wolf - fixing global finance (2010)

[...]... currency, foreigners lend to it, in any currency, at their great peril! • 7 • • Fixing Global Finance Chapter 7 considers global reform This is less important than domestic changes, but there are important issues here as well There is a case to be made for a global currency But in practice the aim should be to make a floating-rate regime work as well as possible The implications for the nature of the flows... This is astonishingly —and disturbingly—different from the experience with financial globalization in the late nineteenth and early twentieth centuries Happily, as late as fall 2007, no sizable emerging market crises had occurred after 2001 (when Argentina defaulted), while the last global wave of • 3 • • Fixing Global Finance crises to affect emerging economies occurred between 1997 and early 1999 This... market economies, which tend to be more corrupt, more inefficient, and often more populist than those of the high-income countries The discussion turns, in Chapter 3, not just to what can go wrong but to what has gone wrong in global finance The chapter recounts the crises • 5 • • Fixing Global Finance of the past three decades and describes their huge costs In most cases, the largest costs arise when devaluations... writing on so fast-changing a subject I am deeply grateful to them all • xv • This page intentionally left blank Fixing Global Finance This page intentionally left blank CHAPTER 1 Learning Lessons The people who benefit from roiling the world currency markets are speculators, and as far as I’m concerned, they provide not much useful value PAUL O’NEILL, FORMER U.S TREASURY SECRETARY FINANCE IS THE BRAIN... Moreover, of the global stock of financial assets in 2005, as much as $44 trillion were equities, $35 trillion were private debt securities, $23 trillion were government debt securities, and $38 trillion were bank deposits The share of the latter fell from 42 percent in 1980 to 27 percent in 2005, as the world shifted to more indirect forms of intermediation This so- • 11 • • Fixing Global Finance phistication... illiquid In addition to these inescapable maturity and liquidity risks, banks are also exposed to market, credit, cur- • 15 • • Fixing Global Finance rency, and wider economic and political risks Market risk consists of the danger of falling asset prices, perhaps because of rising long-term interest rates; credit risk covers the potential bankruptcy of borrowers; currency risk derives from a mismatch... higher-return uses for surplus funds at home, such as in additional public or private consumption Thus the “solution” to global financial instability afforded by U.S external borrowing, and the associated current account deficits, itself caused significant problems This takes the discussion to the questions of global adjustment and reform There is a tendency among creditor nations to argue that so-called... it may appear, is to collect more information But this too has a drawback: “free-riding.” If all information is present in the market, those who have made no investment in collecting it can benefit from the costly efforts of those who have done so That will, in turn, reduce the incentive to invest • 13 • • Fixing Global Finance in such information, thereby making markets subject to the vagaries of “rational... desire of private investors to invest once again in many of these countries has led the emerging market economies to engage in large-scale foreign-currency intervention and accumulation of foreign-currency reserves Emerging market economies “smoke, but do not inhale” in global capital markets The majority are prepared to engage in capital markets, but do not accept—indeed have worked hard to avoid accepting—net... in the world economy and, on the contrary, are generating surpluses themselves, some high-income countries had to absorb those funds instead Thus the net flows of capital were from the rest of the world to a few creditworthy high-income countries and, above all, to the United States, which became the superpower of global borrowing The emergence of America as an enormous borrower did indeed generate a . updated ed. p. cm. Includes bibliographical references and index. ISBN-13: 97 8-0 -8 01 8-9 57 3-9 (pbk. : alk. paper) ISBN-10: 0-8 01 8-9 57 3-1 (pbk. : alk. paper) 1. International finance. I. Title. HG3881.W565. Charles Street Baltimore, Maryland 2121 8-4 363 www.press.jhu.edu Library of Congress Cataloging-in-Publication Data Wolf, Martin, 1946– Fixing global finance / Martin Wolf. —Expanded and updated ed. p class="bi x0 y0 w0 h1" alt="" Fixing Global Finance Forum on Constructive Capitalism Francis Fukuyama, Series Editor Fixing Global Finance Expanded and Updated •• MARTIN WOLF The Johns Hopkins University