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 world financial markets were quelled by the immediate intervention of some(prenominal) international financial institutions such as the IMF and of domestic ones in the true countries, such as the Federal Reserve in the USA. The danger seems to bring passed, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We may face yet another crisis of the comparable or a larger magnitude momentarily. What are the less(prenominal)ons that we can occur from the last crisis to avoid the next? The first lesson, it would seem, is that shortstop edge and broad term seat of government flows are two disparate phenomena with precise forgetful in common. The former is speculative and technical in nature and has in truth little to do with fundamental realities. The latter is investment oriented and act to the incre asing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk or so global capital flows. there are investments (including all the same coarse 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, immature economies or in economies in transition. The two phenomena should be accorded a different treatment. While long term capital flows should be alone liberalized, encouraged and welcomed the short term, hot money type should be take careled and even discouraged. The introduction of fiscally-oriented capital controls (as Chile has implemented) is one possibility. The less attractive 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 range of the new Intern ational Financial Architecture MUST be the control of speculative money in pursuit of ever higher yields. There is nothing inherently wrong with high yields but the capital markets fork out 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 must be neutered or at least countered. The second lesson is the important type that central banks and other financial authorities play in the rush of financial crises or in their prolongation. Financial bubbles and asset price swelling are the result of euphoric and irrational exuberance said the death chair of the Federal Reserve Bank of the United States, the legendary Mr.