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From “Global Finance” to the Crisis of Globalization

  • Otto Hieronymi
Part of the Studies in Banking and Financial Institutions book series (SBFI)

Abstract

The crisis and the debate that is currently underway regarding the future, is not only the crisis of “global finance” but also about globalization. The central question discussed in this book is not only “what will happen” but also about “what should happen” to globlization?

Keywords

Exchange Rate Monetary Policy Central Bank Credit Default Swap Current Crisis 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.
    The period since the 1970s has witnessed an unprecedented pace of change in both domestic and international monetary order. One of the most striking developments has been the globalization of financial markets, and the simultaneous loss of power of domestic and international official institutions. Parallel with the globalization of financial flows, there have been attempts at regionalization, and efforts to impose uniform (deregulated) rules on financial institutions operating in what are today still very different economic environments. Many of the features of this new world are positive and should be recognized as such. Nevertheless, politicians and the general public are increasingly concerned about the domestic and international monetary system and about the reforms that continue to aim at increasing the weight of the markets and reducing the responsibilities of national and international monetary authorities. Increasingly it is felt that the pendulum may have swung too far and that once more the time has come for a fundamental rethinking of our assumptions about the role of money in the economy and about the appropriate monetary and financial policies and institutions in the ‘good society’—at the national level and in the world at large. The need is particularly great to redefine fundamental objectives and the respective roles of government rules and markets and private interests, and to recreate conditions for effective international co-operation in this field. Otto Hieronymi (1998), “Agenda for a New Monetary Reform,” in Futures, vol. 30, no.8, pp. 769–81, Pergamon, Elsevier Science Ltd.CrossRefGoogle Scholar
  2. 4.
    Otto Hieronymi, “Political Order and Universal Values in the 21st Century,” in Humanitarian Values for the 21st Century, Proceedings of the 7th Annual Humanitarian Conference of Webster University, Refugee Survey Quarterly, vol. 21, no. 3, pp. 126–34, UNHCR, Oxford University Press, 2002;Google Scholar
  3. Otto Hieronymi, “The Spirit of Geneva and Globalization,” in Otto Hieronymi and Kathleen Intag (Editors): The Spirit of Geneva in a Globalized World, Refugee Survey Quarterly, Oxford University Press, vol. 26, no. 4, 2007, pp. 274–305.Google Scholar
  4. 5.
    The late Professor Kindleberger, a prominent student of a broad range of the past financial crises, did not believe in the inevitability of financial crises. Cf. Charles P. Kindleberger and Robert Z. Aliber, Manias, Panics and Crashes. A History of Financial Crises, fifth edition, Palgrave Macmillan, London, 2005.CrossRefGoogle Scholar
  5. Cf. also Alexandre Lamfalussy, Financial Markets in Emerging Markets. An Essay on Financial Globalisation and Fragility, Yale University Press, New Haven and London, 2000.Google Scholar
  6. 6.
    By now there is a vast literature on the advantages and shortcomings of globalization. In recent years the debate had become more and more virulent between the two extremes: unconditional defenders of the current version of globalization and those who reject the market economy and all liberal ideas on ideological grounds. Probably the best-known and most serious critique of globalization is Professor Joseph Stiglitz. As a high-ranking member of the national and international policy establishment in the first half of the 1990s (in the Clinton Administration and in the World Bank), he was a relative latecomer to the issue of “international economic and monetary reform.” He made up for this with the intelligence, clarity and productivity of a world-class Nobel-prize winning economist. Cf. for example: Joseph Stiglitz, Globalization and its Discontents, Penguin Books, London, 2002;Google Scholar
  7. also Jagdish Bhagwati, The Wind of the Hundred Days, How Washington Mismanaged Globalization, The MIT Press, Cambridge, Mass., 2002Google Scholar
  8. and Jagdish Bhagwati, In Defense of Globalization, A Council on Foreign Relations Book, Oxford University Press, 2004. Professor Bhagwati, while an ardent defender of globalization from the point of view of both the developed and the developing economies, rightly (according to the present writer) sees the lack of social dimension as the Achilles heel of globalization and a major cause of a potential protectionist backlash.Google Scholar
  9. Cf. also Martin Wolf, Why Globalization Works. The Case for the Global Market Economy, Yale University Press, New Haven and London, 2004Google Scholar
  10. and Martin Wolf, Fixing Global Finance, The Johns Hopkins University Press, Baltimore, 2008.Google Scholar
  11. 7.
    This may have been the case of the President of the Swiss National Bank who in a long interview in November 2008 revealed that the Swiss National Bank began to work on contingency plans to come to the rescue of UBS already in the fall of 2007. Roth, Jean-Pierre, “Wir Schweizer sind ein Volk von Uhrenmachern,” Interview, Neue Zürcher Zeitung, Zürich, 1–2 November, 2008.Google Scholar
  12. 9.
    Alan Greenspan compared the position of central bankers today to that of a “U.S. Airforce B-2 pilot who (does not) know, or need (not) to know, the millions of automatic split-second computer-based adjustments that keep his aircraft in the air.” Alan Greenspan, The Age of Turbulence. Adventures in a New World, The Penguin Press, New York, 2007, p. 490. Greenspan did not elaborate on what happens to the plane in case of engine trouble and after the pilot has ejected.Google Scholar
  13. 12.
    Alexandre Lamfalussy, Financial Markets in Emerging Markets. An Essay on Financial Globalisation and Fragility, Yale University Press, New Haven and London, 2000, p. 172.Google Scholar
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    Robert A. Mundell, “Optimum Currency Areas,” Extended version of a luncheon speech presented at a Conference on Optimum Currency Areas, Tel-Aviv University, December 5, 1997.Google Scholar
  15. 14.
    For a listing of the major exchange regimes cf. quoted in Shalendra D. Sharma, The Asian Financial Crisis. Crisis, Reform and Recovery, Manchester University Press, Manchester, 2003, p. 324.Google Scholar
  16. 15.
    Cf. Otto Hieronymi, Economic Discrimination against the United States in Western Europe, 1945–1958, Dollar Shortage and the Rise of Regionalism, Librairie Droz, Geneva, 1973.Google Scholar
  17. 16.
    Robert Triffin, Gold and the Dollar Crisis, revised edition, Yale University Press, New Haven, Conn., 1961.Google Scholar
  18. 17.
    Cf. Otto Hieronymi (Editor), The New Economic Nationalism, Macmillan, London, 1980.Google Scholar
  19. 22.
    Robert Triffin, “Foreword,” in Miklos Szabo-Pelsöczy (Editor), The Future of the Global Economic and Monetary Systems, (2nd Sziràk Conference, 1988), Budapest, 1990, p. 29.Google Scholar
  20. 24.
    Paul Volcker, “Globalization and the World of Finance,” The 2001 Hutchinson Lecture, University of Delaware, April 30, 2001.Google Scholar
  21. 25.
    Robert Mundell, “Monetary Nationalism and Floating Exchange Rates,” in Otto Hieronymi (Editor), The New Economic Nationalism, Macmillan, London, 1980, p. 40.Google Scholar
  22. 26.
    One of the principal studies on the nature of monetary nationalism–and on its incompatibility with a liberal international economic order–is still Hayek’s classic 1937 statement: Friedrich A. Hayek, Monetary Nationalism and International Stability, Augustus M. Kelley, Reprints of Economic Classics, New York, 1937, 1964. In the vast literature that has developed on the oeuvre of Hayek since the 1970s this seminal work is very rarely mentioned and for obvious reasons. A rare exception is the study by a remarkable historian of political and economic theory: Alan Ebenstein, Friedrich Hayek, A Biography, The University of Chicago Press, Chicago, 2003.Google Scholar
  23. On Hayek and the rejection of monetary nationalism see also: Otto Hieronymi, “In Search of a New Economics for the 1980s: The Need for a Return to Fixed Exchange Rates,” Annals of International Studies, Institut Universitaire de Haute Etudes Internationales, vol. 12, Geneva, 1982, pp. 107–26;Google Scholar
  24. Otto Hieronymi (Editor), The New Economic Nationalism, Macmillan, London, 1980.Google Scholar
  25. 27.
    Cf. HELLEINER, Eric and PICKEL, Andreas: Economic Nationalism in a Globalizing World, Cornell University Press, Ithaca, 2005.Google Scholar
  26. 29.
    Friedrich Hayek, Denationalisation of Money, Institute of Economic Affairs, London, 1990, p. 80Google Scholar
  27. quoted in Alan Ebenstein, Friedrich Hayek, A Biography, The University of Chicago Press, Chicago, 2003, p. 278.Google Scholar
  28. 32.
    Robert Mundell, “Panel Session II: Implications for International Monetary Reform,” in Michael Bordo D. and Barry Eichengreen (Editors), A Retrospective on the Bretton Woods System. Lessons for International Monetary Reform, A National Bureau of Economic Research Project Report, University of Chicago Press, 1993, p. 609.Google Scholar
  29. 33.
    Among those whose theories have been receiving renewed attention in recent months is Hyman P. Minsky and in particular his writings about the inherent instability of financial markets. It is interesting to note that in his extensive discussions about the various aspects of financial instability–of its nature, sources and consequences–Minsky pays very little attention to the international dimension of the issue and in particular to the role, positive or negative, of international order or of its absence on financial markets. Cf. Hyman P. Minsky, Can “It” Happen Again? Essays On Instability and Finance, M. E. Sharpe Inc., Armonk, N.Y., 1982;Google Scholar
  30. Hyman P. Minsky, Stabilizing An Unstable Economy, McGraw Hill, 1986, 2008;Google Scholar
  31. and Hyman P. Minsky, John Maynard Keynes, McGraw Hill, New York, 2008 (first edition 1975). Minsky was a participant in the 2nd Sziràk Conference held in 1988, where he did address international financial issues and the exchange-rate regime. Cf. Hyman Minsky, “Money Manager Capitalism, Fiscal Independence and International Monetary Reconstruction,” inGoogle Scholar
  32. Miklós Szabó-Pelso˝czy (Editor), The Future of the Global Economic and Monetary Systems, (2nd Sziràk Conference, 1988), Budapest, 1990, Institute for World Economics of the Hungarian Academy of Sciences, pp. 209–18.Google Scholar
  33. 35.
    For a similar view cf. Tommaso Padoa-Schioppa, La Veduta Corta. Conversazione con Beda Romano sul Grande Crollo della Finanza, Il Mulion, Bologna, 2009.Google Scholar
  34. 38.
    On the various categories of financial risks, including “artificial risks,” cf. Otto Hieronymi, “Agenda for a New Economic Reform”; and Paul H. Dembinski, Finance Servante Ou Finance Trompeuse? Parole et Silence, Desclée de Brouwer, 2008, pp. 81–8.Google Scholar
  35. 40.
    World Bank, Global Development Finance. The Development Potential of Surging Capital Flows, World Bank, Washington, DC. 2006, pp. xi–xii.Google Scholar
  36. 44.
    “(The) Fed has really only one tool–changing the funds rate,” in Ethan S. Harris, Ben Bernanke’s Fed. The Federal Reserve After Greenspan, Harvard Business Press, Boston, Mass., 2008, p. 12.Google Scholar
  37. 52.
    On systemic turning points cf. Otto Hieronymi, “A Turning Point for the Better or the Worse? The Current Outlook for International Order,” Foresight, Journal of Future Studies and Strategic Thinking and Policy, vol. 6, no. 4, pp. 204–07, Emerald Group Publishing Ltd, 2004.Google Scholar
  38. 54.
    Cf. Ashby Mccown, Patricia Pollard, and John Weeks, Equilibrium Exchange Rate Models and Misalignments, Occasional Paper NO. 7, US Department of the Treasury, Office of International Affairs, Washington, DC., 2007.Google Scholar
  39. 55.
    Bank for International Settlements, BIS Quarterly Review, BIS, Basel, March 2009, p. 44.Google Scholar
  40. 58.
    Borrowed from a famous American political philosopher: Richard M. Weaver, Ideas Have Consequences, The University of Chicago Press, Chicago, 1948.Google Scholar
  41. 59.
    Thomas S. Kuhn, The Structure of Scientific Revolutions, The University of Chicago Press, Chicago, third edition, 1962, 1996.Google Scholar
  42. 61.
    On the “intellectual path” leading to the Thatcherian revolution cf. Richard Cockett, Thinking the Unthinkable, Think-Tanks and the Economic Counter-Revolution, 1931–1983, Harper Collins, London, 1995. Beside a thorough discussion of the history and role of the Institute of Economic Affairs, Cockett also discusses the role of the Mont Pélerin Society. Both Cockett and Plickert provide fascinating about both theories and personalities. Fridrich Hayek played an important (intellectual) role in the creation of both the Mont Pélerin Society and the IEA. One of the most interesting and most influential personalities in this story was Anthony Fisher, without whom the IEA would not have developed and thrived, and probably the history of Britain and of the world might have taken a somewhat different course. Fisher was a successful businessman, courteous and direct, not snobbish or pretentious in the least, but driven by an important cause: liberalism and the market economy. While scholars like Friedman and Hayek remain household names years after they dies, relatively few people knew of Anthony Fisher, and even fewer of the work he accomplished, even during his life time.Google Scholar
  43. 63.
    George Soros, The New Paradigm for Financial Markets. The Credit Crisis of 2008 and What It Means, Public Affairs, Perseus Group, New York, 2008, pp. 100 and 102.Google Scholar
  44. 64.
    Cf. Robert A. Mundell and Jacques J. Polak (Editors), The New International Monetary System, Columbia University Press, New York, 1977;Google Scholar
  45. Otto Hieronymi (Editor), The New Economic Nationalism, Macmillan, London, 1980; Otto Hieronymi, “In Search of a New Economics for the 1980s”;Google Scholar
  46. Alexandre Lamfalussy, Financial Markets in Emerging Markets. An Essay on Financial Globalisation and Fragility, Yale University Press, New Haven and London, 2000;Google Scholar
  47. Paul Volcker and Toyoo Gyothen, Changing Fortunes: The World’s Money and the Threat to American Leadership, Times Books, New York, 1992.Google Scholar
  48. 65.
    Cf. Otto Hieronymi, “Political Order and Universal Values in the 21st Century,” in Humanitarian Values for the 21st Century, Proceedings of the 7th Annual Humanitarian Conference of Webster University, Refugee Survey Quarterly, vol. 21, no. 3, pp. 126–34, UNHCR, Oxford University Press, 2002.Google Scholar
  49. 66.
    Cf. Wilhelm Röpke (1953), “Deutschland–Massengrab falscher Voraussagen,” reproduced in Wilhelm Röpke, Gegen die Brandung, Eugen Rentsch Verlag, Zürich, 1959, pp. 206–18.Google Scholar
  50. 67.
    On the Marshall Plan OEEC and EPU cf. Otto Hieronymi: Economic Discrimination Against the United States in Western Europe, 1945–1958. Dollar Shortage and the Rise of Regionalism, Librarie Droz, Genève, 1973.Google Scholar
  51. 68.
    Cf. Keynes’ famous speech in the debate on the International Monetary Fund in the House of Lords on May 23, 1944, in Seymour E. Harris (Editor), The New Economics, Keynes’ Influence on Theory and Public Policy, Augustus M. Kelley, Reprints of Economic Classics, New York, 1965 (First Edition 1947), pp. 369–79.Google Scholar
  52. See also: Richard Gardner, Sterling-Dollar Diplomacy, Anglo-American Collaboration in the Reconstruction of Multilateral Trade, Clarendon Press, Oxford, 1956Google Scholar
  53. and Robert Skidelsky, John Maynard Keynes, Volume 3: Fighting for Britain, 1937–1946, Macmillan, London, 2000.Google Scholar
  54. 71.
    Otto Hieronymi, “Wilhelm Röpke, the Social Market Economy and Today’s Domestic and International Order,” in Otto Hieronymi, Chiara Jasson, and Alexandra Roversi (Editors), Colloque Wilhelm Röpke (1899–1966), The Relevance of His Teaching Today: Globalization and the Social Market Economy, HEI-Webster University, Cahiers HEI, Geneva, 2002;Google Scholar
  55. Richard Cockett, Thinking the Unthinkable, Think-Tanks and the Economic Counter-Revolution, 1931–1983, Harper Collins, London, 1995;Google Scholar
  56. Philip Plickert, Wandlungen des Neoliberalismus. Eine Studie zu Entwicklung und Ausstrahlung der “Mont Pélerin” Society, Marktwirtschaftliche Reformpolitik, Schriftenreihe der Aktiengemeinschaft Soziale Marktwirtschaft, Lucius & Lucius, Stuttgart, 2008.Google Scholar
  57. 74.
    Robert Mundell, “Monetary Nationalism and Floating Exchange Rates,” in Otto Hieronymi (Editor), The New Economic Nationalism, Macmillan, London, 1980, pp. 34–50Google Scholar
  58. and Robert A. Mundell and Jacques J. Polak (Editors), The New International Monetary System, Columbia University Press, New York, 1977.Google Scholar
  59. 75.
    On the impact of the post-war balance-of-payments debate and of the theories of a so-called permanent dollar shortage on the shift toward regionalism and on the origins of European integration cf. Otto Hieronymi, Economic Discrimination Against the United States in Western Europe, 1945–1958. Dollar Shortage and the Rise of Regionalism, Librarie Droz, Genève, 1973.Google Scholar
  60. 78.
    Quoted in Otto Hieronymi, “In Search of a New Economics for the 1980s: The Need for a Return to Fixed Exchange Rates,” in Otto Hieronymi, International Order–A View From Geneva, Annals of International Studies, Institut Universitaire de Hautes Etudes Internationales, vol. 12, Geneva, 1982, p. 114.Google Scholar
  61. 83.
    Otto Hieronymi, “The Case for an ‘Extended EMS’: A New International Monetary Order to be Built by Europe, Japan and the United States,” in Miklos Szabo-Pelsöczy (Editor), The Global Monetary System After the Fall of the Soviet Empire, (In Memoriam Robert Triffin–1911–1993, Sixth Conference of the Robert Triffin-Sziràk Foundation, Sziràk, 1993), Averbury, Aldershot, 1995, pp. 57–67Google Scholar
  62. 84.
    Cf. Otto Hieronymi and Daniela Bensky, “The Outlook for the Post-War Western Model of International Order and the Prospects for Perpetual Peace,” Paper presented at 8th International CISS Millennium Conference, Paris, June 13–15, 2008.Google Scholar

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© Otto Hieronymi 2009

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