Timeforavisiblehandbook.Pdf

Time for a Visible Hand The Initiative For Policy Dialogue Series The Initiative for Policy Dialogue (IPD) brings together the top voices in development to address some of the most pressing and controversial debates in economic policy today. The IPD book series approaches topics such as capital market liberalization, macroeconomics, environmental economics, and trade policy from a balanced perspective, presenting alternatives, and analyzing their consequences on the basis of the best available research. Written in a language accessible to policymakers and civil society, this series will rekindle the debate on economic policy and facilitate a more democratic discussion of development around the world. OTHER TITLES PUBLISHED BY OXFORD UNIVERSITY PRESS IN THIS SERIES Fair Trade for All Joseph E. Stiglitz and Andrew Charlton Economic Development and Environmental Sustainability RamońLo´pez and Michael A. Toman Stability with Growth Joseph E. Stiglitz, Jose´ Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar The Washington Consensus Reconsidered Narcis Serra and Joseph E. Stiglitz Capital Market Liberalization and Development Jose´ Antonio Ocampo and Joseph E. Stiglitz Industrial Policy and Development Mario Cimoli, Giovanni Dosi and Joseph E. Stiglitz Time for a Visible Hand Lessons from the 2008 World Financial Crisis Edited by Stephany Griffith-Jones, Jose´ Antonio Ocampo, and Joseph E. Stiglitz 1 1 Great Clarendon Street, Oxford OX26DP Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York # Oxford University Press 2010 The moral rights of the authors have been asserted Database right Oxford University Press (maker) First published 2010 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain on acid-free paper by Clays Ltd., St Ives Plc ISBN 978–0–19–957880–1 (Hbk) 978–0–19–957881–8 (Pbk) 13579108642 Acknowledgments The book is the outcome of the research of a task force on Financial Market Regulation of the Initiative for Policy Dialogue (IPD) at Columbia University, directed by Stephany Griffith-Jones, Jose´ Antonio Ocampo, and Joseph Stiglitz. IPD is a global network of over 250 economists, researchers, and practitioners committed to furthering understanding of the development process. We would like to thank all task force members, whose participation in provocative dialogues and debates on financial market regulation informed the content of this book. We gratefully acknowledge the contributions of the authors. In addition, we acknowledge the dedication of IDP staff members Sarah Green and Farah Siddique, who helped organize task force meetings and coordinated the various stages of production of the book. Our thanks also to former staff member Ariel Schwartz and IPD interns Alexander Berenbeim, Sarah Bishop, Vitaly Bord, John Conway Boyd, Eduardo Gonzalez, Kevin E. Jason, Emily-Anne Patt, and Kohei Yoshida. We thank our editor Sarah Caro and the staff of Oxford University Press for bringing this book into publication. We are most grateful to the Brooks World Poverty Institute and the Ford Foundation for funding the meeting of the IPD Task Force on Financial Market Regulation, out of which this book was conceived. Finally, we acknowledge the John D. and Catherine T. MacArthur Foundation, the Rockefeller Brothers Fund, and GTZ for their generous support of IPD’s work. This page intentionally left blank Contents List of Figures ix List of Tables x Contributors xi Acronyms xiv 1. Introduction 1 Stephany Griffith-Jones, Jose´ Antonio Ocampo, and Joseph E. Stiglitz Part I. The Crisis in the United States 2. The Financial Crisis of 2007–8 and its Macroeconomic Consequences 19 Joseph E. Stiglitz 3. Sub-Prime Finance: Yes, We are Still in Kansas 50 Gerard Caprio, Jr. 4. Background Considerations to a Re-Regulation of the US Financial System: Third Time a Charm? Or Strike Three? 62 Jan Kregel 5. Responding to the Crisis 76 Joseph E. Stiglitz Part II. Reforming Financial Regulation 6. Central Banks, Liquidity, and the Banking Crisis 101 Philip Turner 7. Agenda and Criteria for Financial Regulatory Reform 126 Jane D’Arista and Stephany Griffith-Jones 8. The Role of Policy and Banking Supervision in the Light of the Credit Crisis 150 Avinash D. Persaud vii Contents 9. How, If At All, Should Credit Rating Agencies (CRAs) Be Regulated? 164 C. A. E. Goodhart 10. Credit Default Swaps: The Key to Financial Reform 185 Perry Mehrling 11. Governing the Global Regulatory System 200 Marion Williams Part III. Developing Country Perspectives 12. The Management of Capital Flows and Financial Vulnerability in Asia 219 Yılmaz Akyu¨z 13. Regulation of the Financial Sector in Developing Countries: Lessons from the 2008 Financial Crisis 242 Y. V. Reddy 14. Economic Development and the International Financial System 253 Roberto Frenkel and Martin Rapetti 15. The Accumulation of International Reserves as a Defense Strategy 269 Fernando J. Cardim de Carvalho Part IV. Reforming the Global Monetary System 16. Reforming the Global Reserve System 289 Jose´ Antonio Ocampo 17. A Modest Proposal for International Monetary Reform 314 Bruce Greenwald and Joseph E. Stiglitz Index 345 viii List of Figures 6.1 Central bank total assets 105 6.2 Open market operations and lending: amounts outstanding 106 6.3 Interbank and policy interest rates 107 6.4 Central bank assets and repos 107 6.5 Measures of real interest rates 111 6.6 Three-month LIBOR–OIS spreads 119 9.1 Fan chart showing the probability of default over time 174 16.1 US current account balance and real exchange rate 294 16.2 Reserves minus gold 301 16.3 Balance of payments: developing countries 304 17.1 Global double deficits, 1980–2006 317 17.2 Current account and government balances: United States, 1980–2006 318 17.3 Current account and government balances: Japan, 1980–2006 319 17.4 Current account and government balances: United Kingdom, 1980–2006 319 17.5 Current account and government balances: Germany, 1980–2006 320 17.6 Current account and government balances: Italy, 1980–2006 320 17.7 Current account and government balances: France, 1980–2006 321 17.8 Current account and government balances: Canada, 1980–2006 321 17.9 Total reserves minus gold 326 17.10 Total reserves minus gold spread 327 17.11 Central bank gold holdings 327 ix List of Tables 6.1 Federal Reserve provision of dollar funding under inter-central bank swap arrangements 119 7.1 Outstanding assets held by financial sectors 133 10.1 Credit risk transfer using “mirror” bonds 191 10.2 Credit risk transfer using CDS 192 10.3 Regulatory arbitrage 195 12.1 Private capital flows, current account balances and changes in reserves in emerging markets 222 12.2 Current account and reserves 228 15.1 Balance of payments and international reserves: all developing countries 276 15.2 Debt indicators: emerging and developing economies 278 15.3 Current account balances: selected emerging economies 280 16.1 Accumulation of foreign exchange reserves, 1981—2007 302 17.1 Pairwise Granger causality tests 322 x Contributors Yilmaz Akyu¨z was the Director of the Division on Globalization and Develop- ment Strategies at the United Nations Conference on Trade and Development (UNCTAD) until his retirement in August 2003. He was the principal author and head of the team preparing the Trade and Development Report, and UNCTAD coordinator of research support to developing countries (the Group-of-24) in the IMF and the World Bank on International Monetary and Financial Issues. He is now Special Economic Advisor to South Centre, an Intergovernmental Think Tank of the Developing Countries, based in Geneva. Gerard Caprio is Professor of Economics at Williams College and Chair of the Center for Development Economics there. From 1998 until January 2006, he was the Director for Policy in the World Bank’s Financial Sector Vice Presidency. He served as Head of the financial sector research team in the Bank’s Develop- ment Research Group from 1995–2003, and previously was the Lead Financial Economist there. Fernando J. Cardim de Carvalho is a professor of economics at the Institute of Economics at the Federal University of Rio de Janeiro. A former chairman of the National Association of Graduate Schools of Economics of Brazil, he has done consulting work for, among others, the National Development Bank of Brazil, the National Association of Financial Institutions of Brazil (ANDIMA), CEPAL, G-24 and NGOs like Ibase (Brazil), Action Aid USA and WEED (World Economy, Ecology and Development—Germany). Jane D’Arista is an economic analyst with the Financial Markets Center. She has written on the history of US monetary policy and financial regulation, international and domestic monetary systems and capital flows to emerging economies.

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