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Lecture

POL208Y1 Lecture Notes - Invisible Hand, Realis Mood, Deficit Spending


Department
Political Science
Course Code
POL208Y1
Professor
John Haines

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LECTURE 2 TERM 2
World Political Economy
January 18!
Financial meltdown 2008-
reminder of globalized world
Planet finance larger than planet earth
Every day roughly 3 trill. Dollars exchanged in foreign exchange market
1980s new financial instruments created-individual debts (mortgages) are sliced and packaged
and for sale
Volume of derivatives (contracts derived form securities) exploding
1990s attempt at regulation largely unsuccessful
2007-bubble burst
Housing market had been good for a long time b/c loans =cheap
Ppl. Assume they can repay loans b.c house could be sold for more than they paid
Some borrowers started deferring on their payments, US house market exploded
What followed?
Dramatic chain reaction
All kinds of securities slumped
Lack of liquidity
Small banks couldn’t borrow money from other banks
Iceland-entire banking sector of country went bust-banking sector 200% of GDP
Iceland had to negotiate loans form IMF
World trade decreased
Conclusion: US house market incident had world wide impact--globalized world
OACD defines globalization as process in which markets and production becoming
increasingly interdependent due to trade, good and services flows, technology
Specialization and increases in transnational companies also can be added to this definition
Even local production might not be local at all
Lower production cost-lower with lower transportation costs
The financial melt down is a great example of how connected things are
Hard to understand inequalities between wall-street and a main street in a little developing
country
Key:
1 Poverty is much more due to the lack of financial institution
2 the financial system reflects and magnifies what human beings are--animals with bounded
rationality and productivity, and with high emotional volatility
On the one hand this crisis demonstrates that state economic policies might be dwarfed by
international happening
On the other hand, reinforced the state as a lender of the last resort, the bail out
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The state is the “fiscal menagerie”, the ultimate printer of money
ex: China’s achievements are extraordinary
The financial crisis have shown the limits and importance of the china case in the world
economy:
1. The crisis demonstrated the economic policies of the state may be dwarfed compared to
world etc
2. Also asks us questions about the regulator of currency
It has reinforced the role of the state as the ultimate printer of money...As a guarantee of money
supply
Lastly the crisis emphasized the need for international cooperation
Key consequence of crisis is that it clearly shows the obsolesce of the g7 group and necessity
to move to a g20 institution
As this introduction has shown, we are not immune from the world of finance
...though of course some countries are doing better
Ex. N. Korea doesn’t suffer too much from the financial crisis but your standard of living is
very different there
China has attempted to shape the rules of the game in its own way
Notably by having copyrights; trying to play with the value of its currency
But if you are a modern democracy you have to answer to the constrains and the opportunity of
the financial sector of the world
Different Approaches to world economy academically:
Fundamental institutions:
1st modern corporation as we know it=
1602 invented in netherleands--united east india company
For the first time this company offered stocks of limited liability
^ absolutely crucial development
Gov. Sponsored enterprise
Monopoly on all dutch trade in a region
That system of shares/stocks with limited liability allowed the company to raise an enormous
amount of money
With that system of limited liability stocks--very quickly first stock market developed
Investors who wanted to have their investments back had to sell their share
Ppl. Started to gather in streets of amsterdam to trade; city decided to build a stock market so
ppl. Could trade
Dutch banks started to accept shares as guarantees for loans
Shares could be purchases with credit
^ is start of modern capitalistic economy
Capitalism/stock market very intertwined with state power
Devep. Of free capitalism, the first bubble occurs
2 decades later in france-famous bankruptcy - the bubble effected other country financial
systems
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Through 17 18 19th century trade fueled by overseas empires and constant wars among euro
powers
Every monarch in europe had own banker to finance conflict and wars
Economic globalization intertwines with policies
Mercantilism developed as set of practices geared towards increased military powers
Economic activities constrained by state power
Eventually state limited trade flows-restricted trade flows among euro countries by setting up
monopolies
International payments became more difficult
Mercantilist policies didn’t last forever; challenged by liberal economic policies
Technology-transport and communication, commerce expansion
After napoleonic wars, the UK was the first to dismantle mercantilist laws
By end of 19th century what we know today as globalization was a reality for europe and the
atlantic
By 1919 about half of the volume of trade between north and south--mostly manufactured
goods from industrialization in exchange for raw materials from south
Today that exchange is around 20%
In 1919 (just before ww1) there were of course differences with todays globalization;
transnational production was rare; foreign indirect investments rare and limited to a narrow
kind of industry; mostly railroad
This first wave of globalization seemed to have produced more inequalities among the
rich countries and LESS inequality in the poor countries
The south north trade was actually highly beneficial for south unanimously
By ww1 economic globalization was a reality
By south--we mean south asia, some africa, s. America
Ww1 came and with it EVERYTHING CHANGED
Even before ww1 tariffs becoming higher, immigration restricted
After ww1 all these elements were generalized
Indeed trade buyers in the 20s and 30s raised dramatically
Showed globalization can be reversed
PROTECTIONISM started to be heard again
Canada took serious offense to the BUY american clause recently
Lesson: globalization can be reversed
State policies can change dramatically the shape of globalization
After ww2 crucial intern. Institutions set up to evolve mistakes of interwar period
Two concerns:
1 to provide the solution to the great depression of the 1930s
2 rebuild destroyed europe economically
Evolve economic collapse of europe
Bretton woods- IMF created to ensure stable exchange rate mechanism
To provide assistance to countries facing a crisis in their balance of payments
The ghost in the room at that time was inflation
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