Andy Haldane, Oxford Martin School, 4th February 2014


Key lesson from the financial crisis: We need to manage the financial system as a system.

But this lesson has not been taken to the international system.
E.g. US tapering (slowing the rate at which they put money into the economy) The US made this decision based on the impacts on their own country, despite there being direct financial spill overs on the rest of the world. The impact has been negative in Emerging Markets, where the cost of borrowing has increased as a result. The problem is that actions are taken in an individual country’s interests rather than for the system as a whole.

The problem of spillovers is greater than at any time before because:
- Global integration (as measured by cross border trade and financial integration) is at levels never seen before
- Financial integration is 10x that of trade

Integration is a double edged sword – it can improve risk sharing, but increase risk spreading too. The incidence of financial crises will increase, as will their impact/scale.

Interesting questions to explore:
- Does integration enhance growth and productivity? Can you have too much?
- Does the global financial system have sufficient insurance? If not, then which mechanisms make most sense?

4 superficially positive things about the state of insurance:
- Improved composition of capital flows (there’s more foreign direct investment and equity, and less debt)
- Higher absolute scale of FX reserves
- Higher absolute IMF resources
- Higher absolute regional/ national resources e.g. European Stability Mechanism

Reasons to be doubtful of these though…
- International reserves as a share of external liabilities has decreased, and holdings are concentrated in the hands of those who least need them.
- Resources as a share of potentially required resources have fallen

Where do we need to go next?
- Improved multilateral surveillance
(The IMF currently conducts surveillance, including spillover reports (that cover the impact of national & international policy on the global financial system), but they put most effort into “Article IV” – which is an annual assessment of individual countries. It is questionable whether the IMF is the right institution to be tasked with “ruthless truth-telling” too.)
- Improved debt structuring
- Improved capital flow/ macro prudential management
(The IMF has reversed its position on controlling capital flows. Now we need rules on when and how this should happen because this is currently happening nationally in an uncoordinated way.)
- Improved multilateral facilities