 Good afternoon. It's a difficult act to follow, but I'll do my best the area Well, we've had Some summaries of the books I Won't labor there are three parts to the book which I think are very very interesting one of them the How the system Doesn't work the second one on how you can manage your capital account better and the third one on the reforms that Jose Antonio proposes and I think it should promote a very interesting academic and policy debate Starting here and now and as he pointed out, it's the book is available Free from the Oxford University Press due to the generosity of wider. So there's absolutely no excuse The There are two graphs in the book There we are there are two graphs in the book which sort of summarise some of what's been said One of which is this the one on the left which indicates the scale of IMF lending which is very very very small in relation to the size of the shocks That we're talking about I mean really is minuscule so I mean the argument about scale and also After the crisis of the 80s the relative scale of IMF lending has been declining steadily so Part in a way of Jose Antonio's argument is not that the IMF should grow, but just it should Recover its previous size or stop drinking as part of the argument the second thing that's been referred to a number of times is the amount of unilateral Self-insurance by countries in accumulating reserves, but of course it's worth pointing out that as a result of the recent crisis Those reserves have been run down particularly by China. So in a sense they've played their role but still reserve levels What these indicate is? self-insurance By individual countries rather than collective insurance Now he makes very bold institutional proposals. He proposes a new global reserve system with SDRs and a currency basket a better G20 macroeconomic coordination including exchange rate target zones, which he didn't mention but Would be returned to sort of managed quasi-fixed exchange rate system better crisis management Which we've discussed Sorry, this isn't my foot It's gone off There we are and a better international governance, which is what Joe was talking about Now part of the process we keep on talking about these external shocks and making broad references to 2008 and so on but I think we have to look at a bit more detail of where these shocks come from and the central argument I'm making is that the private sector dominates in all these flows unless we understand what the private sector is up to and Where these fluctuations come from we have very little chance in trying to cope with them just by public Sector activities So where do they come from well the first point is this is no longer a Bretton Woods world We would like it to be so but it isn't a world where Capital flows are administered by governments as they were Originally after the war they are completely out of the control of governments in that sense and The point I'm making I want to make now is that asset demand is crucial that is the demand by private sector of For emerging market assets is what is driving the market and that this demand goes up and down Due to factors which have got very little to do with the fundamentals in the country's concern and unless we address the question of asset demand What we do at the moment is to address the question of emerging market assets supply That is how much debt they have and so on and how and Extra resources they might or might not have but we don't look at demand fluctuations Which is where I think a lot of the problem comes from I Think you also have to take a balance sheet approach That is we keep on talking about loans and and reserves and so on but everybody's asset is somebody else's liability and vice versa So all these emerging market liabilities are someone else's asset and the key problem is that people trying to sell those assets and In a sense what the fund does or central bank does is buy those assets off the private sector and give the private sector Another asset that it wants and that is the crucial Transaction that takes place. So the key issue is not just Fundamentals Whatever these fundamentals might be but also crucially factors such as contagion uncertainty return on other assets and Changes in risk appetite and inversion from the investor's point of view and it's what determines investor behavior It's what concerns me and I think any form of regulation that's going to work Global regulation on national regulation has to address the directly the issue of investor behavior Just to illustrate the problem these are some graphs from the IMF's global financial stability report. I don't want to Speak about them in great length, but I just want to point out that For example, if we take this one, this is the IMF's own commentary on these fluctuations You've got the Greek crisis Causing a selloff across all emerging markets got an Irish crisis causing another selloff You've got the first ECB expansion causing another wave of selloffs. You've got the temper tantrum again Right, and none of these have got anything to do with most of them China equity selloff again has a effect throughout emerging markets And and then the US presidential election also is a great source of instability in them What I'm getting at is these are not just once in a lifetime events like 97 or 2008 These are continual year by year year by year large fluctuations which are brought about by conditions Completely alien to most emerging markets and again I don't want to dwell on this, but you can see the corresponding changes in inflows into and out of developing countries as a consequence of these various shocks now There's only one equation. I'm sorry about this, but it really is necessary There we are If you put pardon This is just your standard portfolio theory and just is in an optimal portfolio Explains the share of emerging market assets that you have in your portfolio is a function of the returns in the emerging market, but also the returns in Other markets, I mean particularly our home market and other emerging markets But a major factor in this is your degree of risk aversion Right and one of my arguments is that the degree of risk aversion is determined what going on on other US markets US junk bond markets or Political uncertainty and so on and also the degree not only of volatility in the emerging market itself I either fundamentals, but also in the home market the degree of volatility and the Covariance between the volatility in the home market and the emerging markets Right, so a large number of factors that are quite are not fundamentals of Chile or South Africa, but are if you like External factors which generate these these shocks and My suggest my what I want to argue is that the very interesting proposals that we've been hearing about from My three co-panelists don't really address what to do by these factors and how these might be stabilized The consequences are of this Problem, which you are that there's extraordinarily high degree of co-movement of in different regions of the sovereign spreads as you can see that all the regions move together with a some of the more extreme than others due to either the High degree of risk aversion on the one hand all their own idiocyncratic shocks, but they all the different This is the EMBI index, which is the difference between It's a sovereign spread the difference between the return on dollar bonds from Chile and the US Dollar interest rate and you can see that the they do tend to move together So there is a co-movement which I would argue is generated in the markets of the north Right, and this is what really has to be addressed Now again risk aversion moves Radically as well the VIX which is the Chicago market of in risk. It's actually technically the price paid If you like to ensure against fluctuations in the standard was 500 index over the next 30 days But it's the standard measure of risk aversion Now of course that risk aversion should change and change so markedly and so rapidly and so largely Is a real problem for all neoclassical economists because of course Risk aversion is derived from the second derivative of the utility curve and in consequence must be stable because if risk aversion is not stable the entire edifice collapses of utility-based Economic theory, but if as I think we all are here fairly unreconstructed Keynesians that doesn't matter to us too much but it is important to see how Rapidly risk aversion changes and how on a what a large scale, right? And given if risk aversion changes due to changes in the US market then Obviously the if we go back to the formula which I won't do but that suddenly has an enormous impact on the amount of emerging market Assets that you want to hold and that in turn will have a huge effect on these fluctuations So this analysis turns out also to be a sort of undermining of the biblical biblical truths that we were taught in economics 101 So Coming back to that supposing we take this more private sector Balanced sheet or asset demand approach to the issue Which I think is essential if we're going to understand what's going on and thus Look at reform proposals What does this mean for Jose Antonio's proposals in his book? Well, I think firstly it reveals that the private capital foes are Systemically unstable. It's not that they are Unstable in some dreadful crisis period or something. They are unstable on a daily basis. They are Intrinsically unstable. It's not that there's been some terrible shock in 2008 or in 1997 it just became more visible there and The question is how much or how little does the international financial system do to Stabilize these of course it does do something. I mean the one of the things about reserve positions that government that Countries hold is they are also for daily and monthly fluctuations. I mean they not only for law enormous shocks But they I don't think that the current proposal for reserve lending for capital controls and so on which basically acting on the asset supply side Right on the supply of asset emerging market assets are really doing anything to stabilize fluctuations in demand for emerging market assets the Second thing is the present approach basically means that you swap that the IMF or somebody Swaps or stands credit credibly ready to swap the assets that Private sectors don't the private sector doesn't want right and to exchange those for some assets that it does want Which are ultimately backed by the US Treasury I suppose. I mean in the end that is what you're getting And then wait until normal conditions return So in a sense, it's a an ultimate insurance policy But there's no attempt to counter the origins of the shock just to Palliate it and wait for it to go away Now part of the solution clearly lies in G20 macro financial Coordination to reduce the fluctuations on the home or the northern market as Jose Antonio suggests But I find it very difficult to see how this new committee is going to have much authority because as Stephanie pointed out even within the euro zone Can't get their act together. I mean to to to do very much But it does mean that we must have greater concern for externalities. So what could be done? It's no good me just sitting here criticizing and saying that all my colleagues are missing something I have a moral responsibility to say what could be done The first one is I think and this is running Bit in the same direction as Stephanie was is what I would call the resegmentation of the markets That is to say that if particular markets like mortgage markets or emerging market funds and some were segmented in the sense that they weren't just Traded and short-term markets, but were held by particular classes of investors like pension funds or long-term insurance funds And so you could get some stabilization, right? So that you would you you would use the Longer-term demand Part of the market to stabilize particular mark. It's always been true in in in continental Europe Here for example that mortgage markets have been stabilized by making them a legally an asset that must be held by Banks and insurance companies and so on and so forth. So that's what I mean by market segmentation And it's that market segmentation that has been broken down during the financial reforms, right? So the whole the entire market ranging from mortgages To long-term industrial finance and so on has become dominated by the money market and by short-term So a lot of the proposals around like for example, Jose Antonio's other book on Development banks are basically resegmenting the market. That is to say they are creating a separate market For long-term development finance, which is not subject to the short-term Flaturations so I'd argue that part of the answer goes along there, but it must be also combined with Market-making obligations for bond issuers. That's to say that if a developing country issues a bond a Bank in London or New York makes an enormous amount of money out of Floating the issue But they don't actually have any responsibility for making a market anymore in that issue, right? And so there's no liquidity. So one of the reasons why People sell off Argentine bonds is not because they feel Argentine Argentine is going down the Down the plug hole that may be but The they not just that it's because they feel that they can't sell this paper Right that they can't find a buyer for it, right? And they sell it as soon as I can if somebody is making a market in those assets Just as much as central banks make a market in domestic government bonds So domestic bond markets are more stable because you always know you can sell it back to the central bank It makes the market, but we don't have any market makers in emerging market issues So the issue for me is whether for example for example the regional development banks could act as market makers That doesn't make them the lenders It makes them the market maker that they stand ready as a secondary market support to buy and sell the bonds issued by Emerging markets and that would give more stability and liquidity to the market and prevent these enormous fluctuations By the same extension. I think that the lender of last resort function of the IMF or of whatever body that you agree to look at in terms of market liquidity that is not just making loans, but of standing ready to buy and trade in Government issues, right providing the liquidity is exactly what the European Central Bank does, right, but not what the IMF does So that it's making a market and providing liquidity and that reduces the risk to investors Because they know that they can always sell at whatever the current This price is and it may go down tomorrow But it's not they're not going to get stuck in a situation where they can't offload the paper, which is what causes market collapses and I think this would be much more productive than just debt rolloves that are present or balance of payments and payments loans and so on which don't actually tackle this issue at all the third point I think is that when we're looking at Domestic bank regulation that bank regulation must include currency balance sheet mismatches that is to say it's not just about the Balance sheet itself or the risk the major risk to emerging market banks is the currency mismatch and I think that In effect one of the most effective forms of capital controls is actually Strict regulation of currency mismatch in the banking system, right, which is where the problem turns up But I'd also argue and I think some of the Brazilian experience is interesting in this way that banks should be judged also on the Currency mismatch of their major clients In other words that it's no good just shifting the currency mismatch out of the banks Into the corporate sector of Brazil or anywhere else, right? Those banks themselves their regulators or either I don't think it's possible to directly regulate the balance sheets of firms But you can make some progress towards that in the risk model for banks has to include the balance sheets of their major clients So that in effect means you're regulating corporate balance sheets what it means Now I think that sort of approach makes it quite different because then we're talking about affecting private sector behavior Stabilizing private sector behavior rather than always running along with public sector behavior after the attacks and trying to compensate