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THE GLOBAL CAPITAL MARKET: Introduction

The Asian financial turmoil of 1997 started as a seemingly localized tremor in far-off Thailand, but then swelled into a crisis with repercussions in stock markets on every continent. Both international lending institutions led by the International Monetary Fund, and national governments including those of the United States, Japan, and the European Union, joined in the policy response. The U.S. Federal Reserve, headed for monetary tightening in the fall of 1997, postponed its move for fear of destabilizing world markets further.

These turns of events would have been inconceivable during the 1950s. In that inward-looking era, most countries’ domestic financial systems labored under extensive government restraint and were cut off from international influences by official firewalls. Despite these restrictions, which were a legacy of the Great Depression and World War II, international financial crises occurred from time to time. Between 1945 and 1970, however, their effects tended to be localized, with little discernible impact on Wall Street, let alone Main Street.

Over the past twenty-five years or so this has all changed dramatically. Regional financial crises seem to have become more frequent, and the domestic impact of global financial developments has grown — to the alarm of many private citizens, elected officials, and even economists. Further change will result from the December 1997 pact on trade in banking, insurance, and other financial services, signed by more than a hundred countries under the aegis of the World Trade Organization. Why has global financial trading grown at such an explosive pace? Does the powerful global market limit our government in the pursuit of legitimate economic and social objectives? Is there any way to prevent destabilizing disturbances that originate in world asset markets, or to mitigate their effects? Does the cross-border mobility of firms threaten our living standards? What benefits could possibly justify exposing ourselves to these risks? Electronic Payday Loans Online

Definitive answers to these questions remain elusive, but a review of the theoretical functions, history, and genuine policy problems raised by the international capital market offers some perspective on both the considerable advantages it offers and the genuine hazards it poses. This duality of benefits and risks is inescapable in the real world of asymmetric information and imperfect contract enforcement. I shall argue, however, that in confronting the global capital market there is no reason to depart from conventional economic wisdom. The best way to maximize net benefits is to encourage economic integration while attacking concomitant distortions and other unwanted side-effects at, or close to, their sources.