1. World Economy Global Financial Changes

2. Misunderstood Changes Emergence of a Global Capital Market Boundaries between national financial markets dissolved => a truly global capital market The change was cumulative, not a single event. Hence, difficult to perceive

3. Misunderstood Changes Incremental changes Single country view Common global forces: innovation, technology, deregulation

4. A Question What happened in USA during these times?

6. The Mystery of Money Globalization includes both current accounts & capital accounts Trade globalization is problematic but not new International capital flows & markets much more difficult The changes are magnitudes larger Net capital accounts deceptively small

7. Capital Flows Net capital flows Gross capital flows Bank lending Currency speculation

8. Checks and Balances Innovation, technology and deregulation have smashed the barriers both within and among national financial markets Absolute differences among the many countries’ financial systems are substantial However, relative changes & rates of change are remarkably similar

9. Segments Customs & tradition Legal regulation Governments wanted to make the financial system safe & predictable As usual, they created monopoly power

10. Control Monopolies need to be controlled Regulators controlled interest rates, credit, quantitative restrictions, moral suasion Regulators controlled interest rates, credit, quantitative restrictions, moral suasion Privileged occupiers of market segments could not be left to themselves Security & control

11. Relationships Financial systems are supposed to gather & process information, relayed by prices (interest rates) But fixed interest rates don’t contain market information, only government information Banks developed specialized expertise, a more-or-less fixed set of clients, & relationship- finance

12. Protection Because this arrangement constituted a national monopoly, protection from foreign banking systems was necessary This was provided by the government Domestic financial firms put up with tight regulation and expected protection in return

13. Bretton Woods Bretton Woods, by controlling capital flows, enabled governments all over the world to make their special deals with providers of capital What followed was the development of national systems, often called “crony capitalism” in many countries