Kasinomics

Eatwell, Taylor – Global Finance at Risk

Last week I had a fascinating conversation with a friend of mine who is an anarchist. We tend to discuss international capitalism and he always wants to convince me that it is possible to create a society without capitalism. When I asked him about what that would mean he often replies that he wants a society in which there no interest paid on the ownership of money. When I replied that interest rates simply identify the price of money, or the costs of borrowing money, which is necessary to induce capital holders to lend to capital borrowers, he replies that he would like to get rid of private ownership of capital alltogether.

I wished I had John Eatwells and Lance Taylors book “Global Finance at Risk: The Case for International Regulation” with me. For anyone interested in important aspects of financial regulations, it is a good starting point. It not only explains how financial markets changed since the introduction of flexible exchange rates, it also makes a good argument on the dilemma that policy-makers face when trying to induce markets to internalize systematic risk. The book also takes apart the notion that a financial crises are always induced by government policies, instead the authors argue that financial cycles leading to a financial crisis can originate in the behaviour of the markets themselves.

Where I disagree with the authors is on their assessment of the necessity of a World Financial Authority. The authors describe the limited capability of domestic regulation in the face of global financial markets and the need to gather the decision-making on the global level. They offer two alternatives for locating the WFA: inside the BIS-System or at an enhanced IMF. The BIS-System has the advantage of market knowledge, access to statistics, and flexibility and thus it would be beneficial to extend the power of this system. However it is unclear whether the USA would agree to move such a lot of regulatory power outside of the US to an institution dominated by Central Banks. And it is not clear whether such a World Financial Authority. And there has been little debate in the current crisis to institutionalize the web of regulatory bodies existing today, probably because any attempt at institutionalization risks loosing the flexibility of the current system.

Topics of this post: Books, capital markets, financial architecture, financial crisis, financial regulation, John Eatwell, Lance Taylor, World Financial Authority

See also

• Intergovernmentalism in Financial Regulation
• Alexander, Dhumale, Eatwell: “Global Governance of Financial Systems”
• The need for systemic risk
• Project: Mapping the Financial Governance
• JF – Joint Forum
• G8-Action Plan on Local Bond Markets – Missing Follow-Up Documents
• BCBS – Basel Committee on Banking Supervision
• World Bank
• Trilemma in financial supervision – Schoenmaker, Oosterloo
• Thoughts on transnational networks of private international bodies in the financial architecture

31. July 2008 by kasi
Categories: Books | Tags: capital markets, financial architecture, financial crisis, financial regulation, John Eatwell, Lance Taylor, World Financial Authority | 10 comments