Governance of the Global Financial System
Governance of the Global Financial System
by Joseph Stiglitz
Financial markets are at the center of the market economy. They have been likened to the "brains" of the economy. How, and how well, they work is critical in determining how, and how well, the market economy works. This has been brought home strongly by recent events: the sub-prime mortgage crisis has led to a freezing of credit markets throughout the world; America exported its toxic mortgages, undermining financial systems around the world; the economic downturn will be costly, for the US and for the rest of the world, including developing countries—for America, the most costly in the last quarter century, it seems likely that there will be a cumulative discrepancy between the economy's actual output and its potential of upwards of $1.5 trillion; the unemployment rolls will increase; some 2 million Americans could lose their homes—and much of their life savings. America's banks and other financial institutions prided themselves on their innovation; innovation was supposed to bring benefits to all, including more home ownership and faster growth. Instead, the share of Americans owning their homes will be lower than at the beginning of the decade, and there is likely to be recession rather than growth.
This financial crisis brings to the fore a set of long festering concerns about the governance of the global financial system. A set of "reforms" has been pushed around the world, based on a particular model of the economy, through multilateral institutions (the BIS, the World Bank, the IMF) and in bilateral agreements (investment agreements, so-called Free Trade Agreements, more accurately called "Managed Trade Agreements"). These have included financial and capital market liberalization, scaling back regulations that had been designed to ensure not only the safety and soundness of financial institutions, but also that consumers are protected and that small businesses and homeowners have access to credit at reasonable terms. These "reforms" have often not produced the promised benefits: there has often been more volatility and less growth. And they have been accompanied by ancillary adverse effects: growing inequality and rampant tax evasion and avoidance.
Asymmetries in the way globalization has been managed, combined with market fundamentalism ideology, have contributed both to global social inequities and instabilities. For instance, asymmetries in financial market and labor market liberalization shifts bargaining power to capital, and the burden of taxation to labor, and inhibits the ability to design balanced regulatory regimes. Countries wishing to regulate capital—or to pass regulation protecting labor—are threatened with capital flight. Those in the periphery were told that they had to engage in pro-cyclical monetary and fiscal policies (e.g., in the 1997-1998 global financial crisis), while those in the center have engaged in counter-cyclical monetary and fiscal policies. This increases the risk at the periphery, especially the risk relative to that at the center, increasing returns in the center, relative to that at the periphery. One could have hardly designed a more inequitable global financial system—or a more unstable one.
The key issues that will be studied in this project can be divided into these six categories: financial market regulation, financial market innovation—especially innovations enhancing access and the transference of risk; new Players, both those already here and those that need to be created; a new global reserve system, sovereign funds, new regional banks and monetary funds; a new international bankruptcy court; and the governance of international financial institution.
