Meghnad Desai and Yahia Said
The new century is barely three years old and many of the certainties of the last century are being re-examined. During the last decade of the last century, there was an overwhelming confidence about the economy. A 'New Paradigm' was hailed; the business cycle had been abolished we were told. It seemed that the knowledge economy did not obey the old laws of economics. There would be no longer boom and bust as a new generation of central bankers and prudent Finance Ministers had fashioned the perfect combination of monetary and fiscal policies for us.
There was a warning in 1997 with the Asian crisis and the triple bypass for Long-Term Capital Management. The 1997 crisis was the first crisis of the new phase of globalisation. But while it sloshed about in Russia and Brazil, it failed to reach the shores of the New York or London financial markets. Smugness returned until in early 2001, the Dow Jones and Footsie began their journey southwards. We were soon hearing of a double-dip recession, retrenchment in the financial services sector and large budget deficits in the USA, Germany, France with no upturn in sight for Japan after ten years of stagnation.
The business cycle is back with us; indeed, it never went away. While a financial meltdown is a rare occurrence in developed country markets, the frequency of such events in periphery is worrisome. In the last ten years, we have had crises in Mexico, Indonesia, Thailand, Malaysia, South Korea, Brazil, Argentina and Turkey. There is financial fragility in India and China. The uneasy marriage of moral hazard of lenders lending to sovereign governments in the knowledge of a certain bailout and the inability of sovereign borrowers to follow time-consistent strategies in shaping their debt profile is becoming a major problem. The questions are many but the answers are few.
This volume attempts to address some of the questions raised by the string of financial crises over the past ten years. As Desai puts it - are global financial markets rational or are manias possible? Should crises which follow manias be allowed to run their course and purge the system or should a lender of last resort intervene to dampen their impact on the real economy? Who can play this role at the global level?
In Chapter 2, Desai explores the term 'crisis' and finds parallels between the medical and financial use of the words. Crises in both areas indicate (a) a turning