Dani Rodrik’s dilemma

Here is the dilemma we cannot evade. If we want a truly global
financial system, we need to acquiesce in a global regulator and a
global lender of last resort. If we do not want the latter, we cannot
have an integrated global financial system, so we must acquiesce
in–gasp!–capital controls.

Where do you stand?

Here is the link.  We already have a global lender of last resort and it is called the Federal Reserve System, plus the IMF plays a role as well.  The global regulator is Basel II and the sequels to come.  The global regulator needs to be improved and in fact we probably need to rely more on national regulators and less on "one size fits all" standards.  That is where I stand and I wonder where Rodrik stands.  Note also that capital controls do not in general eliminate financial crises.  The United States for instance has hardly been suffering from capital flight and most plausible forms of capital controls would not have saved Iceland from financial ruin.

Comments

This really depends on when you imposed the capital controls--it seems to me that
plausible capital controls could have prevented Iceland from having such an outsized financial sector in the first place.

Once you have a banking sector with assets 12 times GDP, the risks are probably not containable.

[The global regulator needs to be improved and in fact we probably need to rely more on national regulators and less on "one size fits all" standards.]

Tyler, this is actual nonsense. The entire meaning of "a global regulator" in context is that it has to mean a "one size fits all" standard, because otherwise there are opportunities for regulatory arbitrage and incentives for some offshore centre or other to do an end run around any given national regulation

"it has to mean a "one size fits all" standard, because otherwise there are opportunities for regulatory arbitrage"

That's a non sequitur. U.S. corporate law and U.S. insurance regulation work fine without a central regulator or a "one size fits all" standard, though of course there is convergence among regulators on many issues.

Basel I and Basel II are global regulatory standards, not global regulators. I doubt if we need a global regulator. For example, the euro zone functions with the benefit of Basel II but without a unified regulator. This seems to cope pretty well with the transnational finacial enterprise.

Basel II (formulated under the auspices of the Bank for International Settlements)will need progressive improvement for the foreseeable future. Already, there are pragmatic concessions in it to be undone and improvements that are clearly needed; as well as full implementation and use of what has so far been agreed.

Our new-found global lender of last resort is the Fed plus the ECB, and those two seem glad to have the Banks of England and Japan tagging onto the gang. The table round which these people sit with other possibly useful gang members is the Bank for International Settlements. If that enlarged gang is permitted to act as lender of last resort to the world's financial system, it may function surprisinly well. The BIS is the place from which global imbalances should be most evident.

The IMF is lender of last resort to the world's governments, not the financial system. When governments get their finances and economies into a mess, the IMF is, and will be, needed because the world's help will and should be conditional in ways which need political backing.

Where the two operations come together is, as now, when drastic operations on the monetary base are required (however temporary). That is, when political backing is required for financial lending of last resort. Come to think of it, a BIS with IMF in the chair weilding a veto power may be all we need.

One theory I read today is that "we" forgot about volatility, which led consumers and investors to run too lean and too leveraged. So, all it took was a little volatility to remind people volatility happens.

So, a global stabilizer of last resort may be self-defeating.

Yes, let's let the United Nations do it. They certainly know what they are doing....

The IMF calls something like a <3% growth rate a recession. Beyond being semantically disingenuous, the idea that you would enact interventions if the growth rate ever dips below trend is dangerous and certainly qualifies as "over-control" in the spirit of Deming's quality control. Don't go into a world regulation situation thinking the rest of the world is as measured (haha) with their interventions as the US. http://en.wikipedia.org/wiki/Recession#Global_recessions

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