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Conference onGlobal Financial Crisis: A Decade after LehmanDecember 3-4, 2018Ambedkar International Centre, New DelhiThis September marks the 10th year of the global financial crisis. A decade later, the world economy still feels the reverberations of the crisis. The attempts to re-stabilise and more importantly to prevent another economic meltdown started immediately after the crisis. In the last ten years, there has been a significant re-structuring of the financial landscape by regulating financial institutions. The attempts to globalise these regulations irrespective of the nature of banking system has had severe impacts. India had been relatively insulated from the crisis due to the public nature of the banking system and their limited market exposure. A decade after the meltdown, the Indian banking system is in deep crisis. In this context there is a need to look closer into the post crisis reforms prescribed to financial institutions and their impacts on the Indian Banking system. To understand the various factors contributing to the crisis of the Indian Banking system in the context of the post crisis reforms, a few organisations are planning to hold a conference. The conference would be held at the Ambedkar International Centre on the 3rd and 4th of December 2018. This event would try and bring economists from India and outside to critically evaluate the effects of the post crisis reforms and the current crisis facing the Indian banking system and the economy at large.A brief note contextualising the conference:A decade back when in September Lehman Brothers filed for bankruptcy, it was clear that an interlinked combination of an excessive overhang of debt in corporate and household balance sheets and unsustainable asset price inflation in equity and housing and real estate markets had precipitated a financial crisis, that soon triggered the Great Recession. Underlying these proximate determinants were worsening inequality, lax regulation and an easy money policy.Crisis in capitalism is often seen as setting off a process of restructuring, which besides pulling the system out of the mess, attempts to mitigate or do away with the factors that resulted in the crisis in the first place. The experience with the process of restructuring over the last decade points to the signal failure of the state-engineered post-2008 restructuring to either deliver a robust recovery or do away with the factors that generated the vulnerabilities of 2007. Rather what we have is the emergence of new vulnerabilities reflects in volatile asset markets in the developed countries and emerging markets, a debt overhang in China, large non-performing assets in India’s banking system, currency volatility in Argentina and Turkey, and signs of contagion in India and Indonesia.The evidence is strong that the vulnerabilities characterizing the current conjuncture is actually a fall out of the policies of restructuring adopted, which, besides a brief reliance on fiscal stimuli largely to recapitalise banks, consisted largely of monetary measures in the form of massive infusion of liquidity through “quantitative easing” programmes in the main advanced country sites of the original crisis, and the maintenance of low, or even negative’ policy interest rates. by December 2017, the six central banks that adopted policies of “quantitative easing” — the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and the Swiss and Swedish central banks — held more than $15 trillion of assets, more than four times the pre-crisis level. The US Federal Reserve held assets worth a little less than $1 trillion before the crisis and by December 2017 recorded assets of $4.5 trillion, around one quarter of US GDP. The ECB accumulated assets of $4.9 trillion, around two-fifths of the EU’s GDP.The resulting availability of cheap liquidity allowed finance to expand credit and invest in asset markets in developed and developing countries, resulting in the resumption of unsustainable debt accumulation and asset market price inflation. Since depressed demand kept the prices of goods and services under control, monetary policy remained loose, despite its role in fuelling asset market speculation. In the event, the global economy finds itself overcome by vulnerabilities of the kind that prevailed prior to the financial crisis of a decade back.However, in a turn that is puzzling, starting about a year back central bankers and macroeconomic policymakers in advanced economies declared that the time has come to end the easy money policies in place for the past decade. If the recovery is not robust, why are central banks and governments fixated on withdrawing the one measure that they used to keep their economies afloat since the crisis? The only plausible explanation is the concern with overheating in asset markets in both advanced and developing economies. The cheap and readily available liquidity in developed country markets has enabled investors to engage in various forms of the carry trade, which have fuelled asset-price spirals. As a result, , different parts of the global economy are as, if not more, vulnerable than they were in 2007 and 2008 prior to the global panic created by the collapse of Lehman Brothers.Besides, asset price inflation, one other major concern is that despite limited global growth the explosion in debt continues. By the third quarter of 2017, global debt stocks had risen to close to $250?trillion – or to more than three times (318%) the gross world product. Though liquidity is being created and infused in the developed economies it has spilt over to the rest of the world. The share of developing countries in these stocks increased from around 7?per cent in 2007 to around 26?per cent a decade later. In developing countries as a whole, the share of public and publicly guaranteed (PPG) external debt owed to private creditors increased from 41?per cent in 2000 to over 60?per cent in 2017.The other trend is that in both developed and developing countries corporate borrowing has risen sharply. In the United States, the ratio of credit to non-financial corporations to GDP, which had fallen from 69.7?per cent in 2007 to 66.1?per cent in 2011, has since risen to 73.5?per cent in 2017.As we have seen, vulnerabilities are particularly serious in the emerging markets. The large foreign capital inflows that drove asset-price inflation also led to the accumulation of stocks of foreign financial capital, brought in by investors with short-term interests, who are likely to exit when access to cheap money in developed countries comes to an end. If and when they do, the resulting capital flight will have destabilizing effects in not just stock, but also currency markets, with attendant external effects (on firms that have foreign currency borrowings on their books, for example). This is what is visible in Turkey, for example.Thus, at the global level, excess liquidity has rendered the system vulnerable to crises – and this is causing central bankers in developed countries to look for opportunities to unwind their unconventional monetary measures, to prevent further build-up of fragility. But the moment central banks made clear their intention to allow rates to rise and drawback the monetary lever, markets turned unstable, as such measures would undermine the basis on which carry trade-type investments were undertaken. This creates a dilemma for central bankers. If they do not reverse the easy money regime, the collapse in asset markets, when it occurs, would be steeper and more damaging. On the other hand, reversing the policy regime would abort the halting recovery that is under way. There are no clear responses to this dilemma, especially as (other than in the United States) there are no plans for any compensating fiscal stimuli to cover for the possible instability.So, even with the more optimistic assessments of future economic prospects, considerable uncertainty anisors: Economic Research Foundation (ERF)Focus on Global SouthCentre for Financial Accountability (CFA) ................
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