ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Transparency Is Not the Answer

Looking ahead of the current meltdown, there are calls for "greater transparency" to improve functioning of the financial markets. But whether this means improved availability of market information or better understanding of complex instruments, in neither case will greater transparency reduce systemic risk in financial markets. Indeed, in some cases greater transparency could make things worse. Regulators must now abandon their belief in the tired trinity of greater transparency, more disclosure and better risk management by firms. Instead they must turn to finding ways to develop a systemic approach to regulation, including pro-cyclical provisioning and system-wide stress testing, and confront the vicious market cycle of rising asset prices accompanied by higher leverage, and the even more vicious cycle running in reverse.

Financial Imbalances in the World Economy

The current account deficit of the US is by far the largest that the world has ever seen, equivalent to about 7 per cent of US national income and nearly 2 per cent of world income. The present situation relies on large capital inflows into the US, but the concentration of investment in the highest-income regions of the world is socially damaging, destabilising and prejudicial to the effective development of resources in the world as a whole. The US deficit can be contained in a less damaging manner only if the rest of the world contains its own surpluses and boosts investment in other regions.
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