Global crises requiere global responses.

The current global financial crisis will induce changes in the regulatory framework under which the local and global capital markets operate. There will be, very likely, a widening of the boundaries of the regulatory system and related “safety net” policies, which in practice have already been extended, at least in the US and Europe. There will also be changes in regulations to reduce the pro cyclical instability induced by the current  system of  capital requirements and fair value accounting, the extent of maturity transformation, the limitation of the “Originate to Distribute Model” and issues of clearance and settlement related to derivative contracts.

There are several groups of experts working on proposals for Financial Reform on these lines, and rather than giving a personal opinion on these issues, I want to reflect optimism on the outcome of this process, as far as the future pricing of risk is concerned.

But I am not optimistic about the future ability of central banks and national treasuries to ameliorate the effects of the current and future financial crisis on the real economies.

From my experience in Argentina and as an observer of the many financial crises that have taken place in the emerging markets since the eighties, I feel that most of them originate in domestic imbalances that are induced by unsustainable public policies that are maintained for too long when waves of optimism provide financing for the happy time.

When a financial crisis occurs, it is because those economies face a sudden stop of financing and the real adjustments cannot be delayed any longer. Therefore, the crisis of the real economy that follows is not the consequence of the financial crisis, but of the disequilibria that preceded it. These disequilibria, having been ignored by investors and financial intermediaries, found easy financing for too long a period of time. If the public policies that are designed to cope with the financial crisis try to prevent the real adjustments that are required to cope with those disequilibria, the renewal of growth and the restoration of price and monetary stability may be unduly delayed.

In today’s global economy, without global public institutions capable of conducting global monetary and financial policies, there is a clear risk that national governments will conduct their own public policies seeking to prevent real adjustments within their national economies and, in so doing, will generate global instability.  I have the impression that at least part of the commodity inflation observed in recent months is a reflection of the interaction of national policies, particularly those of the United States, Europe and the Asian Countries, that do not reflect any degree of coordination.

In my opinion, to improve global policy coordination in the monetary and financial fields, it is key to look at the experience of emerging market economies with financial crises, paying particular attention to the cross responsibility of domestic disequilibria and international shocks in feeding those crises and in making it difficult to find good solutions for them.