Nobel Laureate Warns of Further Financial Crisis

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Last updated at: (Beijing Time) Monday, May 27, 2002

Nobel Laureate Warns of Further Financial Crisis

Nobel economic prize laureate Daniel McFadden said Sunday morning in Beijing that the volatility of current international capital markets virtually guarantees further crises in the future.

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Nobel economic prize laureate Daniel McFadden said Sunday morning in Beijing that the volatility of current international capital markets virtually guarantees further crises in the future.

Addressing the 2002 Annual Forum of the APEC Finance and Development Program (AFDP), the professor of economics from UC Berkeley, in the U.S., said the international capital market today resembles in some respects the U.S. credit market 150 years ago.

The virtually unregulated free flow of capital across borders is fueling innovation and economic growth, but also creating volatility and financial panics that hinder economic development and damage people's lives, said McFadden.

In his speech, titled, "Hot money and cold comfort: global capital and financial crisis in emerging market economies," McFadden said that even the United States, with its current account deficits that are not sustainable indefinitely, runs the risk of contributing to future global financial crises.

In order to reduce the frequency and severity of financial crises, McFadden suggested several measures to be adopted by various economies, including prudent supervision of financial intermediaries and effective institutions to allow the pooling of risks both within and across borders.

He also pointed out that the International Monetary Fund (IMF) should be reformed, and that new institutions designed to help countries manage crises should be considered.

He suggested that the new institutions include international deposit insurance, international prudential supervision of private lenders and crisis resolution institutions, such as global bankruptcy courts.

He said that the IMF policies are too much influenced by the United States government and the interests of the large international banks, and too little influenced by the collective interests of the emerging economies.

"International capital markets currently exhibit some of the adverse consequences of insufficient regulation, and it is in the interest of all nations, both industrialized and emerging, to redress the balance," he said.

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