Managing International Financial Instability

Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.

Chapter 1: An uneasy relationship

Fabrizio Saccomanni

Subjects: economics and finance, money and banking


The relationship between markets and central banks . . . is similar to that between tigers and their tamer. The latter can bend the former to his will if he uses superior skill, great care, and intelligence. If, instead, the tamer excites and irritates the tigers, they will win. The spectacular growth in the size of markets of the last ten years has widened the gap between the strength of the tigers and that of the tamers, and having more than one tamer in the cage does not help. Tommaso Padoa-Schioppa (1994, p. 19) The relationship between monetary authorities and financial markets has, for most of the twentieth century, been difficult, confrontational and at times openly conflictual. This has reflected the different objectives pursued: monetary and financial stability by monetary authorities; and the optimum combination of risk and return on investments by market intermediaries. The relationship has often been described by the press, but also in economic literature, as a never-ending contest between allegedly sovereign authorities and forces that behave unpredictably, even crazily or irrationally, and are endowed with magic or supernatural powers. These descriptions recall characters such as the ‘gnomes of Zurich’ or financial ‘wizards’ à la George Soros. But there are also references to the ‘casino capitalism’ and ‘mad money’ denounced by Strange (1986 and 1998), the ‘manias and panics’ dispassionately psychoanalysed by Kindleberger (1978) or the ‘irrational exuberance’ evoked by the then Federal Reserve Chairman Alan Greenspan (1996). More recently, in 2005, Franz Müntefering, Chairman of...

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