Int’l fi­nan­cial sta­bil­ity must for global peace

The Pak Banker - - Front Page -

TOKYO

Mr Masaaki Shi­rakawa, Gover­nor of the Bank of Ja­pan ad­dress­ing at a high-level sem­i­nar, co-hosted by the Bank of Ja­pan and the In­ter­na­tional Mone­tary Fund said it is a great plea­sure for me to wel­come you to Tokyo on the oc­ca­sion of the an­nual IMF-World Bank Meet­ings. About two years ago, at the Per Ja­cob­s­son Lec­ture in Basel, my old and re­spected friend, the late Tom­maso Padoa-Schioppa, of­fered his in­sights on how to strengthen the gov­er­nance of the rapidly in­te­grat­ing global econ­omy.1 Since then, the sub­ject has been in a cor­ner of my mind. To­day, I am happy to co-host with the In­ter­na­tional Mone­tary Fund a high-level sem­i­nar de­voted to that topic.

Many of you here to­day prob­a­bly heard Tom­maso force­fully present his case, but for those mem­bers of the au­di­ence who were not on hand at that time, I would first like to of­fer you a brief sum­mary. Tom­maso ob­served that one of the causes of the Great Fi­nan­cial Cri­sis was the fail­ure of na­tional gov­ern­ments to prop­erly rein in mar­ket forces, which were fast be­com­ing global in na­ture.

He saw that the in­crease in cross­bor­der fi­nan­cial ac­tiv­i­ties re­quired a cor­re­spond­ing in­crease in the pro­vi­sion of ba­sic fa­cil­i­ties or ser­vices - sup­port­ing or fa­cil­i­tat­ing those ac­tiv­i­ties - in­clud­ing pru­dent reg­u­la­tion and su­per­vi­sion from a cross-bor­der per­spec­tive.

Nev­er­the­less, the sup­ply of such fa­cil­i­ties or ser­vices was de­fi­cient or lack­ing be­cause na­tional gov­ern­ments in­her­ently could not pro­vide for them. The so­lu­tion, he ar­gued, was to en­hance supra­na­tional gov­er­nance of the global econ­omy. I.

The Great Fi­nan­cial Cri­sis and the sup­ply of global pub­lic goods As Tom­maso and many oth­ers have pointed out, the Great Fi­nan­cial Cri­sis has ex­posed the naïve sim­plic­ity of the view that, if the eco­nomic poli­cies of in­di­vid­ual economies are geared to­wards do­mes­tic eco­nomic sta­bil­ity, and pri­vate ac­tors are al­lowed to op­er­ate freely in such an en­vi­ron­ment, the global econ­omy would be all right.

The painful re­al­iza­tion is that the self-cor­rect­ing power of the mar­ket goes only so far. Mar­kets must some­times be nudged, pushed, or even force­fully shoved off their ex­ist­ing tra­jec­tory so as to pre­vent them from run­ning into dis­as­ters.

In or­der to func­tion prop­erly, mar­kets also de­pend on things that are not pro­vided spon­ta­neously by them­selves, such as the rule of law, re­spect for pri­vate prop­erty, and the safety and free­dom of pas­sage.

"Pub­lic goods" is the name as­cribed to these fa­cil­i­ties or ser­vices in eco­nom­ics text­books, and global pub­lic goods are those needed for the global econ­omy to func­tion prop­erly.

So, what are the global pub­lic goods that sup­port the func­tion­ing of the global fi­nan­cial sys­tem? One ob­vi­ous but only par­tial an­swer is the ap­pro­pri­ate reg­u­la­tion and su­per­vi­sion of cross- bor­der fi­nan­cial ac­tiv­i­ties.

The Great Fi­nan­cial Cri­sis has demon­strated that there were many short­com­ings in this area, and the in­ter­na­tional community has taken steps to cor­rect them.

Good reg­u­la­tion and su­per­vi­sion are im­por­tant, but by them­selves are not suf­fi­cient. The sound­ness of in­di­vid­ual fi­nan­cial in­sti­tu­tions is one build­ing block of fi­nan­cial sta­bil­ity. In this sense, the in­ter­na­tional pub­lic good sup­port­ing global fi­nan­cial

1 Padoa-Schioppa, Tom­maso, "Mar­kets and Gov­ern­ment Be­fore, Dur­ing, and Af­ter the 2007-20XX Cri­sis," The Per Ja­cob­s­son Lec­ture in Basel, Switzer­land, June 27, 2010. By look­ing at in­ter­na­tional fi­nan­cial sta­bil­ity as a pub­lic good, we can ap­ply a well-es­tab­lished mi­croe­co­nomic an­a­lyt­i­cal frame­work to it.

A pub­lic good is a good that is both non-ri­val­rous and non-ex­clud­able: that is, one's use of a pub­lic good does not re­duce the avail­abil­ity to oth­ers and one can­not ef­fec­tively pre­vent the use by oth­ers. Con­se­quently, two im­por­tant fea­tures of pub­lic goods are that they will not be pro­vided if left solely to the mar­ket, and that they tend to be con­sumed ex­ces­sively when they are pro­vided at all.

The lat­ter in­sight al­lows us to in­ter­pret the Great Fi­nan­cial Cri­sis as be­ing the con­se­quence of over­con­sump­tion of a pub­lic good - namely, in­ter­na­tional fi­nan­cial sta­bil­ity. Fi­nan­cial in­sti­tu­tions took sta­bil­ity for granted and shoul­dered ex­ces­sive risks.

This ex­ag­ger­ated the im­pact when the risks were man­i­fested; mar­kets could not re­gain sta­bil­ity by them­selves and had to wait for in­ter­ven­tions by the pub­lic sec­tor, in­clud­ing the co­or­di­nated pro­vi­sion of liq­uid­ity by cen­tral banks.

Pro­vid­ing global gov­er­nance in a glob­al­ized world In a world where glob­al­iza­tion is deep­en­ing, and where na­tional fi­nan­cial sys­tems are be­com­ing more in­ter­con­nected, fi­nan­cial sta­bil­ity must in­creas­ingly be achieved at the global level.

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