Given this climate of uncertainty, the need for policy initiatives towards both macroeconomic and financial stability becomes extremely urgent. Modern financial markets are organized less to create wealth and employment than to extract rents by buying and selling existing assets, and the discipline that these markets exert on policy makers reinforces the position of existing wealth holders. Instability is a systematic feature of financial markets. A factor that has added to the intensity of financial crises is the rapid increase in the leverage of global finance. This has enhanced its potential to generate exaggerated boom-bust circles by creating destabilizing linkages among various markets and adding to the herd behaviour of investors in lending as well as exiting.
Financial instability is a major reason for slow and erratic growth in the global economy.
Slow growth, greater job insecurity and income inequality associated with financial instability could lead to political backlash, creating conflicts in international economic relations and encouraging ad hoc and irrational restrictions on global economic integration. Since the collapse of the Bretton Woods system increased global capital mobility has been accompanied by an increased frequency of financial crises in both the developed and the developing countries. Experience shows that in developing countries domestic financial crises often translate into currency turmoil, payment difficulties and even external debt crises. Similarly, reversal of external capital flows or attacks on currencies almost invariably threaten domestic financial stability in developing countries. By contrast, currency turmoil in industrailized countries does not usually spill over into domestic financial markets, nor do domestic financial disruptions necessarily lead to currency and payment crises.