Recent disturbances in global financial markets were quelled by the immediate intervention of both international financial institutions like the IMF and the nationals of developed countries like the U.S. Federal Reserve. The danger seems to have passed, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We face a new crisis of the same or larger now.
What are the lessons to be learned from the last crisis to avoid the next?
The first lesson, it seems, is the short and long term capital flows are two different phenomena with very little in common. The former is speculative and technical in nature and has little to do with the fundamental reality. The latter is investment oriented and committed to increasing the welfare and wealth of their new home. It is therefore a mistake to speak of "global capital flows." There are investments (including portfolio investments, including long-term and risk capital)? and not speculative, "hot" money. While "hot money" is very useful as a lubricant in the wheels of liquid capital markets in rich countries? can be destructive in less liquid, immature economies or in economies in transition.
The two phenomena should be treated differently. While long-term capital flows should be completely liberalized, encouraged and welcomed? In the short term "hot money" type must be controlled and discouraged, even. The introduction of capital controls-oriented fiscal (as Chile has implemented) is one possibility. The springs in Malaysia less attractive model of the mind. It is less attractive because it penalizes both the short and long term financial players. But clearly an important and integral part of the new international financial architecture should be the control of speculative money in pursuit of increasing returns. There is nothing inherently wrong with high yields? but capital market returns are related to economic depression and falling prices through the mechanism of short selling and using certain products. This aspect of things must be neutered or at least countered.
The second lesson is the importance of central banks and other financial authorities play in precipitating the financial crisis? or its extension. Financial bubbles and inflation of asset prices are the result of euphoric and irrational exuberance? Said Federal Reserve Chairman United States, the legendary Mr. Greenspun and who can deny? But the question that was delicately sidestepped: Who is responsible for financial bubbles? Expansionary monetary policies, very timely signals on interest rates markets, liquidity injections, currency interventions, international salvage operations? are coordinated by central banks and other central or international institutions. Official inaction is so favorable to the inflation of financial bubbles as is official action. By refusing to restructure the banking system, establishing adequate bankruptcy, corporate transparency and good corporate governance, by engaging in protectionism and isolationism, by avoiding the application of legislation against the competition? many countries have fostered the vacuum within which financial crises breed.
The third lesson is that international financial institutions can be of any help? when not governed by political or geopolitical and when not married to a dogma. Unfortunately, these are rare cases. Most of the international financial institutions? particularly the IMF and to a lesser extent, the World Bank? are politicized and doctrinaire. It is only lately and following the recent mega-crisis in Asia, that IFIs began to "reinvent" themselves, their doctrines and their recipes. This conceptual and theoretical flexibility led to better results. It is always best to tailor a solution to customer needs. Perhaps this should be a major step in evolution:
International financial institutions shall consider the countries and governments within their remit as inefficient and corrupt beggars, in constant need of financial infusions. Rather, one should consider these countries as customers, customers who need the service. After all, that is, exactly, is the essence of free market? and it is from IFIs that such countries should learn the ways of the free market.
In general, there are two types of emerging solutions. One type is market oriented? intervention and others. The first type requires the free market, specially designed financial instruments (see the example of the Brady bonds) and a global "laissez faire" environment to solve the problem of financial crises. The second approach regards the free market as the source of the problem rather than its solution. Calls for domestic use and that needed intervention and assistance in resolving financial crises.
Both methods have their advantages and both should be applied in various combinations on a case by case basis.
In fact, this is the greatest lesson of all:
There are no magic bullets, final solutions, right ways and only recipes. This is aa trial and error and the war should not be limiting their arsenals. We will use every weapon at our disposal to achieve the best outcomes for all involved.
What are the lessons to be learned from the last crisis to avoid the next?
The first lesson, it seems, is the short and long term capital flows are two different phenomena with very little in common. The former is speculative and technical in nature and has little to do with the fundamental reality. The latter is investment oriented and committed to increasing the welfare and wealth of their new home. It is therefore a mistake to speak of "global capital flows." There are investments (including portfolio investments, including long-term and risk capital)? and not speculative, "hot" money. While "hot money" is very useful as a lubricant in the wheels of liquid capital markets in rich countries? can be destructive in less liquid, immature economies or in economies in transition.
The two phenomena should be treated differently. While long-term capital flows should be completely liberalized, encouraged and welcomed? In the short term "hot money" type must be controlled and discouraged, even. The introduction of capital controls-oriented fiscal (as Chile has implemented) is one possibility. The springs in Malaysia less attractive model of the mind. It is less attractive because it penalizes both the short and long term financial players. But clearly an important and integral part of the new international financial architecture should be the control of speculative money in pursuit of increasing returns. There is nothing inherently wrong with high yields? but capital market returns are related to economic depression and falling prices through the mechanism of short selling and using certain products. This aspect of things must be neutered or at least countered.
The second lesson is the importance of central banks and other financial authorities play in precipitating the financial crisis? or its extension. Financial bubbles and inflation of asset prices are the result of euphoric and irrational exuberance? Said Federal Reserve Chairman United States, the legendary Mr. Greenspun and who can deny? But the question that was delicately sidestepped: Who is responsible for financial bubbles? Expansionary monetary policies, very timely signals on interest rates markets, liquidity injections, currency interventions, international salvage operations? are coordinated by central banks and other central or international institutions. Official inaction is so favorable to the inflation of financial bubbles as is official action. By refusing to restructure the banking system, establishing adequate bankruptcy, corporate transparency and good corporate governance, by engaging in protectionism and isolationism, by avoiding the application of legislation against the competition? many countries have fostered the vacuum within which financial crises breed.
The third lesson is that international financial institutions can be of any help? when not governed by political or geopolitical and when not married to a dogma. Unfortunately, these are rare cases. Most of the international financial institutions? particularly the IMF and to a lesser extent, the World Bank? are politicized and doctrinaire. It is only lately and following the recent mega-crisis in Asia, that IFIs began to "reinvent" themselves, their doctrines and their recipes. This conceptual and theoretical flexibility led to better results. It is always best to tailor a solution to customer needs. Perhaps this should be a major step in evolution:
International financial institutions shall consider the countries and governments within their remit as inefficient and corrupt beggars, in constant need of financial infusions. Rather, one should consider these countries as customers, customers who need the service. After all, that is, exactly, is the essence of free market? and it is from IFIs that such countries should learn the ways of the free market.
In general, there are two types of emerging solutions. One type is market oriented? intervention and others. The first type requires the free market, specially designed financial instruments (see the example of the Brady bonds) and a global "laissez faire" environment to solve the problem of financial crises. The second approach regards the free market as the source of the problem rather than its solution. Calls for domestic use and that needed intervention and assistance in resolving financial crises.
Both methods have their advantages and both should be applied in various combinations on a case by case basis.
In fact, this is the greatest lesson of all:
There are no magic bullets, final solutions, right ways and only recipes. This is aa trial and error and the war should not be limiting their arsenals. We will use every weapon at our disposal to achieve the best outcomes for all involved.
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