergradu-ate student reading Philosophy, Politics and Economics at the University of York.


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existing hedge funds are suffering due to the crisis in the $600bn convertible-bond market, which have lost 35% this year, with the average convertible-bond hedge fund down some 50%. This was thanks to massive recent sell-offs af-ter failed strategies and the curb on short-selling by the U.S Securities and Exchange Commission, in the wake of the Lehman Brothers bankruptcy. In a short sale, a trader borrows stock and sells it in the hopes it can be bought back later at a cheaper price. The re-striction, which was lifted 8 October 2008, prevented investors from hedg-ing the risk that convertible bonds would fall in value.

Nevertheless, convertible bonds arguably still provide investors with the greatest flexibility and the lowest risks compared to other conventional corporate bonds. The recent price de-crease in convertible bonds, due to a hefty sell off, should now provide an attractive prospect to those who want to enter.

New research indicated that almost 50% of major credit portfolio man-agers do not have “systematic and sufficiently rigorous analytical cycle management” for another crisis. So called HNWI (High Net Worth Indi-viduals) are reducing leverage on their portfolios, depriving wealth managers of lucrative income streams that have proved core revenue streams for some of the larger wealth managers such as UBS, Credit Suisse and Citigroup. Last

month Goldman Sachs published re-ported that profits would fall an aver-age of 25% from 2007 to 2009.

Wealth managers don’t normally dis-close how much clients leverage, some-thing which provides a double income stream for private banks. Clients in Asia are generally known to be more willing to borrow against their portfolio than those in Europe. “There are private banks where collateralized loans are a standard product to boost perfor-mance,” says Bernard Coucke, head of ING Europe. Yet leverage might bring some unpleasant surprises for inves-tors who might have received loans on the basis of a portfolio including leveraged products that have now lost much of their value, reducing not only the clients’ money in the bank, but also their borrowing capacity.

Wealth managers’ focus should be to continue to provide low-margin ser-vices and ride out the crisis and hope clients stick around for more lucrative products. Barclays Wealth division just published a new article entitled “The Rise of the Instividual”. This describes the growing trend of new investors in the midst of the financial maelstrom

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There are some moneymakers that are having the last laugh having bet against the subprime mortgage market.

collapse of the financial sector, much of the banking sector defaulted or was bailed out, credit liquidity dried up, and the crisis spread from the Us to the rest of the world.

Explanations of the how the De-pression became so serious have been attempted by all kinds of schools of economic thought. As a mainstream American economist, Bernanke follows

the traditional orthodoxy of thinking that monetary policy and its effects on the size of the money supply are the fundamental determinant of GDP. milton friedman, the ideological father of this ‘monetarist school’, blamed the great Depression on monetary retrac-tion- the money supply as measured by M2 shrank by a third between 1929 and 1933. This, Friedman claims, occurred

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As THE CURRENT fINANCIAL CRI-sIs LOOks TO sET TO WORsEN,

both economists and the media have become increasingly tempted into drawing parallels between current woes and the Great Depression which began in 1929 and lasted well into the 1930’s. Yet the current chairman of the US Federal Reserve, Ben Bernanke, has described the current economic turmoil as being rather different in na-ture to that which resulted in the Great Depression. Given that Dr Benanke has spent much of his career analysing the causes of the Depression, it would seem, that he is in a better position than most to adjudicate as to what parallels can and should be drawn from the past. Yet, despite decades of research by economists like him, there remains a surprising amount of uncertainty as to what exactly caused (and eventually remedied) the Depression.

It is generally agreed that both the current recession and the great De-pression came about as the downswing of the cyclical expansion and contrac-

tion that, despite politicians claims to the contrary, appears to be an inher-ent aspect of a capitalist economic system. Indeed, the Great Depression was one in a long line of recessions that were often just as damaging, long-lasting or global in scale. However, the Depression is distinct in that all these properties were simultaneously pres-ent. The current economic crisis has yet to reach anywhere near the same magnitude as that of the great De-pression. Forecasts suggest, at most, a GDP retraction of just a few percent and unemployment levels not reach-ing over 10% in the Us and Europe, whilst some developing states are still registering substantial growth trends. Although unemployment is creeping up in the Us and Europe, it has a long way to go to reach the levels of the 1930’s. It thus perhaps seems prema-ture to draw too strong a comparison between this recession and that of the Great Depression. Yet there are unde-niably common features to them both- failure on ‘main street’ followed the

ThE GREAT DEPRESSION

Lessons from history?

By Charlotte Gaughan and Oliver Elliott


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A destitute pea picker, Florence Thompson, a mother of seven children, age 32, in Nipomo, California, March 1936Photop-graph by Dorothea Lange.

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rise of mortgage abuses. Variable rate mortgages have no doubt been a caus-al factor of the recent crisis and the instigation of a gold standard would bring needed stability to an oscillating market. However, not many hold this view. Bernanke believes that the use of the gold standard in the Depression made it very hard to effectively use monetary policy to restore liquidity.

Towards the end of the Great De-pression, it was the Structuralists who dominated the economic discourse and directed US economic policy. John maynard keynes famously advo-cated a fiscal stimulus in the form of a huge increase in government spend-ing, with the multiplier effect ensuring any money invested in the economy would provide an even greater positive feedback effect in the economy. In-deed, this is the line President Obama had pledged to take, announcing ambi-tious spending plans, investing heavily in infrastructure and public services in an attempt to boost the economy and to ease unemployment. Both Obama’s and Brown’s strategy in part paral-lels that of Roosevelt’s “New Deal” which saw a mass cash injection and substantive government orchestrated projects.

Nevertheless, the success of the New Deal continues to be debated. On the one hand, it is certain that Hoover’s policy of economic prudence and bal-anced books failed to resuscitate the economy. Yet whilst unemployment decreased under the New Deal, it al-

ways remained at above 20 percent. Economists Cole and Ohanian, from UCLA, have blamed the prolongation of the Depression and the subsequent weak recovery on the New Deal, sug-gesting that it was only the eventual onset of the Second World War which finally shifted the United States out of depression. Regardless, economists tend to be unanimous in agreement that it was the huge boom in exports following the European arms drive and later America’s own need for war mo-bilisation, which brought full recovery to the US economy. The large num-ber of government issued contracts resulted in output massively increas-ing and a doubling in US GNP. There was also, of course, the tremendous political and social rally which caused priorities to change from fighting the depression to fighting the war.

Today, governments are embarking on a mixture of fiscal and monetar-ist policy to try and manoeuvre their economies out of recession. Follow-ing the experiences of the Depression, some important lessons have been learnt. The international trade system has been liberalised and import tariffs spurned so as to avoid the rampant protectionism that severely hampered international trade and thus economic recovery in the early 30’s. The impor-tance of a strong banking system in maintaining economic stability has also been fully appreciated. World govern-ments have spent billions of dollars in taxpayers’ money bailing out ailing


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because the US Federal Reserve failed to support the banks that were on the verge of collapsing. As liquidity dried up, businessmen found it impossible to get loans and investment slumped. Moreover, once banks began to panic over the faltering economy, they called in loans and forced thousands of indi-viduals and businesses into defaulting since very few had the money to pay back their loans. This led to a vicious circle of panic, banks runs and ulti-mately bankruptcies. If the banks had been provided with emergency lending by the Fed, according to Friedman, the economic recession produced by the consumer and stock market slump of 1929 would not have escalated to the point of a full-blown depression.

The parallel with today in terms of macroeconomic policy response is clear. In an effort to avoid a repeat of the 1930’s, major economies have been very proactive in pumping huge amounts of liquidity into the banking system. Yet there is disagreement over the role the money supply may have had in perpetuating economic crisis. Economists of the Austrian school, such as Friedrich Hayek, have claimed that it was an expansion of the money supply in the economic boom period of the 1920’s that led to an excess of credit and unsustainable rises in asset prices and capital goods. This is very similar to some accounts of the con-temporary economic crisis which place blame on the over expansion of credit financing without the necessary asset

backing. A second advocate of the Austrian school, Rothbard, claims that government reaction to this should avoid maintaining this artificially inflat-ed money supply. Rather, one should leave the economy to naturally deflate and readjust to its normal, healthy lev-el. Government attempts to intervene in the markets through monetary ex-pansion can only hamper this process.

There is no doubt that Rothbard is right to question the success of gov-ernment attempts to increase liquid-ity. Despite repeated government in-jections of capital, banks still remain hesitant to lend to one another or to individuals due to a lack of faith in the stability of the whole system. A key aspect of the Austrian school of economic thought, and an option be-ing increasingly discussed within the media, is the restoration of the gold standard. As an alternative solution to a government bail-out, Nobel Prize winner John Nash has argued that an international monetary standard would curb inflation and help prevent the

Once banks began to panic over the faltering economy, they called in loans and forced thousands of individuals and businesses into defaulting, all leading to a vicious circle of further panic, banks runs and ultimately bankruptcies.


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banks in an effort to ensure credit is still available to firms and to safeguard people’s savings.

However, comparisons between the banking systems of the 1930’s with to-day are limited in use given the vast dif-ferences between them. For example, many US banks in the 1930’s were not allowed to have multiple branches so banks remained small and were unable to diversify their risks. Furthermore, banking deposit insurance did not ex-ist during the early 1930’s, resulting in panic withdrawals, which have so far been largely averted in the current cri-sis. Bernanke has also claimed that we have avoided one of the major pitfalls of the financial collapse of the 1930’s- the destruction of banking ‘informa-tion capital’. This information is the record of credit worthiness of indi-viduals, which often was lost whenever a bank collapsed in the Great Depres-sion, resulting in ever greater reticence to lend amongst the remaining banks. Such information is nowadays taken by governmental bodies. `

It is clear that the economic situation now faced by the world is quite differ-ent to that of the 1930’s. Moreover, the unresolved diversity of accounts of the Depression has left policymakers unsure as to what policies are neces-sary to avoid repeating it. Many of the technical pitfalls of the great Depres-sion have been successfully avoided but there remains a larger problem regarding the extent to which financial institutions can go unregulated. Recent

decades have seen many governments enthusiastically deregulate financial markets. A combination of finance sector greed and public sector con-nivance, coupled with an aspirational social philosophy that has pushed for an unchecked growth in consumption has led to disaster. It has caused many people to question whether there are more fundamental problems with the way we run our economic systems and whether we need to find a way of en-trenching systems of financial regula-tion in a manner that will protect them from short-term political machina-tions. Of course, others would go fur-ther. Marxist critiques of the economic system have seen a resurgence in recent months. Marx suggested that the capi-talist system is inherently an unstable one and that the accumulation of capi-tal will necessarily lead to these periods of ‘readjustment’ where it will be the poorest and most oppressed people in society who will lose the most.

_____________________________Charlotte Gaughan is a third year undergrad-uate student reading Philosophy, Politics and Economics at the University of York. Oliver Elliott is a third year undergraduate student reading Philosophy and Politics, also at York.

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THE CURRENT fINANCIAL CRIsIs has taught us at least one thing.

Although we may not all be socialist converts, given the scale and scope of the damage, it seems irrefutable that unregulated financial markets are in-herently unstable. As capital expands to satisfy an exponentially increasing need to accumulate, its proliferation leads to an extension of mechanisms that outpaces government oversight, and an intensification of mobility that surpasses state boundaries. This leads to short-sightedness and risk obfusca-tion, the combination of which leads to investment decisions that are nei-ther enlightened nor optimal, privately or socially. The inevitable consequence is a boom and bust situation, whereby success becomes so uncontrollably ravenous that it feeds on itself until it can no longer lift its own weight.

It may seem odd, then, that during the East Asian crisis of the 1990s, the directions of neo-liberal financial in-stitutions was to scale back state regu-lation and ownership. The root cause

of the crisis was deemed to be ‘moral hazard’, resulting from a divergence of the initial benefits of a risky venture, which accrue to the decision-maker, and the potential costs of failure, the probability of which are borne by the entire system rather than the agent. It would appear that either the prescrip-tion or the diagnosis was incorrect, or both. If moral hazard was indeed the cause, it was essentially a collective ac-tion problem – how, then, does it fol-low that the only apparatus capable of socialising such risk, and hence opti-mising investment decisions for each private party, should be scaled down in order to reverse or prevent the ensu-ing crisis?

This inconsistency is even more baf-fling in light of Western responses to moral hazard, both historically and in modern times. Our capitalist econo-mies are based on the socialisation of risk: limited liability and central banks are fundamental pillars of fi-nancially-propelled capitalism. Such mechanisms go unnoticed in times of

ThE fINANCIAL CRISIS IN COmPARATIvE PERSPECTIvE WITh ThE EAST ASIAN CASE

By Spencer Thompson

support was performance-based, and was not binding; it could be given and withdrawn from any businesses in any industry no matter how vital they would have seemed to overall stabil-ity. And whereas recent interventions have gone beyond financial sector prop-ups, trespassing into the sanc-tity of the ‘real economy’, any institu-tion that was not a bank in East Asia had little or no reason to expect state support. The state takeover of Shin-jin, once the largest car manufacturer in the country, contrasts sharply to United states government rescue of the ‘Big 3’ Detroit-based car manufac-turers. Not only did state support in East Asia have more strings attached, but rather than bailing out businesses and leaving them to their own devices, a common undertaking in the modern case which fails to address root causes and so introduces the risk of relapse, government support involved take-over and restructuring so as to ensure future performance. It seems that our mistaken perception of East Asian cronyism is in fact a self-reflection of our own society rather than an educat-ed assessment of reality.

moreover, if the East Asian han-dling of troubled corporations was cronyism, we are not only ‘guilty’ of such nepotism, which indicates a re-markable level of hypocrisy; we have also failed to operate it properly. Due to our ‘cronyistic’ democracy (labour union power was certainly an elec-toral consideration during the ‘Big 3’

episode), we are unable to follow in the footsteps of the East Asian states. The state tried to be selective by let-ting certain banks fail but in the end, it was the state that failed. The second premise is now relevant. It has been argued that state reduction not only failed to address the causes of the fi-nancial crisis, but in fact exacerbated them. By removing the coordinator of mass investments, the agencies that filled the resultant vacuum often dupli-cated their endeavours. Furthermore, by weakening the main determiner of resource allocation, corruption was al-lowed to take hold, which was most likely the case in Thailand. It could be countered that the undoing of these ‘causes’ is an inevitable feature of the East Asian Developmental state, and therefore that if the crisis was caused or worsened by state reduction, the model is still to blame. However, such an accusation cannot withstand the consideration of the current financial storm.

The only explanation is that the case against government intervention is theoretically incoherent. Cronyism, as understood in the case against the East Asian state, is by definition selec-tive, and so cannot precipitate moral hazard. In a purely capitalist system managers are often unaffected by the consequences of their decisions; this disparity between ownership and control is elucidated by reference to the public outcry against managers of failed banks continuing to receive

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boom because their function is to in-fluence perceptions of certainty and risk rather than to materially intervene; (for example, expectations of interest rate changes and confidence based on the institution of lender-of-last-re-sort). Therefore it surprises us when, in times of downturn, these establish-ments must actually employ their origi-nal mandates.

Furthermore, we are now doing ex-actly what we told East Asia not to; the factors we blame for causing the East Asian crisis are the very ones we are employing to resolve our own. For instance, our ad hoc basis for bailing out banks is far more nepotistic than the selective alliances of south korean governments, government provisions have fewer strings attached and man-agers are often not held responsible for unwarranted profligacy. Whereas in south korea, many large corpora-tions were left to fail, we have inter-vened not only to bail out and prop up banks, which form the bloodstream of the financial system, but have also interfered with the real economy, ini-tially by providing commercial paper and eventually by bailing out compa-nies, a la GM/Chrysler. The finan-cial crisis has revealed that even our Western model of cut-throat capital-ism includes some institutions that are too big to fail; the trade-off between financial stability and moral responsi-bility remains pertinent.

Assuming that moral hazard was in-

deed to blame for the East Asian cri-sis, the evidence indicates not only that state intervention was not to blame for any occurrence of moral hazard, but also that government reduction did not solve the crisis once it had taken root. This inference is based on three premises. Firstly, the specific aspects of government involvement which are charged with precipitating moral haz-ard were either not abundant in East Asia or were already present long be-fore the crisis, and so their existence does not explain the abrupt financial downturn; secondly, the decrease of these factors resulting from adherence to neo-liberal prescriptions of state diminution closely coincided with an exacerbation of the financial collapse rather than an expected alleviation; and thirdly, that even theoretically the suspected causes do not lead to moral hazard.

As to the first point, the accusation that state interference led to moral hazard by creating an irresponsible mentality of reckless investment due to overconfidence in state support falls apart due to a misunderstanding of the relationship between govern-ment and business in East Asia. South Korean businesses, even those that would be deemed to be indispensable to the system, were often left to fail. The harsh treatment of Sambo, at one point the second largest chaebol (big business) in South Korea, after a se-ries of bankruptcies, expounds this case. Unlike current responses, state


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excessive bonuses even after it was ac-knowledged that their recklessness had necessitated a government bailout. In the case of deposit insurance, the de-positor is not the decision-maker, and so it cannot follow that by insuring his deposits the state creates moral hazard. far from creating moral hazard, state intervention in these cases can in fact prevent it, by ensuring that culprits are penalised, whilst still preserving finan-cial stability.

psychologically, people tend to over-value potential losses vis-à-vis poten-tial gains. Any successful version of capitalism must, therefore, offset this instinctive risk averseness if it is to fos-ter the large scale investments neces-sary for its initiation and preservation. When considering a situation whereby capitalism is still developing, such as East Asia at the time of the crisis, the marginal importance of wealth is far greater – lower incomes augment the conservative tendency as a failed in-vestment decision could lead to abject poverty, not only a loss of wealth. The importance of the state in fostering confidence is therefore paramount, not to mention the fact that the gov-ernment, through the facility of taxa-tion, will be the only agent capable and motivated to engage in certain necessary investments, for example physical and financial infrastructure, or expensive research. Furthermore, investments are often complementary (consider the recent admittance that the financial system is the life source

of the economy) and as such, cannot be left to collapse.

We obviously understand the need for intervention. Deposit insurance, one of the supposed culprits of moral hazard in the East Asian case, was ex-ecuted in the early days of the current crisis. Ironically, the globalised heaven of free capital flows meant that once a few countries had fully insured de-positors, everyone else had to follow suit however reluctant they may have been. Furthermore, it is often forgot-ten that the International monetary Fund (IMF), the institution at the heart of the moral hazard accusations, is it-self a lender of last resort, mandated to preserve global financial stability by socialising risk on a world scale. It is the ‘guardian of capitalism’. If state intervention creates moral hazard, and moral hazard is to blame for financial crisis, then it follows that the IMF it-self is at least partially responsible for the East Asian crisis.

Capitalism is a national project. Ev-ery version of capitalism – be it his-toric or modern, Eastern or Western – is inextricably bound to the entity of the state. As a neo-liberal ideal, capital-ism may involve a minimal state; as a reality, this minimum is rather consid-erable.

_____________________________Spencer Thompson is a second year under-graduate student reading Philosophy, Politics and Economics at the University of York

Sue Mendus is Professor of Political Phi-losophy at the University of York and a Fellow of the British Academy.

Her research expertise include modern po-litical philosophy, liberalism and toleration. Professor Mendus has published widely and wrote books on “Feminism and Emotion” (2000), “Impartiality in Moral and Politi-cal Philosophy” (2002) and “Religious Tol-eration in an Age of Terrorism” (2008), amongst others.

vOX: In this mostly secular age, shouldn’t we see a re-emergence of political philoso-phy? That is, political philosophy as, at least, a general framework of discussion for virtues if not as a direct source of ideas?Sue mendus: I think we should definitely see the re-emergence, and we are seeing it. Political philosophy went into a very deep decline in the period leading up to 1971 prior to the publication of Rawls’ A Theory of Justice. One of the reasons for this was that this period in philosophy was a period in which the discipline was understood very narrowly and very linguistically. It was only with the publication of ToJ that we had a very significant work of political phi-losophy that spoke to philosophers, economists, and political scientists. It offers an ideal theory that is meant to guide the actions of people work-ing in political life. Subsequent to the publication of ToJ political philoso-phy has had an enormous revival and there have been very many debates which have important implications for policy. The School of PEP, and the

vOX INTERvIEW:

CRISES, hISTORY AND APOLITICAL POLITICAL PhILOSOPhY VOX’s Magda Assanowicz and Ilaf Scheikh Elard speak to Sue Mendus, Professor of Political Philosophy at the University of York.

Professor Sue Mendus


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vOX: Analytical political philosophy seems to be just managing the status quo. John Rawls for example says: “[T]here are many groups each equally entitled to engage in civil disobedience. Moreover they all wish to exercise this right, equally strong in each case; but if they all do so, lasting injury may result to the just constitution to which they each recog-nize a natural duty of justice.”*

Is a constitution rather unjust if the ex-ercise of all the legitimate claims leads to a collapse of the constitution?

Sm: I think it is a difficult case because Rawls does not say much about civil disobedience. That is a criticism of him in itself in not dealing with the realities. It is a question of the form ‘Isn’t Raw-ls being overly optimistic that all the different and conflicting demands that people make can be recognised and fulfilled within a good society?’ This is precisely the point that Rawls’ critics make of him. Although he purports to recognise the differences between people, passages like the one you just quoted indicate that he hasn’t really grasped how conflicting these situa-tions might be. To add to that, I think those criticisms have become louder post 9/11 and 7/7. What’s being said is ‘look, these political events indicate that a kind of political philosophy that deals in distributive justice, allocation of scarce resources, is a philosophy of comfortable times’. We are not in comfortable times, either financially or politically. Rawls’ theory of justice is

the wrong approach in times of crisis.

vOX: What are our priorities in times of moral confusion such as the current financial crisis? Wasn’t Rawls wrong when he said that only or especially in times of crisis we can find our moral nature? To draw a simile, a friend proves his friendship not in everday situations but in extraordinary circumstances.

Sm: There are (at least) two kinds of political philosophers. Some are like Hobbes, who feels that although we have a stable society, the protection of government, protection against one another, and against enemies is very precarious; at any moment it could all collapse. The security provided by the state is the thing that we have to sustain. That is our big political task: to keep the security of the state going. Other people, like Rawls, make the as-sumption that the state is stable. Then he says: what is the just way of distrib-uting resources such as education and healthcare given that we are in a stable state, and given that western liberal so-ciety is not going to collapse. I won-der whether 9/11 and 7/7 put us in the kind of Hobbesian frame of mind, where once again we have to start ask-ing: Is the state really stable? Can we afford the luxury of thinking about re-distribution at the expense of thinking about stability? Were we not wrong to take our eyes away from the possibility that the stability of state will not al-ways be with us? Perhaps Rawls was right for his time.

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three disciplines that go to make up PPE, seem to me very well matched. In those three disciplines you can in-vestigate philosophical analysis, politi-cal policy and economic implications. You see that since 1971 with ToJ there are very important debates not only about justice but also equality and dis-tribution of resources within liberal democratic societies.

vOX: Some say ‘Yes, there has been revival but it has been mostly concentrated within university departments and has not influenced real political discussion’.Sm: In the US, academic influence on politicians seems to be much greater than here. There are many lawyers, po-litical philosophers, and political scien-tists who are significant advisers to the President. That isn’t the case in Britain. The second point is about the influ-ence of academics on so-called ‘lay-men’. That has declined quite dramati-cally. We do not seem to have people like Isaiah Berlin, who were great pub-lic intellectuals in the post-war period. A partial explanation of this is that the disciplines of PPE have become very technical, so it’s very difficult to engage the public in what has become quite a professional enterprise. Bernard Wil-liams took the view that philosophy could become ‘corrupted’ by the in-creasing technicality of the subject and I think he’s right. I think it gets harder and harder for philosophers to per-suade the public and themselves that what they do has importance.

vOX: Would you agree, then, that contempo-rary political philosophy is apolitical?

Sm: A number of political philoso-phers say that political philosophy of the Rawlsian, liberal kind is very inno-cent about political reality. They think that whilst people writing on the lib-eral tradition and equality make ges-tures in the direction of the influence of philosophy on public policy, the same people are too optimistic and na-ïve about the extent to which there can be consensus. So the thought is, to put it quite crudely, that political philoso-phy is not sufficiently political. It does not deal with the realities of political life. That seems like a gesture towards a return to Machiavelli; to a recogni-tion of the clashes that can occur in real politics.

We do not seem to have great public intellectuals. A partial explanation of this is that the disciplines of PPE have become very technical, so it’s very difficult to engage the public in what has become quite a professional en-terprise. Williams took the view that philosophy could become ‘cor-rupted’ by the increasing techni-cality of the subject and I think he’s right.

* Rawls, J. (1999) A Theory of Justice (Harvard University Press, Cambridge) 2nd ed. pp. 328-9]

VOX - The STudenT JOurnal Of POliTicS, ecOnOmicS and PhilOSOPhy

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vOX: On a slightly different note: Is history having an effect on our lives? Do we ever learn from history?

Sm: There is great danger in taking historical solutions and trying to map them on to the modern world. I think we can learn from history in Mac-Intyre’s sense, that history explains to us how we came to be where we are. We can understand our own situation more clearly if we understand the his-torical path that brought us here. His-tory will not necessarily give us a so-lution to our problems; the important thing is the route we took to get here. History is like a map: it tells you where you are.

vOX: Alexandre Kojève, a French philoso-pher who also worked at the French Minis-try of Economic Affairs as one of the chief planners of the European Common Market, was asked what students should do in order to critique the system. Kojève answered, “Learn Greek.” In what sense do you think the Clas-sics matter, if at all?

Sm: In a book called Shame and Ne-cessity, Bernard Williams says that we are in a condition very much like the ancient Greeks of 400 B.C. We live in a world that is disenchanted and secu-lar, where we can’t invoke God to jus-tify the politics we have. The modern world is in that respect very like An-cient Greece, where there aren’t Gods who will make everything right. A huge amount of political thought and

philosophy is suffused with a belief that God explains and justifies. Why is it that we have rights? Locke answers in his second Treatise: “because god gave them to us.” Williams thinks that the task for us, like the task for the an-cient Greeks, is to say how we can jus-tify without appeal to God.

We have to explain morality, justify the moral order without invoking anything beyond ourselves. If people doubt that there is anything to learn from the Classics they should read Thucydides’ Peloponnesian War. When you read it, you are reading about Iraq, the Middle East. You are reading about something that happened in 400 B.C. but it comes off the page as if it was written yester-day. If anybody really thinks the Clas-sics are redundant, I implore them to go and read that, then tell me that you haven’t got a different perspective on the problems that there are between the Middle Eastern countries. If any-one did, I would be amazed because it really does enrich one’s thought on the problems of modernity.

VOX The STudenT JOurnalOf POliTicS, ecOnOmicS and PhilOSOPhy

voxjournal.co.uk

call for PapersVOX Summer Issue 2009

Theme: The nation

VOX - The Student Journal of Politics, economics and Philosophy - is calling for the submission of articles for the Summer Term issue 2009, which will be on the wide theme of the “The nation” (see list below).

The article should be between 1000-1500 words. If you want to write, please let us know by emailing a short outline of your proposed article to [email protected] by 22 March 2009.

you might want to pick an article idea from the following list or suggest your own topic:

ethics (morality between nations)identity and Vagueness (What is the nation?)Governance (The nation, devolution and Suprana-tional Bodies)Pol. history (Social forces leading to nation State)Globalization and the nation (is the logical conclusion of globalization the end of the nation?) The nation as an economic force, or___________ (your own article idea.)

note: undergraduates, graduates and academics from any degree programme are welcome to contribute.

Back issues are available at: www.voxjournal.co.uk

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Summer

Issue

2009

:

The n

ation

History will not necessarily give us a solution to our problems; the important thing is the route we took to get here. History is like a map: it tells you where you are.

© 2009 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP or, as the context requires,the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

Nationwide Opportunities Spring and Autumn 2009No rigid thinking here. For instance, we’ve designed our structureddevelopment programmes to fit around you – whether you want tospecialise in one specific business area or gain a broad experience.We encourage you to think laterally, as well as logically, wherever youwork. And we even offer a benefits package you can tailor to yourspecific needs. We also look forward to seeing what you have to offer.If you’re as flexible as we are, you could soon be finding out first-handwhy, for the fifth year running, we’ve been voted number one inthe Times Top 100 Graduate Employers survey for offering thegreatest opportunity. There’s only one number one employer – so find out why we’re the one firm for all adaptable graduates.

pwc.com/uk/careers/Text: PwC to 85792(Texts charged at your standard network rate.)

We value diversity in our people.

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Requirements:2:1 in any subject280 UCAS tariffor equivalent

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