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 2 nd 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