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From UNCTAD - 19 March 2009

The Global Economic Crisis:
Systemic Failures and Multilateral Remedies

Table of contents
Key messages
Foreword by the Secretary-General of UNCTAD

Executive summary

Chapter I
A crisis foretold
A. Introduction
B. What went wrong: blind faith in the efficiency of financial markets
C. What made it worse: global imbalances and the absent international monetary system
D. What should have been anticipated: the illusion of risk-free greed and profligacy

Chapter II
Financial regulation: fighting today’s crisis today
A. It was not supposed to end like this
B. Lessons for developing countries
C. Conclusion: closing down the casino

Chapter III
Managing the financialization of commodity futures trading
A. Introduction: commodity markets and the financial crisis
B. The growing presence of financial investors in commodity markets
C. The financialization of commodity futures trading
D. Financialization and commodity price developments
E. The implications of increased financial investor activities for commercial users of commodity futures
F. Policy implications
G. Conclusions

Chapter IV
Exchange rate regimes and monetary cooperation
A. Introduction: currency speculation and financial bubbles
B. The history of different exchange rate regimes is of a series of failures
C. Global exchange rate management, trade and investment
D. Currency crisis prevention and resolution
E. A multilateral approach to global exchange rate management
F. Conclusion

Chapter V
Towards a coherent effort to overcome the systemic crisis
A. More and better coordinated countercyclical action is needed
B. The State is back but national action is not sufficient
C. No “crisis solution” by markets


Full Report [PDF, 80pp., 1´890KB]
Key messages:

UNCTAD’s longstanding call for stronger international monetary and financial governance rings true in today’s crisis, which is global and systemic in nature. The crisis dynamics reflect failures in national and international financial deregulation, persistent global imbalances, absence of an international monetary system and deep inconsistencies among global trading, financial and monetary policies.

National and multilateral remedies

Market fundamentalist laissez-faire of the last 20 years has dramatically failed the test. Financial deregulation created the build-up of huge risky positions whose unwinding has pushed the global economy into a debt deflation that can only be countered by government debt inflation:

– The most important task is to break the spiral of falling asset prices and falling demand and to revive the financial sector’s ability to provide credit for productive investment, to stimulate economic growth and to avoid deflation of prices. The key objective of regulatory reform has to be the systematic weeding out of financial sophistication with no social return.

- Blind faith in the efficiency of deregulated financial markets and the absence of a cooperative financial and monetary system created an illusion of risk-free profits and licensed profligacy through speculative finance in many areas:

– This systemic failure can only be remedied through comprehensive reform and re-regulation with a vigorous role by Governments working in unison. Contrary to traditional views, Governments are well positioned to judge price movements in those markets that are driven by financial speculation and should not hesitate to intervene whenever major disequilibria loom.

- The growing role and weight of large-scale financial investors on commodities futures markets have affected commodity prices and their volatility. Speculative bubbles have emerged for some commodities during the boom and have burst after the sub-prime shock:

– Regulators need access to more comprehensive trading data in order to be able to understand what is moving prices and intervene if certain trades look problematic, while key loopholes in regulation need to be closed to ensure that positions on currently unregulated over-the-counter markets do not lead to “excessive speculation”.

- The absence of a cooperative international system to manage exchange rate fluctuations has facilitated rampant currency speculation and increased the global imbalances. As in Asia 10 years ago, currency speculation and currency crisis has brought a number of countries to the verge of default and dramatically fuelled the crisis:

– Developing countries should not be subject to a “crisis rating” by the same financial markets which have created their trouble. Multilateral or even global exchange rate arrangements are urgently needed to maintain global stability, to avoid the collapse of the international trading system and to pre-empt pro-cyclical policies by crisis stricken countries.


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