Finance

-Todays international financial system is private with only marginal official participation. Showdown between government and banks during currency crisis of 1972. ?Smithsonian Agreement ,? allowed greater flexibility in currency values. In the 70?s U.S firms weren?t even loyal to the dollar. Sophisticated speculation playing a major role in international finance. Everyone is trying to cash in on exchange fluctuations ?leads and lags.? (I say why not) Central banks are big losers: their intervention, and inflow of dollars was so large that it was inflationary. Lesson learned is that they cannot control private capital flows. Firms did protect themselves against the anticipated devaluation over a longer term by shifting the currency composition of liquid assets and debts, and by prepaying accounts payable in currencies expected to be devalued. In 1973 we basically exported inflation to Europe. No one is sure how close we came to a financial disaster in the 70?s, but it?s a fact that we were on the edge. *Franklin-Herstatt failure contained. Floating rates survived.

Chapter Four-The Economics and Politics of Global Debt

-In the nineteenth century, private banks helped countries cope with swings in the trade cycle and made emergency loans to keep governments afloat. A reason why bankers disliked the Bretton Woods Conference was that it created a competing public sector institution, the IMF, to provide short-term loans to countries experiencing trade and financial difficulties. The Third World owes the Western banking system over half a trillion dollars. Lost cause thinking we will be paid

back. Global debt crisis had two fundamental causes-importance of Third World countries in global banking revolution of 60?s and 70?s; series of economic shocks that hit the world economy in the 70?s.Richard Weinert lists four main factors that are responsible for the banks? expansionist thrust into the Third World in the 70?s: servicing client needs, defensive expansion to keep clients, earnings growth, and the opportunities offered by Eurocurrency markets. Economic shock of 70?s: inflation, dramatic increase in oil prices, and slowdown in world economic growth (recession on 74-75), soaring interest rates. Deficits so high, need to borrow large sums of money to start paying off. Largest share of Third World debt is to private banks. Finacial system proving to be extremely resilient. Global