THE FIRST-WORLD DEBT CRISIS IN GLOBAL

PERSPECTIVE

Robert Wade

See essay with same title, Challenge, July/Aug 2008

OUTLINE

• The current and likely future trajectory

• The larger significance of the crisis

• Public policy response: What is being done and what should be done?

Drivers of 2nd stage crisis

NATIONAL

• Demand shock from falling house prices

• New defaults in corporate & consumer debt

INTERNATIONAL

• Perverse interaction b/w capital markets and foreign exchange rate

• Internat. rules: Basel 2 and IAS 39

Even if crisis turns out to be a blip, it is historic:

• Crisis is first time dev’ed c’ies dependent on dev’ing c’ies

• Crisis exposes flaws in “efficient markets” theory, and in regulatory structures

• Now is the most promising time for fin. reform for half a century

• US middle class may support reform

(Continue)

• Crisis not only financial crisis and macroeconomic crisis, but also crisis of neoliberal ideology and of US hegemony

• Crisis erodes US strategy towards China

• Crisis gives US incentives to “cheat” on neoliberal norms

Regulatory response

Robert Wade, “A new financial architecture?”, New Left Review July/Aug 07

• Tighter regulation can be effective despite “globalization”: anti-money laundering technology; “negative enforcement”

• Be cautious about fin. liberalization• Aim for “positively correlated” capital structures:

GPD-linked bonds; countercyclical international rules – Basel 2 and IAS 39

Regulatory response

• Credit rating agencies

• Central bank mandate

MORE RADICAL PROPOSALS

• Finance to be made an auxiliary to “real economy”: same frame as alcohol, explosives

• Capital controls

• “Mixed economy” in banking

Financial governance reforms

• US: Regulatory regime grew bit by bit, each new product got own regulator, over 100 authorities now regulate different segments. Needs to be consolidated.

• International: Regulatory regime very complex, large # of bodies, obscure relationships b/w them, no locus of leadership. Eg Basel Cttee; IOSCO