Achieving Financial Stability

Parliamentary Conference on the Global Economic Crisis

Inter-Parliamentary Union, Geneva8 May 2009

2

Crisis Unexpected?•A crisis foretold•Unsustainable global imbalances •International financial architecture

•Ideology: deregulation, self-regulation, capital account liberalization

•Financial Globalization: growth, stability?

3

Globalization: finance>trade

0

20

40

60

80

100

120

140

160

180

1980 1990 1995 2000 2006

US

$ T

rillio

ns

0

50

100

150

200

250

300

350

As

pe

rce

nt

of

GD

P, in

dic

es

19

80

=1

00

Global financial assets

Global merchandise trade

) Global financial assets as a percentage of GDP(right axis

) Global merchandise trade as a percentage of GDP(right axis

4

Finance-investment nexus?

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Gross Fixed Capital Formation

Gross Financial Investment Abroad

Financial globalization

•Net capital flows from South to North (US largest borrower)

•Cost of funds not generally lower due to financial deepening (more intermediation, financial rents)

•Higher volatility•Lower growth, higher instability

Short-term capital inflows very problematic•No real contribution to investment,

growth rates•Asset (shares, real estate) price +

related (e.g. construction) bubbles instead

•Cheaper finance for consumption binges•Over-investment excess capacity•All exacerbate instability, pro-cyclicality

7

Contagion: crisis spreadsFinancial sector contagion (incl. vicious circles):Sub-prime crisis financial crisis asset price deflation liquidity/credit crunch

Financial crisis Economic recession(including feedback loops)Real economy contagion (incl. vicious circles): Less investment, especially abroad (FDI) Less consumption

Reduced demand for imports, i.e. for exports of others Prices, output declines globally Growth, employment declines globally

Deflationary spiral•Asset (stock, property) markets

deflating negative wealth effect

more bank insolvency generalized credit squeeze

•Lower external demand, world trade excess capacity investment slowdown

•Depressed domestic demand lower prices, outputrices, output lower employment, incomes

9

Financial impacts on developing countries• Despite non-involvement in sub-prime debacle:

Emerging stock markets collapse greater Reversal of capital flows, FDI also down Spreads rise, much higher borrowing costs

• But financial positions stronger than during Asian + LA crises (more foreign reserves, better fiscal balances)But reserves rapidly evaporating with export collapse; fiscal space also disappearing

Social, political impacts •>200 m. more working poor •ILO: Unemployment to rise by 51m

•Government social spending at risk

•Rising social and political unrest•US intelligence report:

crisis -- greatest security risk

Financial reform?•Financial intermediation important•Rethinking role of banks (Buiter)•Rethinking role of stock markets•Appropriate financial regulation?•Avoiding excessive risk management•Ensure comprehensive systemic

reform•Ensure developmental financial

system•Ensure inclusive financial system

15

Stiglitz Commission: 10 Immediate Measures2. Stable additional funding (e.g.

SDRs, regional liquidity schemes), without conditionalities for developing

countries3. Additional development funds

via new credit facility4. Developing countries need

more policy space (including financial policy to pursue countercyclical policies)

16

Stiglitz Commission: 10 Immediate Measures5. Rectify lack of coherence between

trade and finance policies6. Avoid protectionism (including finance)

8. Meaningful regulatory reforms urgent (for financial

stability, growth, inclusion, development)9. Financial support measures need to be globally coordinated.

17

Stiglitz Commission: Systemic Reforms

• Create new Global Reserve System (multi-country system with greatly expanded SDRs)• Reform governance of BWIs and other IFIs • Better and more balanced surveillance

18

Stiglitz Commission:

Systemic Reforms• Reform central bank policies to

promote development• Financial market policies

Create Financial Products Safety Commission

Comprehensive financial regulation

Regulate derivatives trading Regulate Credit Rating Agencies Host country regulation of foreign

subsidiaries

19

Stiglitz Commission:

Systemic Reforms• Support for financial innovations to enhance risk mitigation• Create sovereign debt restructuring mechanism, improve framework for handling cross-border bankruptcies• Need for more stable and sustainable development finance

New Bretton Woods moment?

Bretton Woods, 1944: United Nations conference on monetary and financial affairs

• 15 years after 1929 Depression• Middle of WW2• US initiative vs UK Treasury stance• 44 countries (28 developing countries; 19 LA)• IMF, IBRD, ITO – UN system• Clear emphasis on sustaining growth, employment

creation, development, not just financial stability

• But BWIs very different governance arrangements

21

Thank youPlease visit UN-DESA Please visit UN-DESA www.un.orgwww.un.org

G24 G24 www.g24.orgwww.g24.org andand PGAPGA www.un.org/ga/president/63/ websites websites

• Research papersResearch papers• Policy briefsPolicy briefs• Other documentsOther documents

Acknowledgements: UN-DESA, ILO, Acknowledgements: UN-DESA, ILO, ESCWAESCWA