Wednesday, April 23, 2014

The Increased Role of Markets and Capitalism in the Global Economic System Should Lead to More Bubbles.

Over the last 35 years there has been a surge in the frequency and size of financial bubbles as compared to the prior 50 years. Robert Aliber, Ron McKinnon and others believe this surge in bubble frequency is due to the large and very mobile global movement of hot capital and its impact especially on smaller economies. However this explanation is not quite complete for while these oscillating flows are clearly a contributing factor they cannot themselves be the initial causes. Leir Center research as well as that of Charles Kindleberger and Hyman Minsky indicate that some dislocation must first create an economic or investment opportunity and this is what attracts both local and international money flows. So an important research question is whether the increased bubble frequency is due to random increases in such events or is part of a larger trend that the hot money follows and with which it interacts.

The Leir Center is starting a research project to show the latter is the case and that the increased frequency of bubbles is due to globalization, that is the identified trend since the early 1980s for a reduction in national barriers to trade, foreign investment and financial flows including among other events the fall of Communism, increased Privatization, and weaker unions complemented by large technological advances in transport and telecommunications. This is because Bubbles are a natural result of markets and capitalism. Therefore it is logical that the increased role of markets and capitalism in the global economic system should lead to more Bubbles. 

It is the intention of this research effort to produce a series or papers and a monograph to demonstrate this development and assess its implications for financial policy. We thus invite comments and ideas from those with an interest. To get this process started the Leir Center has posted working paper #15 on “Banking Regulation In An Era Of Globalization And Financial Bubbles”. In this paper Professor Rapp introduces the argument that the regulatory and technological changes that define globalization can be directly linked to particular Bubbles beginning with the deregulation of gold in the 1970s, then Reagan and Thatcher's privatization, Japan's Yen/$ dollar accord, etc. He also argues this is one reason the idea of more direct regulation of financial bubbles has met so much resistance including Alan Greenspan's because it goes against the prevailing anti-regulation winds of the globalization trend and view free markets always know best. Yet the recent financial crisis not only undermines the credibility of this perception but also shows why a different bank regulatory approach is required to retain the benefits of globalization and market liberalization while avoiding or moderating the negative impacts from the re-emergence of larger and more frequent Bubbles with global impacts as happened before 1929. 

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