LONDON CENTRE
FOR CORPORATE GOVERNANCE
AND ETHICS
In the Wake of the Financial ‘Tsunami:’
Birkbeck,
University of London Malet Street
Bloomsbury
London
WC1E 7HX
United Kingdom
Theory, Policy and Reality
SASE 2009
Paris
17 July 2009
Friday, 08:45-10:15 a.m.
56 rue des Saints-Pères: Salle 104
Session Abstract
The 1929 Stock Market Crash and Great Depression discredited (for a time) Classical economic theory and policy and opened the way for Keynesianism. Similarly, a consequence of the recent collapse of confidence in financial markets and the banking system – and the effect that this has had on the global macro economy – is currently discrediting the ‘conventional wisdom’ of neo-liberalism. This session begins with an exploration of the co-evolution of theory, policy and reality contributing to the current economic situation; and it considers the challenges associated with the inability to regulate at a level co-extensive with the market. It then examines alternative institutional arrangements, responses to the crisis and outcomes being generated at the level of the firm, the nation state and the broader economy as well as their resulting dynamic effects within the global political and economic system. Whilst those involved may be consulting with each other, they are acting independently in pursuit of individually perceived social, political and economic imperatives. This puts a clear focus on the possibilities for designing an appropriate formal framework that is inclusive, flexible and effective for coordinating a response not only to the current crisis but to unforeseen future scenarios,
Moderator:John Wright
London Centre for Corporate Governance and Ethics (LCCGE) and
LondonSchool of Hygiene and Tropical Medicine
(e-mail: )
Papers
Paper Title: Organizations and Markets:The Gap between Economic Theory and Reality
Presenter:Sue Konzelmann
Director, LCCGE; Director Taught Postgraduate Programmes in Management and Director Postgraduate Programmes in Corporate Governance and Ethics. (e-mail: )
Abstract:The instability in world financial markets and the resulting economic slow down is currently dominating economic commentary and policy making. Just as the 1929 Stock Market Crash discredited Classical economic theory and policy and opened the way for Keynesianism, a consequence of the collapse of confidence in financial markets and the banking system – and the effect that this has had on the global macro economy – is currently discrediting the ‘conventional wisdom’ of neo-liberalism. This paper argues that at the heart of the crisis is a breakdown in governance that has its roots in the coevolution of political and economic developments and of economic theory and policy since the 1929 Stock Market Crash and the Great Depression that followed. However, while many are looking back to the Great Depression and to the theories and policies that seemed to contribute to recovery during the first part of the twentieth century, the current context is different from the earlier one; and there are more recent events that may provide better insight into the causes and contributing factors that gave rise to the present crisis.
Paper Title:A Bunch of Losers … and a Bunch of Winners:Why the Credit Crunch Wasn't Such Bad News for all Banking Systems
Presenters:Marc Fovargue-Davies
LCCGE (e-mail: )
Gerhard Schnyder
LCCGE and Centre for International Studies and Diplomacy (CISD), School of Oriental and African Studies (SOAS)
(e-mail: )
Abstract:This paper starts off with the observation that different countries’ banking systems were stricken to different extents by the current financial crisis. Based on the evolution of the cumulated market capitalisation of their largest banks, we identify four winner countries – Australia, Brazil, Canada and China – and four loser countries – Japan, Switzerland the UK and the US. Based on qualitative narratives of the evolution of each countries banking system during the last decades, we then investigate the factors that explain the solidity or frailty of banking systems. We draw on a multitude of previous research and theories of financial crisis from different academic disciplines, and argue that the crisis cannot be understood as purely economic phenomenon, a purely political phenomenon or a pure corporate governance problem. We find that there is indeed no simple answer to the question ‘what made some banking systems more solid than other?’
A multitude of factors have shaped the banking system of each country along the way of its evolution, leading to certain – often unintended – features that made it either vulnerable or solid. We do find some evidence however that suggests that certain factors may have played a systematic role across all cases. Most importantly, rapid and radical liberalisation (‘Big Bang’) seems to have invariably made banks vulnerable, while absence of such radical changes seems to lead to stable banks. Related to this factor, several countries with politically powerful banking sectors appear to have experienced more problems than others, as bankers successfully lobbied for weaker regulations. Conversely, significant previous crises over the last decades have led legislators in different countries to favour prudential regulations, which protected their banks largely from the crisis. Yet, both factors are not universally applicable as we also find country cases where the same factor had the contrary impact, which underscores once more the important of context. We conclude by arguing that these factors should hence be at the centre of future research on this subject.
Paper Title:The Saudi Financial Regulators: Their Evolution and Intervention in Current Volatile Markets
Presenter:AbdullahAdib AlZamil
LCCGE (e-mail: )
Abstract:In the summer of 2008 and when the whole world was witnessing the collapse of financial institutions and capital markets, one market was living an historical boom; the oil market. Oil prices peaked at almost US$145 per barrel in July 2008, and for country like Saudi Arabia, the largest producer and exporter of oil, this meant a surge of unprecedented revenues. And although oil prices sharply fell in the months following, the average for 2008 was almost US$100 per barrel with forecasters pricing it at an average of US$65 per barrel for 2009. The Saudi financial regulators couldn’t celebrate; they were too busy dealing with problems inherited from the years before as well as potential ones in the days ahead. The Saudi Arabian Monetary Authority (SAMA) had to swing its policies from busting inflation and reducing liquidity in the beginning of 2008, to policies that encourage lending and hinder a possible economic stagnation. The Saudi Riyal’s exchange rate peg to the US dollar meant that SAMA, as the Saudi central bank, had to follow US interest rate changes. Those changes did not always match the economic situation in Saudi Arabia. This paper discusses the evolution SAMA and the current role it plays in light of the different challenges the country's economy is facing. It also addresses how SAMA positions itself from the different stakeholder groups it serves.
Paper Title:Financialisation and Corporate Responsibility: implications for the Nature of the Firm
Presenter:Laurence Cranmer
LCCGE;Associate Fellow, Said BusinessSchool, University of Oxford; Director, Woodgreen Consulting Ltd.
(e-mail:)
Co-Author:German Heufemann, LCCGE (e-mail: )
Abstract:Firms appear to be subject to an increasing process of 'financialisation'; at the same time there is an increasing interest in 'corporate responsibility'. In a world economy where financialisation may increase the importance of financial markets, financial motives and financial actors, one of the key questions seems to be the determination of what companies are responsible for. In this context we explore corporate responsibility through an extended view of value creation. Our approach seeks to take into account wider dimensions of financial and non-financial value creation to analyse a ‘minimal-maximal’ spectrum corporate responsibility and a 'low-moderate-high’ spectrum of financialisation. We will suggest a framework that maps these two phenomena. On this basis will make some observations about the interaction of corporate responsibility and financialisation and possible implications for the firm.
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