As India ascends to the Group of Twenty Presidency, internationalism is stuck. The Paris Agreement on climate change is deadlocked as countries point fi ngers at each other. Development assistance is being siphoned off into defence and foreign affairs budgets. And all the while global temperatures rise, and a silent debt crisis rips through the emerging world. Here are fi ve “asks” for India’s G20 Presidency to champion to unstick global fi nance and turn the billions being spent on addressing climate change into the trillions we need. They are highlights of what is being called the “Bridgetown Initiative” after a meeting of offi cials, academics and civil society hosted by Prime Minister Mia Mottley in Bridgetown.
I have had a career that has spanned investment banking, public policy, and academia, in the early phase of my working life. As you can imagine, academia was the least, and investment banking the most, posh.
Our sights must be set on moderating the recurring cycle of financial crises and our solutions must go beyond the instruments, institutions or individuals of the day. Blaming offshore financial centres or the complexity of derivatives for the current problems misses the point. This article proposes counter-cyclical capital charges to push banks to develop incentive packages that are more encouraging of longer-term behaviour and a valuation method based on the relative maturity of an intermediary's funding. What the latter will do is allow any institution in a liquidity crisis to set up its own internal "bad bank" mechanism so long as it has sufficient long-term funding to support it.
The new governor of the Reserve Bank of India will have to navigate a path that brings international recognition of India's banking supervision and standards, but avoids the worse pitfalls of the "Basle Consensus", which places market prices at the heart of modern financial regulation. The RBI should follow an alternative model of banking regulation that will have three pillars. The first should be that the economic cycle must be put close to the centre of banking regulation, since this is the source of market and systemic failure. The second should be a focus on systemically important distinctions, such as maturity mismatches and leverage. And the third pillar would be to require banks to either self-insure or pay an insurance premium to taxpayers against the risk that the taxpayer will be required to bail them out.
The dollar is on its way out as the world's reserve currency. The decline will neither be smooth nor quick, and the US will use its political, economic and military powers to retain influence. What will eventually replace the dollar? It will not be the euro, it will be some other currency.
What makes the ongoing crisis in world financial markets more complicated and more hazardous than the previous ones is the very thing that Alan Greenspan and others argued that made financial systems safer: the securitisation of credit.
If there were no policy interventions of any kind in the foreign exchange markets, and all markets were present and deep, it is far from clear that the size and direction of global imbalances would be any different than they are today. What would be different is the manner in which surplus savings are being managed. The real problem today is not a macroeconomic one to be alleviated by a complex policy coordination of monetary and fiscal policies. Instead, it is a microeconomic problem of how to best manage national savings.
