Monday, November 30, 2009

Notes from Held's book on globalization of finance

Held Ch. 4
Shifting Patterns of Global Finance
4.1: Indicators of Financial Globalization and Financial Enmeshment
· Openness of national financial markets: level of legal restrictions on international financial transactions
· Enmeshment: extent of national financial engagement in global financial activity
o Measured by: turnover of overseas assets on national markets, involvement of both foreign financial institutions in domestic financial markets and domestic financial institutions in overseas financial markets and national shares of various global financial flows
· Integration: precise economic sense of the extent to which the process of, and the returns to, assets are equalized between different national financial markets
· Best indicator of financial globalization as a historical process: extent to which there is a convergence between returns to, or process of, similar financial assets
· Extensity: measured by geographical reach
· Intensity: magnitude of global financial flows
· Velocity: related to changing infrastructure, like communications technology
· Impacts: it has always impacted but the kinds (decisional, institutional, distributional and structural) can vary among eras; mediated by national economic conditions
4.1.1: The structure of the argument
· Global finance embraces:
o Flows of credit
o Investment
o money
· Seeks to identify the key attributes of various eras
· Technical terms:
o International capital flows: cross-border flows of assets and loans differentiated into several types:
§ FDI: ownership of or investment in overseas enterprises in which the investor plays a direct managerial role
§ International bank lending: loans to foreign creditors in domestic or foreign currency
§ International bonds: credit instruments issued by or to overseas creditors which include a promise to pay a specified amount of money on a fixed date and to pay interest periodically at stated intervals – bonds are marketable securities denominated in standard units
§ Portfolio investment: investment in corporate shares or longterm bonds held simply for their return with the investor playing no managerial role
§ International equities: shares in companies issued to foreigners
§ New financial instruments: derivatives, options, swaps
§ Development assistance: official government-to-government aid flows
§ International monetary flows: buying and selling of foreign currency
o Gross capital flows: measure total capital flows out of an economy or alternatively flows inwards
o Net capital flows: measure gross outward flows minus gross inward flows – net flows indicate whether an economy is accumulating claims on the rest of the world or visa-versa.
4.2: Early patterns of global financial activity
· 12th century: Precious metals used by international traders
· 14th century: Organized international finance: Florentine merchant banks
· 16th century: Europe imported large quantities of precious metals used to finance purchases in Asia (Europe and Asia became intertwined
· 16th century: Antwerp developed as financial center b/c of liberal financial policies
o Growth of international finance fueled by 2 things:
§ Growing trade networks fueled demand for cross-border financial systems to prevent danger of transporting money across lands
§ Difficulties faced by states to finance wars created pressure and opportunity for organized finance
· Example: Bank of England created to finance England’s war with France
· 18th century: demand for international finance led to sophisticated markets
o Communications took about a week
o But intensity of trading makes it a cohesive whole
· Although extensive, the reach was limited to the reach of imperial systems
4.3: The classic Gold Standard period: 1870-1914
· Developments n communication and infrastructure means that international markets became enmeshed with national markets
· Skeptics: this period is the benchmark for financial globalization because it was during this time that the scale of net flows was the greatest and adherence to the Gold Standard meant that countries had to subsume their domestic economic policies to the international rules.
· Transformationalist: this is misleading and untrue
4.3.1: International capital: the extensity, intensity and stratification of financial flows
· Remember that Held is saying transformationalists believe the skeptic position is misleading
· Exact capital flows across countries is hard to measure, but the general sense is that it increased
· This period had capital flows changing from European-centric to having a distinctive interregional or intercontinental character
· Charts are in book to show capital flows and where they went/how much was invested
· A liberal financial market: little to no regulation on international transactions during this time; especially on global bond market (privately organized)
· There was an intercontinental reach but it was concentrated and stratified
· Infrastructure changes made it possible to have global markets more effectively: intercontinental telegraphs, encouraged the institutionalization and formalization of international monetary arrangements (classical Gold Standard)
4.3.2: International money: the operation of the classical Gold Standard
· Values of major currencies were fixed to gold
· Established formally in 1878 (Paris International Monetary Conference – 1867)
· Initially, participation confined to leading European economies, N.A. and Australia
· Membership required that countries both convert their currency to gold on demand and did not restrict international gold flows.
o Some say this was an open and automatically adjusting system
o Critics say – not so, but it was open
· P. 196: The operation of the Gold Standard – in theory

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