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THE FIRST-WORLD DEBT CRISIS IN GLOBAL PERSPECTIVE Robert Wade See essay with same title, Challenge, July/Aug 2008 OUTLINE • The current and likely future trajectory • The larger significance of the crisis • Public policy response: What is being done and what should be done? Drivers of 2nd stage crisis NATIONAL • Demand shock from falling house prices • New defaults in corporate & consumer debt INTERNATIONAL • Perverse interaction b/w capital markets and foreign exchange rate • Internat. rules: Basel 2 and IAS 39 Even if crisis turns out to be a blip, it is historic: • Crisis is first time dev’ed c’ies dependent on dev’ing c’ies • Crisis exposes flaws in “efficient markets” theory, and in regulatory structures • Now is the most promising time for fin. reform for half a century • US middle class may support reform (Continue) • Crisis not only financial crisis and macroeconomic crisis, but also crisis of neoliberal ideology and of US hegemony • Crisis erodes US strategy towards China • Crisis gives US incentives to “cheat” on neoliberal norms Regulatory response Robert Wade, “A new financial architecture?”, New Left Review July/Aug 07 • Tighter regulation can be effective despite “globalization”: anti-money laundering technology; “negative enforcement” • Be cautious about fin. liberalization • Aim for “positively correlated” capital structures: GPD-linked bonds; countercyclical international rules – Basel 2 and IAS 39 Regulatory response • Credit rating agencies • Central bank mandate MORE RADICAL PROPOSALS • Finance to be made an auxiliary to “real economy”: same frame as alcohol, explosives • Capital controls • “Mixed economy” in banking Financial governance reforms • US: Regulatory regime grew bit by bit, each new product got own regulator, over 100 authorities now regulate different segments. Needs to be consolidated. • International: Regulatory regime very complex, large # of bodies, obscure relationships b/w them, no locus of leadership. Eg Basel Cttee; IOSCO
