Lenders of Last Resort in a

Globalized World
Maurice Obstfeld

Presentation at the Central Bank of Argentina Money

and Banking Conference
August 31, 2009
 Main Themes
• Global economic financial integration
implies we should take a globally systemic
perspective on financial stability.
• For industrial countries national LLRs will
persist – even though this is not first best.
• Emerging world is becoming coequal.
• There is a role for IMF, eventually possibly
extending to industrial countries.
Emerging markets have gained importance in world
output …

Figure 1: Country-group percentage shares in world GDP

70

60

50

40

30

20

10

0
0

8
8

0
19

19

19

19

19

19

19

19

19

19

20

20

20

20

20
Source: IMF, WEO database, April 2009. GDP measured at purchasing pow er parity.

Advanced countries Emerging and developing countries

 …and in world finance…

Figure 2: Emerging and developing-country asset purchases in

advanced countries, as a percentage of advanced-country GDP
6

0
2001 2002 2003 2004 2005 2006 2007 2008
Source: IMF, W EO , table B18, A pril 2009.

Res erve acquis itions (net) Nonres erve as s et acquis itions (net)
 ….as a result of deregulation in emerging…

Figure 3: Index of financial restriction: Emerging markets

3.00

2.80

2.60

2.40

2.20

2.00

1.80

1.60

1.40

1.20

1.00
Jan-73

Jan-75

Jan-77

Jan-79

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05
Source: Kaminsky and Schmukler (2008).

Capital account Domestic financial sector Stock market

 …and mature economies.

Figure 4: Index of financial restriction: Mature economies

3.00

2.80
2.60

2.40

2.20

2.00

1.80

1.60

1.40

1.20

1.00
Jan-73

Jan-75

Jan-77

Jan-79

Jan-81

Jan-83

Jan-85

Jan-87

Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05
Source: Kaminsky and Schmukler (2008).
Capital account Domestic financial sector Stock market
 The Global Context for LLRs
• In our world economy there are multiple
LLRs corresponding to multiple
sovereignties.
• But currency mismatches may require
cross-border interventions.
• Greater scope for international contagion.
• Problems: insolvency, regulation.
 The Recent Experience
• Fed dollar swap lines, in some cases
unlimited, extended to central banks.
• Fed has acted a global LLR in dollars.
• Others too, on smaller scale.
• IMF has also been more active.
• Responses to global deleveraging.
 Deleveraging: U.S. Case
Figure 5: U.S. external financial flows through 2009:I
800000

600000
Millions of US dollars

400000

200000

-200000

-400000

-600000
1999:III

2000:III

2001:III

2002:III

2003:III

2004:III

2005:III

2006:III

2007:III

2008:III
1999:I

2000:I

2001:I

2002:I

2003:I

2004:I

2005:I

2006:I

2007:I

2008:I

2009:I
Source: U.S. Department of Commerce, Bureau of Economic Analysis, seasonally adjusted
quarterly data

Foreign private net purchases of US assets

U.S. private net sales of foreign assets
U.S. government net sales of foreign assets (mainly Fed central bank swaps starting 2008)
 Global Dollar Shortage
• European banks invested heavily in dollar assets
in 2003-07.
• Often AAA rated structured products that reduced
Basel II required capital.
• Short-term dollar funding for these positions and
FX swaps became more difficult.
• Role for Fed dollar liquidity channeled through
other central banks.
• Fed has subcontracted out LLR functions.
 A Systemic View of the World
• Investor runs such as Bear Stearns, Lehman
– also have afflicted emerging markets.
• Systemic view stresses fallacy of
composition.
• EMs can self-insure through reserves.
• What happens when they withdraw these
during a global panic?
 Inside vs. Outside Liquidity
• Reserves provide inside but not outside
liquidity.
• Holmstrom-Tirole provide some theory.
• May need outside when there is insufficient
supply, or when existing supply
misallocated.
• Central banks provide own-currency outside
liquidity.
 First-Best Solution
• Global institution(s) to address:

-- liquidity shortages/crisis management

-- supervision/regulation
-- fiscal support for restructuring
 What Is Feasible at Present?
• Episodic central bank arrangements,
perhaps formalized, for industrial countries.
• For emerging markets, and some more
advanced, enhanced role for IMF through:
-- more resources
-- more flexibility (FCL a step)
-- perhaps access to more outside liquidity
through central bank credit lines
 Problems for IMF
• Political legitimacy, neutrality? More rules,
transparency.
• Mechanisms to handle national insolvency?
• A huge problem: moral hazard.
-- in the financial sphere, great global
regulatory cooperation is needed
-- what about other national policies?
-- are some countries too big to fail?
 The Future
• Can economic globalization proceed too far
ahead of political globalization?
• We need much more international cooperation
in the supervisory sphere – perhaps binding
rules.
• Given that we can limit moral hazard, the IMF
could evolve into a true global LLR, drawing
on national central bank credit lines.
• World central bank, world currency? Might
create more problems than it solves.