Financial Crises And Global Capital Flows :: essays research papers

<a href="http//www.geocities.com/vaksam/">Sam Vaknins Psychology, Philosophy, Economics and Foreign Affairs Web SitesThe recent upheavals in the cosmea financial markets were quelled by the immediate intervention of both international financial institutions such as the IMF and of domestic ones in the developed countries, such as the national Reserve in the USA. The danger seems to have passed, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We whitethorn face yet another crisis of the same or a larger magnitude momentarily. What are the lessons that we can derive from the last crisis to avoid the next? The beginning lesson, it would seem, is that go around term and long term capital flows are two disparate phenomena with precise little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth o f its new domicile. It is, therefore, wrong to conference about global capital flows. There are investments (including even long term portfolio investments and venture capital) and there is speculative, hot money. While hot money is very useful as a lubricant on the wheels of liquid capital markets in rich countries it can be destructive in less liquid, babyish economies or in economies in transition. The two phenomena should be accorded a different treatment. While long term capital flows should be completely liberalized, encouraged and welcomed the short term, hot money type should be controlled and even discouraged. The introduction of fiscally-oriented capital controls (as Chile has implemented) is one possibility. The less captivating Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long term financial players. But it is clear that an important and integral part of the new International Financial architecture MUST be the control of speculative money in pursuit of ever higher yields. There is nothing inherently wrong with high yields and the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things mustiness be neutered or at least countered. The second lesson is the important role that central banks and other financial authorities play in the presumption of financial crises or in their prolongation. Financial bubbles and asset price inflation are the result of euphoric and irrational exuberance said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr.