Managing Financial Emergencies in an Integrating World

Financial risks as well as opportunities now flow more freely across the borders of all but the poorest countries in the world. But globalizing finance became an observable fact before appropriate political structures were in place to steer it. The basic proposition that robust financial markets both rested on and reinforced the legitimacy of state power was decisively tested during the Great Depression. It is being tested again today. Two outcomes define the spectrum of policy choices in the medium run. One would return us to a version of the post-1945 order characterized by renewed barriers around national markets and strengthened home-country control of tightly regulated financial intermediaries. The second would entail the grand irony of states transcending one of the last bastions of sovereignty as traditionally conceived, namely autonomous fiscal authority. During the crises of 2007-2008, there were surprising, if opaque, moves in the latter direction