global financial analysis

Global Financial crisis- a perception analysis
(By Dr. G. Balakrishnan, PhD, a public policy specialist)


Dr. Y V Reddy, Ex. RBI Governor, in his Ranganathan Memorial Lecture on 30 November highlighted on the following issues:
- Huge public funding of Finance sector in the West bloated balance sheets of Central banks still persist;
- Declining trends of outputs and Employment seems to have been arrested in some countries;
- Adverse effect/impact on economic activity and on Employment is still evident;
- Dubai crash developments in Financial market is a reminder of their possibility of ?Unexpected dangers? ahead;
- Huge uncertainties still remain in the trends towards travel to normalcy;
- Exit from unconventional measures and stimulus is being given;
- Managing crisis is indeed very critical(appears )to have been successful ? thus front loading profits, but the costs are back loaded;
- Distribution of burden among different sections of society of people in future is CONTENTIOUS;
- Rigorous growth drivers seem to be restored in seemingly ample measure, burden on Tax payer or(public services including health care and pressure on prices becoming Notable);
- Crisis Global - actions are some kind of National benefits could be (cosmetically) universal ? burdens in future on their account could have to be incurred at National levels (a doubtful problematic situation, (since not pragmatic);
- Exit is essential (if risk to growth abate)inflation Risks emerge with intensity;
- Exit is critical to very critical ( since premature exit may derail recovery and growth);
- Growth while delayed, exit may feed ?inflation?;
- Threaten growth over medium term;
- Every country should consider proper tools to exit crisis;
- Communication of policies and ?intents? become great challenges
(of interest of finance market participants and the interest of policy divergence);
- Divergences are not observed at the time of ?crises? though not in all economies ( a conceptual predilection):
- Two approaches to new Normalcy:-
-RETHINK ? A RETHINK OF FUNDAMENTALS
? IDEOLOGICAL AND THEORETICAL FOUNDATIONS
OF MARKET ECONOMY;
_ (Practical terms reflected in informal chat with Chinese
Officials) their view ? ?Used to see the US as their teacher and now they realized their folly ??teacher keep making mistakes ? Bernanke accepted before US Congressional Hearings when he was making his case for second term recently) So China decided to quit the Class room! They express serious doubts about the validity
of Conventional wisdom after assessing economic performance of US and China ? E.g. China showed resurgence ?high growth in real sector for a prolonged period was possible consistent with stability without any significant development of Modern Free Market based ?Financial sector?;(not dear to China). Able to ward of ?inflationary pressures? if the currency is systematically remained devalued for a prolonged period;

- Initiatives to develop ?New Economic Thinking? (NET);


- (Advising board includes two Nobel Laureates of Economists)-
Current Great Recession (CGR) is comparable to Great Depression may result in such a fundamental Rethink theory, Practice and Institutions?:
Alternate View
- Markets benefit society and economy but some Excesses or aberrations took place that led to crisis after crisis. Need to be re-balanced within the broader but existing framework.

-Dubai Crumbled ? Realty fell to 75% low ? Indians and Britons are big investors there ? hurt demand for Indian Realty, at 10.25 a.m. on December 2nd.

Reasonable to assume - ?Destinations of Exit strategies
Currently under Consideration would be towards a ?New Normalcy? (yet ill-defined) re-balancing;
- Re-balancing in favor of State(presumption to be in favor of ?relative efficiency? of Markets ?rejig? to continue (but with clear understanding that it is presumption it could be rebutted when appropriate, with State acquiring the policy space to intervene at its discretion.
- RECOGNITION:
- ?Excessive financialization of Economy? ( with Cognizable disconnect between development(Real sectors ) goods and services finally consumed ? and in financial sector as critical role mobilizes resources;
- Finance contributes and allocates them efficiently/weal-being through a la variety of ways;
- Real issue determines appropriate level of financial sector development as well as he sophistication and Regulation ? promotes genuine ?innovation? and ?curbs? speculation;
- Excessive leverage in financial sector warrant correction then and there;
- Some curbs on financial sector relative to real sector seem to be part of ?rebalancing?;
- Take several firm steps: ? higher capital cushion curbs on managerial remuneration, changes in incentives frame work, taxes on financial transaction, measures for investor and consumer protection including certification of Safety on financial products restrictions on OTC trades, expanding scope and interest of regulator to intensify regulation and so on;
- Consensus for virtual REGULATION in major developed countries on financial sector needs a thorough overhaul wherever crises getting strengthened to save gullible investors and consumers, is a view advanced;
- Globalization of finances has significant to very significant risks, unlike globalization of trade, which is beneficial;
- Rebalancing could happen by globalization of Regulation or recalibrating exiting Regulation on financial sector with a combination of trade even;
- Re-balancing could happen globalizing regulation and recalibrating financial sect;
- Effort to develop globally acceptable standards of Regulation at Technical levels in Boards of Financial Stability (BFS);
- Renewed interest in Capital Control by instruments ?Tobin Tax? and strengthening of Regulation by host of countries may be indicative of reality of recalibrating of Globalization of Finance;
- Focus on Tax Havens and harmonize financial regulations. May not fully address issues of Tax arbitrage;
- Advocacy of Counter Cyclical Regulation affects balance between policy space available at National Level and assess compulsion of global finance;
- Authorities have to decide on weight to be given to National Level Economic Cycles and Global Economic cycles( unless it is assumed they still always converge;
- Counter Cyclical policies to be effective needs a lot of harmonization of policies and financial regulation of monetary and fiscal control authorities;
- Re-balancing of exercises in regulation of financial sector may have to address the broader issues of Policy Space of National authorities and governance of arrangements that oversee globalization of finance;
- Tobin Tax: James Tobin (Yale Nobel Laureate in Economics) argued ?Currency speculation - money moving internationally to bet on ?fluctuations in Exchange Rates? ? was having a DISRUPTIVE EFFECT on the World Economy. To reduce this disruption, a small tax, a trivial expense on Ever Exchange Currencies. Such a tax on people engaged in Foreign trade or Long Term investments but it would be a major disincentive for people trying to make a fast buck(on Euro or Yen) by out guessing the markets over the course of a few days or week(s).It would be ?to throw some sand in the well greased wheels?.
- Paul Krugman said ?Idea no where at the time. Much to his (Tobin?s) dismay it becomes a favorite hobby horse on anti-globalization.
- Turner Brown proposal in Congress in US would apply ?Tobin Tax? to all financial transactions ? not just those involving in foreign currency trade is very much in very much in Tobin spirit. A trivial expense for long term investor but it would deter much of ?churning that now takes place in our hyper sensitive financial markets ?.