No abstract
Instability in foreign exchange markets and currency dumping/manipulation cultivate further mistrust in international economic relations. At the same time, instability in foreign exchange markets and currency dumping/manipulation can be a cause of systemic risk. For example, foreign currency exposures were a key vulnerability behind the series of emerging market crises in 1997-98. The global financial crisis of 2008 also showed that currency mismatches are not just a concern for emerging markets. This chapter argues that currency mistrust exposes as flawed the notion that an international financial order may exist separately from the global monetary and trade and investment orders on a self-standing basis through the technocratic standards promulgated by the Basel Committee and the Financial Stability Board, notwithstanding the importance of such standards. While said separation achieved a great deal in terms of integration of regulation and governance of international finance in the past three decades, at the same time, it has worked to promote financialisation and the global shadow banking sector. The paradox of the separation of the three international economic orders, albeit for defensible reasons, has given rise to massive rent-seeking by the global financial services industry. It has also undermined any efforts of creating coherent international structures for the governance and regulation of global finance, since these could be defended only if they were seen as integral in buttressing the global trade and investment order. Finally, the chapter proposes a transparent and objective benchmark for the approximation of currency values which could be the first step towards the reversal of the current trend towards currency and trade wars. Such reversal is the sole path towards rebuilding the trust required to augment the governance structures of global finance. 3Currency mistrust exposes as flawed the notion that an international financial order may exist separately from the global monetary order and trade and investment on a self-standing basis through the technocratic standards promulgated by the wise heads of the Basel Committee and the Financial Stability Board (FSB), notwithstanding the importance of such standards.The separation of the three international economic orders achieved in the first three decades a great deal in terms of integration of regulation and governance of international finance. Not only discussion between regulators in the predominant global standard-setting fora of the G-20, the FSB, and the Basel Committee have progressed vis-a-vis setting globally accepted financial standards because they were held apart from the last decade's vexed discussions on international trade, 2 but also much needed international cooperation in the aftermath of the Global Financial Crisis(GFC) didn't have to stumble on unresolved (but not unrelated) trade issues.At the same time, said separation has, arguably, worked to promote financialisation and the global shadow banking sector since cross-border financial...
Loose financial regulation encourages some banks to adopt a risky strategy of specializing in residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability or deposit insurance), they offer mortgages at less than actuarially fair interest rates. This opens a door to home-ownership for some young low net-worth individuals. In turn, the additional demand from these new homebuyers drives up house prices. All of this leads to non-trivial distribution of gains and losses from lax regulation amongst the households. Renters and individuals with large non-housing wealth suffer from the fragility of the banking system induced by the lax regulation. On the other hand, some young middle-income households are able to get a mortgage and buy a house, thus benefiting from the lax regulation. Furthermore, the current (old) homeowners benefit from the increase in the price of their houses. If the latter two groups constitute a majority of the population, then regulatory failure can be an outcome of a democratic political process. * The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or the Bank of Canada.
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