Managing International Financial Instability
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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.
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Chapter 2: Global financial players

Fabrizio Saccomanni

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2. Global financial players What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! . . . The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, . . . and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; . . . and could then proceed abroad to foreign quarters . . . bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. John M. Keynes ([1919] 1971, p. 6) Despite the general usefulness of the assumption of rationality, markets can on occasions – infrequent occasions, let me emphasize – act in destabilizing ways that are irrational overall, even when each participant in the market is acting rationally. Charles P. Kindleberger (1978, p. 41) 2.1 THE ORIGINS OF FINANCIAL GLOBALIZATION The globalization of finance is a recent phenomenon but its roots are ancient.1 The books that a scholar of international financial history such as Kindleberger (1978 and 1984) has devoted to the subject provide readers with a host of...

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