Question

Write a term paper on “Financial Globalization; Lessons learnt and emerging trends”

Guidelines for writing a term paper (academic style of writing)

• Cite appropriately from books and journal articles (Use APA referencing Style) and not web pages
• Avoid bullets and numbering of points; write in continuous prose

Answer 1

years ago, the global economy and financial system entered a severe crisis. The incidence and ramifications of the crisis were obscure. Even now, the full dimensions and consequences are not known, but almost certainly this crisis will prove to be the most severe in the extent and severity of its global impact and depth since the end of World War II. Because the crisis is not yet over, among other reasons, we lack the perspective to develop a full catalog of the lessons from the crisis, either in general or for developing countries in particular. However, I thank the Banco de Guatemala for inviting me to share my thoughts on this important and complex subject from the vantage point of June 2009.

In these remarks, I first offer my perspective on the causes of this crisis and how this crisis differs from previous global financial crises. This is a necessary precondition to learning the appropriate lessons from the crisis. Otherwise our lessons will be off-target or incomplete. Second, I offer some key relevant lessons under five headings: too good to be true is probably false; be better prepared; the myth of self-insurance; the role of the International Monetary Fund (IMF); and the future of globalization.

Causes of the Crisis

I concluded six months ago (Truman 2008) that there was no shared diagnosis of the origins of this crisis. Nothing that I have heard or read since then has convinced me otherwise. If anything, disagreements have become more intense, in the meantime. This fact hampers our ability to learn the proper lessons from this crisis. This fact also means that it is useful for me to declare my own biases in advance. Conventionally, causes of this financial crisis include some or all of the four following elements: macroeconomic policies, financial-sector supervision and regulation, financial engineering, and the global activities of large private financial institutions. The context for each element is the United States or other similarly advanced countries.

In my view, macroeconomic policies in the United States and the rest of the fully developed world were jointly responsible for the crisis we are now experiencing to a substantial degree. In the United States, fiscal policy contributed to a decline in the US saving rate, and monetary policy was too easy for too long. In Japan the mix of monetary and fiscal policies distorted the global economy and financial system. Finally, many other countries also had very easy monetary policies in recent years, including other Asian countries, energy and commodity exporters, and, in effective terms, a number of countries within the euro area. The impressive accumulation of foreign exchange reserves by many countries also distorted the international adjustment process, including but not limited to taking some of the pressure off of the macroeconomic policies of the United States and other countries.