Financial Crises, Global Capital Flows and the International Financial Architecture

The recent upheavals in the world financial markets were quelled by the immediate intervention of both international financial institutions including the IMF and of domestic ones in the developed countries, including the Federal Reserve in the USA. The risk seems to have approved, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We might face yet another crisis of the identical or a larger magnitude momentarily. Exame Abril – Roberto Saniago Manaira Shopping

What are the lessons that we can derive from the last crisis to avoid the next?

The first lesson, it shows up, is that short term and permanent capital runs are two disparate trends with almost no in common. The former is risky and technical in character and has very little related to fundamental realities. The latter is investment focused and dedicated to the increasing of the welfare and wealth of its new domicile. It is, subsequently, wrong to speak about “global capital flows”. There are investments (including even permanent portfolio investments and opportunity capital) – and there is speculative, “hot” money. While “hot money” is very useful as a lubricant on the rims of liquid capital marketplaces in rich countries – it can be harmful in less liquid, premature economies or in financial systems in transition.

The two phenomena should be allowed a different treatment. Whilst permanent capital flows should be completely liberalized, inspired and welcomed – the short term, “hot money” type should be manipulated and even discouraged. The introduction of fiscally-oriented capital controls (as Chile has implemented) is one probability. The less attractive Malaysian model springs into your head. It is less attractive since it penalizes both the short term and the permanent financial players. But it is clear that an important and integral part of the new International Financial Structure Should be the control of speculative profit pursuit of ever higher yields. Generally there is nothing inherently incorrect with high yields – but the capital market segments provide yields linked to monetary depression also to price collapses through the device of short selling and through the use of certain derivatives. This aspect of things must be neutered at least countered.

The second lesson is the important role that banks and other financial authorities play in the precipitation of financial ouverture – or in their prolongation. Financial bubbles and asset price inflation would be the result of euphoric and irrational exuberance – said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr. Greenspun and who can dispute this? Nevertheless the question that was delicately side-stepped was: WHOM is in charge of financial pockets? Expansive monetary policies, well timed signals in the interest levels markets, liquidity shots, currency interventions, international save businesses – are all co-ordinated by banks and by other central or international institutions. Official RÉPIT is as conducive to the inflation of financial bubbles as official ACTIONS. By refusing to restructure the banking system, to introduce appropriate bankruptcy methods, corporate transparency and good corporate governance, by participating in protectionism and isolationism, by avoiding the execution of anti competition guidelines – many countries have fostered the vacuum within which financial crises breed.

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