Saturday, October 25, 2008

Current financial crisis: A preliminary approach (II)

The current financial unstable situation will last some time , as its effects on the real economy will become evident in the months ahead. However, much of the discussion about its long lasting impact has already begun. On this regards, there are some key important issues which might be important to keep in mind:
a.. This crisis is not the first ,and it will not be the last one ,following the capitalism rules.. In fact, crisis are at the core of trail and error characteristics of markets forces. Since 1970 up to 2007 there has been 124 banking crisis (IMF WP 08/224. Systemic Banking crisis: A new database. Laeven and Valencia 2008),almost 40% of them concentrated between 1991 and 1995..There has been 208 currency crisis, spread out in different periods ,although 58% of them concentrated in the nineties decade (1990-1999). Therefore ,while the economy becomes more globally interconnected, crisis represent a sort of adjustment (trial and error) to the new global economy framework, whose main characteristic seems to be more risk averse.-
b.- Despite the Asian economies crisis of 1997, there has not been a clear understanding about the way global economy works. In the past, domestic economic unbalances in industrial economies , mattered only for internal design of their policy stabilization . Its international effects, were restricted to the ability of the coordination efforts of few countries whether it was needed . From now on ,and specially in the bigger economies, domestic unbalances matter for the global economy more than it was expected , thus each economy must consider its own means as the primary source of expenditures, specially because the stabilization effort framework, must consider global coordinated efforts ,which impose additional transaction costs to the necessary adjustment .
c.- Deregulation works better with oversight policies. There is an optimal level of regulation, beyond which economic growth become slower and at some point it start to decrease. It follows, that there is a decreasing relationships between regulations and economic growth. However, deregulation by itself is not enough to improve growth expectations. In those nations with important economic power , it requires better supervision policies to cope with global systemic risk . This time , the IMF (heavily criticized during the Asian economies crisis), passed the test, so it is properly qualified for a broader role on the global economy. However, a key point is that when the IMF speak, the world economies should listen.
d.- Capitalism as such is far from being responsible for this crisis. Based on its instinct for risk, it depends on the risk filter of those entities aimed at improving the information flow for better price signals and a more efficient decision making . Those entities, should improve their management standard otherwise they will not get back market confidence. On the other side ,it is a fact that market fails, but those fails are related to weak institutional framework. In this case, it is required a better global financial framework .The global economy ,can not depend either on one economist or one institution, to anticipate crisis ,it seems necessary to have a more often and transparent analysis of global economy condition .-
e.- Government has the right to intervene as the lender of last resort. In other words, it must face its failures. It can not run away from them. Socialism instead, is based upon restricting people freedom in exchange for expected fairness, which means that the State is in charge of everything , most of the time without excuses .Thus, the real issue is that Government as well as markets fails. Both failures can not be corrected without Government action.-