Bank of England — Minouche Shafik: Fixing the global financial safety net – lessons from central banking

The benefits of free trade are now well established. Similarly, economic theory provides compelling arguments for the potential advantages of integrated global capital markets based on the efficient allocation of resources. But, in practice, cross-border capital flows can be fickle and flighty, with destructive effects on the real economy. It is fair to say that the case for the free movement of capital took something of a knock following the string of crises since the early 1990s in Latin America, East Asia, Russia and most recently in Europe. As a result, a variety of means to insure against sharp changes in capital flows have developed at domestic, regional and international levels which are collectively referred to as the “global financial safety net”.3 The cross border impact of the global financial crisis has forced a fundamental rethink about whether this global financial safety net is functioning as efficiently as it should, and whether more needs to be done to contain the systemic spillovers from sovereign crises.….

Today, given my current role overseeing the Bank of England’s market functions, as well as my previous experience at the IMF dealing with the crisis in the Eurozone and in the wake of the Arab Spring, I would like to offer some thoughts on how lessons from reform to the domestic financial safety net for banks could be applied to sovereigns, to the IMF as international lender of last resort and to the global financial safety net more broadly. I will argue that we need a stronger and more resilient global financial safety net to reduce the systemic implications of sovereign crises and allow nations to cope with shocks in order to reap the economic rewards of an integrated system of trade and finance. I will also argue that the effectiveness of that safety net would be enhanced by implementing policies that strengthen surveillance and the stress testing of countries balance sheets, and better mechanisms for resolving sovereign debt crises when they occur. These are of course my personal thoughts rather than an official UK position, but I offer them in the spirit of encouraging debate.…

Another indication that capitalism gives rise to internal contradictions that only governments have the authority and capacity to address. That economic liberalism results in spontaneous natural order that optimizes distribution of scarce resource most efficiently and effectively as possible is a crock.

Minouche Shafik: Fixing the global financial safety net – lessons from central banking

Speech by Ms Minouche Shafik, Deputy Governor for Markets and Banking of the Bank of England, at the David Hume Institute, Edinburgh, 22 September 2015.