Skittish at the prospect of further losses, the Chinese government has taken action. On Saturday, the country’s largest brokerage firms agreed to establish a fund worth 120 billion yuan ($19.4 billion) to buy shares in the largest companies listed in the index. Beijing has also lowered interest rates, relaxed restrictions on buying stocks with borrowed money, and imposed a moratorium on initial public offerings. The country has even relied on propaganda to encourage the public to hold onto their shares for patriotic reasons.
.. The boom was fueled by retail punters relatively new to investing—according to the Financial Times, more than 12 million new accounts were opened on the stock exchange in May alone. Once dominated by elites, the stock market increasingly has become a vehicle for China’s emerging middle class. Two thirds of households who opened accounts in the first quarter of 2015 didn’t even finish high school. Equity market fever has spread to China’s universities, where 31 percent of the country’s college students have invested in a stock. Three quarters of them used money provided by their parents.
.. According toBloomberg, over 90 million people in China have invested in equities—a number greater than the total membership in the Chinese Communist Party.
Other People’s Money: Masters of the Universe or Servants of the People
Lending to firms and individuals engaged in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3 per cent of that total (see Chapter 6).
.. The finance sector establishes claims against assets – the operating assets and future profits of a company, or the physical property and prospective earnings of an individual – and almost any such claim can be turned into a tradable security.
.. If securities are claims on assets, derivative securities are claims on other securities, and their value depends on the price, and ultimately on the value, of these underlying securities. Once you have created derivative securities, you can create further layers of derivative securities whose values are dependent on the values of other derivative securities – and so on.The value of the assets underlying such derivative contracts is three times the value of all the physical assets in the world.
.. If some members of that closed circle make extraordinary profits, these profits can only be made at the expense of other members of the same circle. Common sense suggests that this activity leaves the value of the traded assets little changed, and cannot, taken as a whole, make money. What, exactly, is wrong with this commonsense perspective?
Not much, I will conclude.
.. A country can be prosperous only if it has a well-functioning financial system, but that does not imply that the larger the financial system a country has, the more prosperous it is likely to be.
.. A remarkable feature of the global financial crisis is that most people in finance seemed to regard it as self-evident that government and taxpayers had an obligation to ensure that the sector – its institutions, its activities and even the exceptional remuneration of the people who work in it – continued to operate in broadly its existing form.
.. These four functions –
- the payments system,
- the matching of borrowers and lenders,
- the management of our household financial affairs and
- the control of risk –
are the services that finance does, or at least can, provide. The utility of financial innovation is measured by the degree to which it advances the goals of making payments, allocating capital, managing personal finances and handling risk.
.. The economic significance of the finance industry is often described in other ways: by the number of jobs it provides, the incomes that are earned from it, even the tax revenue derived from it. There is a good deal of confusion here, discussed in Chapter 9. But the true value of the finance sector to the community is the value of the services it provides, not the returns recouped by those who work in it.
.. I will explain how the regulation which has been applied with more and more intensity and less and less effect through the era of financialisation is part of the problem – a major part – not part of the solution. There has not been too little regulation, but far too much.
How Iceland Emerged From Its Deep Freeze
After Iceland’s three largest banks fell in the space of three days, the currency collapsed, the stock market fell 95 percent and nearly every business on the island was bankrupt.
Short-term suffering followed, but today, Iceland is buzzing: Unemployment is 4 percent, the International Monetary Fund is predicting 4.1 percent G.D.P. growth for 2015, and tourism is booming.
.. As real wages fell 11 percent from 2007 to 2010, the government did not take a hacksaw to social services, but instead raised taxes and also offered debt relief to the country’s mortgage holders.
And Iceland did what no other developed country has seemed particularly eager to do: It jailed a bunch of bankers.
Why won’t the UK join the Eurozone?
The UK’s banks were at least as badly damaged as Ireland’s in the financial crisis. But the UK had its own currency and a functioning central bank. The currency acted as a shock absorber, falling in value as the central bank cut interest rates to historic lows and used extraordinary measures to reflate the economy in the aftermath of the crisis. The UK’s economy still suffered – it has had a very long, slow recovery. But had it been a Euro member, the damage would have been far, far worse. It would have gone down the same road as Ireland
.. But Cyprus is actually doing considerably better than the IMF’s prediction of 8% gdp contraction, and far better than Ireland, Greece, Portugal or Spain. This is no doubt because it forced bank creditors to take losses and used capital controls to protect its economy from damaging capital flight.
.. But Iceland’s government had a big advantage over Ireland and Cyprus. It had its own currency and full control of monetary and fiscal policy. It could protect its economy. It allowed its banks to fail and refused to honor foreign liabilities: there was legal action against it, of course,but it won. It allowed its currencyto devalue by 50% and imposed capital controls, most of which are still in place. And it provided fiscal support to businesses and households. Six years later, Iceland’s economy has recovered fully from its crisis and is expected to grow at a rate of 2.5% over the next year.