Essays in Honor of Lance Taylor
Edited by Amitava Krishna Dutt
Chapter 18: The challenges facing international financial regulation
18. The challenges facing international ﬁnancial regulation John Eatwell The ﬁnancial crisis in the Autumn of 1998 was the ﬁrst post-World War II crisis in which events in emerging market economies seriously threatened the ﬁnancial stability of the West, and where the origins of the crisis were clearly to be found in the workings of liberalized markets and private sector institutions. The spark was the ﬁnancial crisis that overwhelmed many of the Asian economies in 1997, and spread to Russia in 1998, but the centre of the conﬂagration was the near failure of the hedge fund Long Term Capital Management. More than any of the other problems in the Autumn of 1998, the threats that LTCM’s diﬃculties posed to ﬁnancial stability throughout the world illustrated beyond all reasonable doubt that the international ﬁnancial system had entered a new era.1 This was not a problem of sovereign debt, or macroeconomic imbalance, or a foreign exchange crisis. Instead it was the manifestation of the systemic risk created by the market driven decisions of a private ﬁrm, and of the behaviour of free ﬁnancial markets. The potential economy-wide ineﬃciency of liberalized ﬁnancial markets was indisputable. In August 1998, in one of those remarkable coincidences that in retrospect look like good judgement, Lance Taylor and I had delivered a Report to the Ford Foundation that dealt directly with the problem of systemic risk in liberal international ﬁnancial markets. We had been drawn to this particular topic because of a shared irritation...
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