would in a sense institutionalize the role of a hegemon with ?a creation of a common
currency for all of the industrial democracies? and ?a joint Bank of Issue to determine
monetary [and financial] policies? (Cooper, 1984:166). This policy proposal endorses the
adoption of an global financial institution managing the operation of coordinated
supervision.
Experience shows us that coordinated supervision is not possible in international
financial markets. For instance, the Basel Concordant was never able to reach
organizational level to properly respond to a crisis. Additionally, ?the BCCI affair
demonstrated the limitations of international bank supervision when confronted by
unscrupulous operators intent on exploiting the gaps in national bank supervisory systems?
(Herring and Litan, 1995:105).
Proponents of re-creating a Bretton Woods-type system are unaware of the lessons
to be learned from that period. The theoretical brethren of hegemonic stability advocates,
proponents of this policy seek too place ?the direction of world monetary policy in the
hands of a single country? or institution that would have ?great influence over the
economic destiny of others? (Williamson, 1977:37). As seen under the Bretton Woods
system the ?destiny? of others was in the hands of a country that was unable to maintain
stability. It is yet to be demonstrated how an institutional framework would sidestep the
same faultlines and management problems experienced by the United States under the
Bretton Woods regime.
The organizational barriers to creating such cooperation and coordination would
be insurmountable. Secondly, whose view would most likely be presented in the
supranational forum? Experience in international organizations shows us that it will
probably be the powerful, industrialized nations. The voice and needs of the less
developed countries is likely to be marginalized and situations such as the Latin American
debt crisis would continue to occur.
When looking at the progress of the European Monetary Union we see that the
completion of a single market is far too radical for today?s international financial climate.
Just as ?the costs of qualifying for the EMU has become too high? it becomes ?unrealistic
to hope that the major industrial countries can make comparable strides toward political
[much less financial] unification in our lifetime? (Eichengreen and Tobin, 1995:170).
Ideally, the best policy for stemming financial instability and spillover effects would
be one that extinguishes the problem at its roots. If deregulation in itself causes instability
in financial markets, then regulation would be appealing. ?Even when the benefits of
financial deregulation are apparent, there is a role for regulatory policy? that would ?leave
the world economy less vulnerable to financial collapse? (Eichengreen and Portes,
1987:51). . If we also hold true the conclusion that the best explanation for financial
instability is speculation, then a global securities transaction tax such as the one proposed
by Tobin would be optimal. The discouragement of short term speculative excursions and
the endorsement of long-term investment will eliminate the problem of volatility based on
speculative attacks that so often stray from market ?fundamentals.? Critics are quite
correct when they argue that the tax could induce financial arbitrage and substitution.
However this problem would be solved as long as the tax was globally adopted.
Secondly, the tax would be applied to goods, services, and financial instruments that had
few or no substitutes. The view that the creation of new government revenues is
overestimated and that Third World countries would carry the financial burden is nullified
when we see that ?a .5 percent tax on exchange transaction would augment government
revenues globally by as much as $300 to $400 billion per anum? and ?devoting merely
10-20 percent of that revenue to a revolving fund for long-term lending to Third World
countries would be a healthy substitute for the hot money on which some have become
disastrously overdependent? (McCallum, 1995:16).
The recognition and ceasing of financial instability and its global transmission is
becoming more and more universally endorsed. To decide on a prudent and practical
policy will prove to be a major hurdle of international financial leaders around the world.
However, if we look closely, we will find the locus of instability in financial markets to be
deregulation and speculative attacks. Government and central bankers can no longer
adopt an attitude of ?benign neglect? toward international financial instability as it
becomes increasingly apparent that there are far reaching consequences on real sectors.
We can see that there is one policy that supersedes the rest. If the world financial system
hopes to curb these real sector ramifications of speculative attacks and financial
liberalization, then it becomes indisputable that the STT is an idea whose time has come.
Richard N. Cooper, ?A Monetary System for the Future? Foreign Affairs Fall, 1984.
Barry Eichengreen and Richard Portes, ?The Anatomy of Financial Crisis,? in Richard
Portes and Alexander Swoboda, Threats to International Financial Stability,
(Cambridege University Press, 1987).
Barry Eichengreen, James Tobin and Charles Wyplosz, ?Two Cases for Sand in the Whells
of International Finance? Economic Journal, 1995.
Jacob Frenkel, ?The International Monetary System: Should It Be Reformed? in Philip
King, editor, International Economics and International Economic Policy
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Ilene Grabel, ?Crossing Borders: A Case for Cooperation in International Financial
Markets,? in Gerald Epstein, Julie Graham, Jessica Nembard (eds.), Creating a
New World Economy: Forces of Change and Plans of Action (Temple University
Press, 1993).
Charles Hakkio, ?Should we Throw Sand in the Gears of Financial Markets?? Federal
Reserve Bank of Kansas City Economic Review, 1994.
Richard Herring and Robert Litan, Financial Regulation in the Global Economy
(Brookings Institution, 1995).
Ethan Kapstein, ?Shockproof: The End of Financial Crisis? Foreign Affairs,
January/February 1996.
Charles P. Kindleberger, The World in Depression (London: Penguin 1973).
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Risk of Economic Crisis (Chicago: University of Chicago Press, 1991).
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1, 1995.
James Tobin, ?A proposal for international monetary reform? Eastern Economic Journal
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1977)
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