From global imbalances to global reorganizations: towards a more stable

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From global imbalances to global reorganizations
towards a more stable equitable IFS

• Robert Wade
• LSE
• Sep 09

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The current world situation

• Sep 08 Mar 09 panic stage talk of 2nd Great
  Depression
• Now clear no 2nd Grt Depression
• Also clear return to normal growth high empt
  will take long time in West. Deving cies many
  face new development crisis (NDC)
• Goals for global policy community define (a)
  shape of new economic world, (b) means of
  achieving. ? DIIS conference

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GROUNDS FOR PESSIMISM

• Conference prospectus says there is now a
  determination to cooperate interationally to
  take bold measures to reassert public authority
  in global finance.
• Who are the agents of bold measures?
• G20F has been almost silent on financial reforms.

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GRNDS FOR PESSIMISM

• Financial Stability Board (FSB) no reason to
  think it will become effective global regulator.
• Same modus operandi as predecessor, FSF.
• Staff of only 9 no independent analytical
  capacity.
• Dependent on views of member states

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GROUNDS FOR PESSIMISM

• UN Commission on the World Financial and Economic
  Crisis ( Stiglitz Commission)
• Came up with radical ideas
• US and other G7 eviscerated it almost completely
  before approving as UN document

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CONCLUSION ON INTERNATIONAL COOPERATION

• Not much sign of major states being willing to
  cooperate to push real reforms.
• US and UK especially resistant
• G20F and G20L have achieved little consensus
  beyond platitudes
• FSB unlikely to be effective global regulator
• UN marginal
• However, grounds for optimism in regional
  arrangements

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GROUNDS FOR OPTIMISM

• Debate about reform of IFIs has to rest on
  understanding of how financial mkts work,
  causes of fin crises in gen GFC in particular
• 2 new lines of argt abt fin crises (1) micro
  theory of momentum trading, based on assumption
  of rationality (2) macro theory of global
  imbalances.
• They have implications for mandate scope of
  IFIs.

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DRIVERS OF FINANCIAL INSTABILITY MICRO STORY

• The efficient-mkt hypothsis (EMH). No momentum
  trading (bubbles trubbles)
• Bernanke house price increases largely reflect
  strong economic fundamentals (2005)
• Greenspan
• EMH underpins IMFs objective restore
  confidence of financial mkts
• Recent criticisms of EMH assume investor
  irrationality

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MICRO STORY RATIONAL MOMENTUM TRADING

• New theory shows how rational individual
  end-investors can produce collective
  irrationality (inefficiency, momentum trading,
  fragility)
• Key (a) information gap b/w end-investors
  their agents (fund managers, brokers, company
  directors) (b) employment contract of agents.
• Implication IMF wrong to presume that financial
  mkts make correct judgements about countries
  their policies, hence that its job is to
  restore confidence of fin mkts.

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DRIVERS OF FINANCIAL FRAGILITY MACRO STORY

• Many commentators ignore or deny role of global
  imbalances.
• GFC results fr confluence of (a) micro failures
  of fin mkts, and (b) macro global imbalances
  their associated capital flows. Two blades of
  scissors.
• The global economic growth model of past decade
  US consumers are main source of end-demand debt
  is main way consumers finance consumption.

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MACRO STORY

• US deficits, US borrowing from surplus countries,
  growth of creditor-debtor relations around the
  world ? increasing fin fragility.
• External deficit implies capital inflows and
  currency recycling currency recycling implies
  credit recycling, in form of fiscal deficit or
  borrowing by households firms.
• The GFC caused by rupture in credit recycling,
  not in currency recyling.

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CONCLUSIONS FROM THE MICRO-MACRO STORY

• The globalization growth model was flawed.
  Depended on rising US indebtedness.
• Flexible exchange rates do not curb imbalances
• Export-led growth model unviable. Need more
  emphasis on domestic demand.

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WHAT SHOULD BE DONE?

• Key (1) establish ways to curb external
  surpluses deficits (2) develop a global
  currency.
• International Clearing Union.
• Multilateral coordination of exchange rates, so
  as to stabilize real exchange rates.
• Capital account management (CAM)