This summer’s financial turbulences

Sorry, I will not write an “essay” on this summer’s financial makret turmoil triggered by the sub-prime mortgage crisis in the US. But since it is relevant to this blog, here a few links to interesting articles published on the matter:

For German readers, an analysis from Die Zeit earlier this month, on the “maturity test” the global financial system is currently undergoing.   It includes an interview with Barry Eichengreen, the big scholar specialising in the history of global financial integration. He warns that the crisis could spread further if the corporate sector starts being affected by the credit crisis that so far has “only” affected financial institutions.

Gillian Tett at the FT has an excellent piece today looking more into history:

“this decade’s burst of market innovation had rewritten the rules of finance. For as financiers have created products that distribute credit risk across the capital markets, this has altered the way the financial system works. That in turn, may have changed the way the credit cycle works – or so some optimists believed until very recently. However, this summer’s market swings are now blowing apart many of these cosy assumptions. (…)”

Looking back:

(…) Though financial markets have only existed for a few centuries, they have already delivered a truly dazzling array of storms. Lehman Brothers, for example, reckons that the first financial crash in the Western world can be dated back to 1622, when the Holy Roman Empire debased its coins, triggering the equivalent of a modern banking panic.

That was followed by the 1637 tulip boom-and-bust in Holland and the 1720 South Sea bubble – an event that spawned the first literary analysis of crashes.

Eight more crashes then occurred in the 18th century, culminating in the Hamburg commodities bubble of 1799. Then in the 18th century, the pace of financial disaster speeded up, with 18 financial storms erupting in Europe, and increasingly in the US too.

These included bank crises that hit the US in 1819, 1837, 1847, 1857, 1873, 1884, 1890 and 1896, several of which were linked to booms and bust in the commodities sphere, or railroad sector.

However, these events contributed to regular bank runs in Europe too, and a financial crisis even struck Australia in 1893.

It was the 20th century, however, which produced the most dazzling array of financial turbulence, with 33 market storms, according to Lehman Brothers. The best known of these are the stock market crashes of 1929 and 1987; however, the Japanese bank turmoil of the 1990s also caused deep economic distress, as did the savings and loan crisis in America in the 1980s – and the bank run of 1907.

Meanwhile, another, lesser-known period which some analysts think carries lessons for banks today was a stock market crash in London in 1974, which was accompanied by a banking crunch.

By the standard of many of these market storms, the recent turmoil still looks pretty modest. Indeed, it is arguable that the only reason the price swings have generated so much shock among investors is that markets have been unusually quiet during most of this decade.

Nevertheless, the one factor that does make this summer’s events different from previous cycles is the degree to which the events have played out in the capital markets, rather than the banking world. That is largely because credit risk has been distributed to a much wider pool of investors than before.

The Asian Century - no longer an elusive reality

This week, Japan’s Prime Minister is visiting India, after a short stop in Indonesia to deepen ties with the South-East Asian democracy. In this context, let’s start with a quote from the FT in an article published yesterday:

“Japan has until recently been the missing link in India’s post-1991 engagement with the world. Now, however, relations that plunged into a deep freeze after New Delhi’s 1998 nuclear weapons test are being revived by a shared concern at the implications of a rising China.

To judge by the number of times Mr Abe’s speeches mention India, the world’s biggest democracy looms larger than ever in Tokyo’s strategic thinking. A frequent visitor to India, Mr Abe likes to talk about the countries’ “shared values” of democracy and respect for human rights as the basis for a “new Asian order” that pointedly sidelines China”.

Three questions come to mind:

1) When will Asia’s new economic might concretely translate into more political-military power generally (If one assumes that there is an automatic spill-over from one to the other – which is not obvious)

2) Will China be the trigger?

3) Should China emerge as a military power with major capabilities, what is the future for the current liberal world order based on the spread of democracy and the market economy?

Change of circumstances

I just moved to Brussels to take on employment, from September onwards full-time, with the world-economy think thank ECIPE.

 

The move explains the recent neglect of my blog. Flat-hunting, organising the move across the Channel and finding my way in the new town were more urgent matters. Let’s see how the blogging itself evolves with the new position and the new location. After having started blogging in ever-stimulating, exhilarating London, working in a global financial media environment, the risk is that my writing becomes boring. The new dullness might be reflecting the comfort of a cosmopolitan but small European capital with much more affordable quality food and housing. If the quality of life doesn’t kill the inspiration, then perhaps Brussel’s slower-paced, less frenzied, bureaucratic and diplomatic environment that stands in complete contrast to London’s hectic fascination as the world’s global financial centre. Myself am feeling like I am starting a serious process of embourgeoisement (”gentrification” is not an ideal translation) over here. I will be based in the elegant parts of the borough of Ixelles and no longer in a flatshare in London’s poor but fascinating immigrant-dominated area Finsbury Park. To say good-bye to it, here one of the finest descriptions of the area I used to live in made by the FT’s Stefan Wagstyl back in 2006:

“Astring of eateries on the Seven Sisters Road offers an instant glimpse of the ethnic mosaic that is London.

In quick succession along this main thoroughfare of Finsbury Park, a suburb in the north of the city, stand the Alban Cafe (Kosovan), Kostas (Greek), Hana (Japanese) and Fassika (Ethopian). A few yards away are a Somali social centre, a Turkish convenience store, a Chinese massage parlour and a newly opened Polish food shop.

All that within hailing distance of both the Rainbow Theatre, a former rock venue that now houses a black evangelical church, and the Finsbury Park mosque, former base of Abu Hamza al-Masri, the extremist cleric jailed this year for inciting hatred.”

My neigbourhood here in Brussels is certainly cosmopolitan, but of another type dominated by the diplomat and the bureaucrat. Elegant houses in Art Deco style and fancy shops in calm quarters along leafy avenues… But I know that if my bourgeois neighbours end up boring me, I can go and have a look over at St Gilles or the Congolese quarter Matonge…

So, is that the end of it?

No, there is hope. The content I will be dealing with is in principle so interesting (to me at least) that my blogging might in fact take a more interesting turn.

Let’s see! Readers you must watch out and warn me at the first signs of dullness. And don’t be shy!

Book review: Global Capitalism, Its Fall and Rise in the Twentieth Century

I haven’t so far happened upon a satisfactory book review available online, for free, of Jeffry A Frieden’s no longer so recent book Global Capitalism, Its Fall and Rise in the Twentieth Century. This a humble attempt to redress this untenable situation.

Weathering an uncertain summer, China and Russia

This summer a heatwave had murderous effects in Southern and Eastern Europe, while Britain was flooded. My Italian and Southern French holiday was just right in terms of weather, but it could have been a bit warmer. Global warming hits, but unevenly…

But back to the business of this blog. Before leaving I talked about the world feeling the heat