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Time for a Visible Hand

Lessons from the 2008 World Financial Crisis

Stephany Griffith-Jones (Editor), José Antonio Ocampo (Editor), Joseph Stiglitz (Editor)

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The financial crisis, which originated in developed country financial markets, has spread to developing countries and has turned into a global financial meltdown. Governments and Central Banks—though taking many and costly measures—seem powerless to stop the crisis.

In light of this major global crisis that is hurting economies across the globe, this highly topical book focuses on the transparency and regulatory measures that become desirable after the current crisis; the implications of both the crisis and regulatory discussions for developing and developed economies; and reforms in the global financial architecture that might make the global financial system more stable and more equitable.

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Hardcover
ISBN13: 978-0199578818
ISBN10: 0199578818

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Given the depth of the current financial crisis, the world economy is in uncharted territory. As a consequence, this book aims to systematically understand current major problems, both in the financial system, its governance, and in its links to global economic imbalances. It will try to explain how both market actors and regulators behavior, as well as how the prevailing ideology of extreme financial liberalization without sufficient regulation contributed to the financial crisis. The book presents radical, but specific and politically feasible, proposals to try to ensure a more stable, equitable and growing world economy.

Contributions are written by leading authorities in their field, with a mixture of very senior national—as well as international—policy makers, practitioners from the private sector, and leading academics; contributors come from both developed and developing countries.

About the Editors

Stephany Griffith-Jones
Financial Markets Program Director
Initiative for Policy Dialogue (IPD)

Stephany Griffith-Jones is an economist specialising in international finance and development, with emphasis on reform of the international and national financial system, especially in relation to financial regulation and global governance. She is Financial Markets Director at the Initiative for Policy Dialogue, Columbia University. Previously she was Professorial Fellow at the Institute of Development Studies at Sussex University. She was Director of International Finance at the Commonwealth Secretariat and worked at UN DESA and ECLAC. She was senior consultant to governments in Eastern Europe, Latin America and Africa and many international agencies, including the World Bank, the IADB, the European Commission, UNDP and UNCTAD. She was a member of the Warwick Commission on financial regulation. She currently is theme leader on finance in the ESRC /DFID growth programme for LICs, especially African ones. She has published over 20 books and many scholarly and journalistic articles. Her books include Time for the Visible Hand, Lessons from the 2008 crisis, edited jointly with José Antonio Ocampo and Joseph Stiglitz.

José Antonio Ocampo
Co-President
Initiative for Policy Dialogue (IPD)

Jose Antonio Ocampo is Co-President of IPD, Professor of Professional Practice in the School of International and Public Affairs, and Fellow of the Committee on Global Thought at Columbia University. Prior to his appointment at Columbia, Professor Ocampo served as the United Nations Under-Secretary-General for Economic and Social Affairs, and head of UN Department of Economic and Social Affairs (DESA), as Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and has held a number of high-level posts in the Government of Colombia, including Minister of Finance and Public Credit, Director of the National Planning Department, and Minister of Agriculture . Professor Ocampo is author or editor of over 30 books and has published over 200 scholarly articles on macroeconomic theory and policy, international financial issues, economic development, international trade, and Colombian and Latin American economic history.

Joseph Stiglitz
Co-President
Initiative for Policy Dialogue (IPD)

Joseph E. Stiglitz is co-President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.

About the Authors

Stephany Griffith-Jones
Financial Markets Program Director
Initiative for Policy Dialogue (IPD)

Stephany Griffith-Jones is an economist specialising in international finance and development, with emphasis on reform of the international and national financial system, especially in relation to financial regulation and global governance. She is Financial Markets Director at the Initiative for Policy Dialogue, Columbia University. Previously she was Professorial Fellow at the Institute of Development Studies at Sussex University. She was Director of International Finance at the Commonwealth Secretariat and worked at UN DESA and ECLAC. She was senior consultant to governments in Eastern Europe, Latin America and Africa and many international agencies, including the World Bank, the IADB, the European Commission, UNDP and UNCTAD. She was a member of the Warwick Commission on financial regulation. She currently is theme leader on finance in the ESRC /DFID growth programme for LICs, especially African ones. She has published over 20 books and many scholarly and journalistic articles. Her books include Time for the Visible Hand, Lessons from the 2008 crisis, edited jointly with José Antonio Ocampo and Joseph Stiglitz.

Fernando Cardim de Carvalho
Professor
Federal University of Rio de Janeiro

Fernando Cardim de Carvalho, is a Professor of Economics at the Institute of Economics at the Federal University of Rio de Janeiro. He previously acted as Former Head of the National Association of Graduate Schools of Economics of Brazil from 1992-1994. Cardim de Carvalho is a former member of the Scientific Committee for Economics, National Research Council o Brazil and CNPq. He has served as consultant to national and international NGOs, such as Action Aid USA, Ibase (Brazil), WEED (Germany), Government Institutions such as National Development Bank of Brazil (BNDES), IPEA, Brazilian Agency for Financing Innovations (Finep), and international organizations such as UNO and ECLAC as well as authoring over 100 articles in scientific journals and book chapters in Brazil and abroad. Cardim de Carvalho received his PhD in Economics from Rutgers University.

Philip Turner
Deputy Head
Monetary and Economic Department
Bank of International Settlements

Yilmaz Akyüz
Former Director, Globalization and Development Strategies (retired)
United Nations Conference on Trade and Development

Dr. Yilmaz Akyuz is the Special Economic Advisor of South Centre. Until his retirement in 2003, he was Director of the Division on Globalization and Development Strategies as well as Chief Economist at the United Nations Conference on Trade and Development (UNCTAD). He has published extensively in macroeconomics, finance, growth and development. His current activities include policy research for international organizations, and advising governments on development policy issues, and the Third World Network on research in trade, finance and development.

Marion Williams
Governor
Central Bank of Barbados

Marion Williams is presently ambassador and permanent representative of the Mission of Barbados in Geneva, where she represents Barbados in all United Nations offices in Geneva, including the World Trade organization. She was a former Governor of the Central Bank of Barbados, a position which she held from 1999 to 2009. Prior to this, Dr. Williams worked as the Research Manager of the East Caribbean Currency Authority. She is a Fellow of the Institute of Bankers (FCIB) of the U.K., and a Certified Management Accountant (CMA). Dr. Williams was the first President and a founding member of the Barbados Institute of Banking and Finance, and is a former Chairman of the Steering Committee of the Caribbean Technical Assistance Centre (CARTAC) and a former Chairman of the Caribbean Centre for Money and Finance. Dr. Williams is the current Coordinator of the CARICOM group in Geneva, Coordinator of the Small Vulnerable Economies group in WTO and up to end June 2011 Coordinator of the Geneva based Commonwealth Group of developing countries. Dr. Williams holds a Masters Degree in Economics from the University of the West Indies and a Ph.D. from the University of Surrey.

Perry G. Mehrling
Professor of Economics
Barnard College

Charles Goodhart
Program Director, Regulation and Financial Stability, Financial Markets Group Research Center
London School of Economics

Avinash Persaud
Founder and Chairman
Intelligence Capital Limited, Warwick Commission

Avinash Persaud is Executive Chairman of Intelligence Capital Limited, a financial advisory boutique; Chairman of Elara Capital PLC, an emerging market specialist; and Chairman of Paradise Beach Limited. He was formerly the managing director at State Street Bank & Trust and global head of currency and commodity research, J. P. Morgan. He is emeritus Professor, Gresham College; Senior Fellow, London Business School; Visiting Fellow, Cambridge University; Governor, London School of Economics; Member of Council, Royal Economics Society; and 2010 President of the Economics Section, British Association for the Advancement of Science. He was Chairman, Warwick Commission on Financial Regulation; Member, Pew Task Force to the US Senate Banking Committee, Member and Chairman of the Regulatory sub-committee of the UN Commission of Experts on Financial Reform and Member, International Task Force on Financial Transaction Taxes. He is a former Visiting Scholar of the IMF and ECB and Member of the UK Treasury’s Audit & Risk Committee. He is a Member of the National Council of Economic Advisors in Barbados.

Jane D'Arista
Research Associate
Political Economy Research Institute

Gerard Caprio
Professor of Economics and Chair of the Center for Development Economics
Williams College

Bruce Greenwald
Professor
Columbia University Graduate School of Business

Jan Allen Kregel
Professor, Levy Economics Institute
Bard College

Jan Kregel is a senior scholar at the Levy Economics Institute of Bard College and director of its Monetary Policy and Financial Structure program. He also holds the positions of professor of development finance at Tallinn University of Technology, Estonia and Distinguished Research Professor in the University of Missouri, Kansas City. In 2009, Kregel served as Rapporteur of the President of the UN General Assembly’s Commission on Reform of the International Financial System. He previously directed the Policy Analysis and Development Branch of the UN Financing for Development Office and was deputy secretary of the UN Committee of Experts on International Cooperation in Tax Matters. He is a former professor of political economy at the Università degli Studi di Bologna and a past professor of international economics at Johns Hopkins University’s Paul Nitze School of Advanced International Studies, where he was also associate director of its Bologna Center from 1987 to 1990.

Roberto Frenkel
Principal Research Associate
CEDES

Roberto Frenkel is Principal Research Associate at CEDES (from 1977) and Professor at the University of Buenos Aires (from 1984). Presently he is also Director of the Graduate Program on Capital Markets (University of Buenos Aires) and teaches graduate courses at the Di Tella and FLACSO-San Andrés Universities in Argentina. He was Professor at the University of Chile, University Católica de Chile, University Central de Venezuela and also visiting professor at the University of California (San Diego), University Católica de Rio de Janeiro and University of Pavia (Italy). He has been a consultant of several international organizations including UN, ILO, UNCTAD, UNDP, ECLAC, and he has also worked for the OECD Development Center, IDB, UNIDO and the governments of Argentina, Bolivia, Colombia, Venezuela and Uruguay. He was Undersecretary Chief of Economics Advisors to the Ministry of Finance (1985-89) and a member of the Board of Directors of the Banco de la Provincia de Buenos Aires (1999-2003) both in Argentina. He is a member of the Board of the World Institute for Development Economic Research (WIDER), United Nations University. He was a member of the UNDP Advisers Group. He published numerous books and articles in academic journals on macroeconomic theory and policy, money and finance, inflation and stabilization policies and labor market and income distribution, with special focus on Argentina and Latin America.

YV Reddy
Emeritus Professor of Economics
University of Hyderabad

YV Reddy was Governor, Reserve Bank of India, from 2003 to 2008. Subsequently, he was Member of the UN Commission of Experts to the President of the UN General Assembly on Reforms of International Monetary and Financial System. Currently, he is Professor Emeritus at University of Hyderabad and an Honorary Fellow of the London School of Economics and Political Science. Dr. Reddy is on the Advisory Board of Institute for New Economic Thinking (INET) and is also on International Advisory Board of the Columbia Program on Indian Economic Policies, Columbia University, New York. He is a Member of an informal international group of prominent persons on International Monetary Reforms, and is also on the Advisory Group of eminent persons to advise the Finance Minister of India on G-20 issues. Prior to being the Governor, he was Executive Director for India, Sri Lanka, Bangladesh and Bhutan at the International Monetary Fund since August 2002. He also was Deputy Governor, Reserve Bank of India, Secretary, Ministry of Finance, and Additional Secretary, Ministry of Commerce in the Government of India. He served Government of Andhra Pradesh, India in several capacities including Principal Secretary and Secretary – Finance and Planning, Collector and District Magistrate, etc. He was also advisor for the World Bank.
 

Joseph Stiglitz
Co-President
Initiative for Policy Dialogue (IPD)

Joseph E. Stiglitz is co-President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.

José Antonio Ocampo
Co-President
Initiative for Policy Dialogue (IPD)

Jose Antonio Ocampo is Co-President of IPD, Professor of Professional Practice in the School of International and Public Affairs, and Fellow of the Committee on Global Thought at Columbia University. Prior to his appointment at Columbia, Professor Ocampo served as the United Nations Under-Secretary-General for Economic and Social Affairs, and head of UN Department of Economic and Social Affairs (DESA), as Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and has held a number of high-level posts in the Government of Colombia, including Minister of Finance and Public Credit, Director of the National Planning Department, and Minister of Agriculture . Professor Ocampo is author or editor of over 30 books and has published over 200 scholarly articles on macroeconomic theory and policy, international financial issues, economic development, international trade, and Colombian and Latin American economic history.

Martin Rapetti
Professor
University of MA, Amherst

1

Introduction

1

2

The Financial Crisis of 2007-2008 and its Macroeconomic Consequences

19

3

Subprime Finance: Yes, We are Still in Kansas

50

4

Background Considerations to a Re-regulation of the U.S. Financial System: Third time a Charm? Or Strike Three?

62

5

Responding to the Crisis

76

6

Central Banks, Liquidity and the Banking Crisis

101

7

Agenda and Criteria for Financial Regulatory Reform

126

8

The Role of Policy and Banking Supervision in the Light of the Credit Crisis

150

9

How, If at All, should Credit Rating Agencies (CRAs) be Regulated?

164

10

Credit Default Swaps: The Key to Financial Reform

185

11

Governing the Global Regulatory System

200

12

The Management of Capital Flows and Financial Vulnerability in Asia

219

13

Regulation of Financial Sector in Developing Countries: Lessons from the 2008 Financial Crisis

242

14

Economic Development and the International Financial System

253

15

The Accumulation of International Reserves as a Defense Strategy

269

16

Reforming the Global Reserve System

289

17

A Modest Proposal for International Monetary Reform

314