how did this second colossal muddle arise? in the aftermath of the great depression we redesigned the machine so that we did understand it, well enough at any rate to avoid big disasters. banks, the piece of the system that malfunctioned so badly in the 1930s, were placed under tight regulation and supported by a strong safety net. meanwhile, international movements of capital, which played a disruptive role in the 1930s were also limited [ due to the regulations ]. the financial system became a little boring but much safer. then things got interesting and dangerous again. growing international capital flows set the stage for devastating currency crises in the 1990 of the 20th century, and for a globalized financial crisis in 2008. the growth of the shadow banking system, without any corresponding extension of regulation, set the stage for latter - day bank runs on a massive scale. what we're going to have to do, clearly, is relearn the lessons our grandfathers were taught by the great depression. i won't try to lay out the details of a new regulatory regime, but the basic principle should be clear : anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks. since the 1930s commercial banks have been required to have adequate capital, hold reserves of liquid assets, that can be quickly converted into cash, and limit the types of investments they make, all in return for federal guarantees when things go wrong. now that we've seen a wide range of non - bank institutions create what amounts to a banking crisis, comparable regulation has to be extended to a much larger part of the system. we're also going to have to think hard about how to deal with financial globalization. " at this moment, the activities and the approach of the international financial institutions, governments and central banks are similar to such understanding of the response to the crisis. financial regulations are being changed intensively. they are directed toward broadening of the perimeter of the regulations ( toward everything that could produce significant risks for the financial system ), but also toward declining of its procyclical character. in that respect, activities have already been undertaken towards actual solutions for : - increasing the quality, consistence and transparency of the core capital. largest portion of the core capital must be consisted of common shares and retained earnings. appropriate principles will be prepared for the legal entities who are

from trade in financial assets, are prone to volatilities derived from information asymmetries, herd behaviour, panics etc., which may be far divested from the fundamental macroeconomic strengths. i resist the temptation to tangentially sail into a discussion on the vagaries of the financial markets. suffice to quote keynes ’ s famous words : “ when capital development of a country becomes a by - product of the activities of a casino, the job is likely to be ill done. ” c. as a consequence of impossible trinity, an open capital account demands a complete ‘ let go ’ of the exchange rate management and volatile capital flows and can therefore lead to extreme volatility in the exchange rate and large departures from its equilibrium value. views of bretton woods institutions 10. it is also important to note the significant shift in the view of bretton woods institutions on capital account liberalisation. imf, which was a strong votary of capital account liberalisation in the pre global financial crisis period, adopted a new institutional view in december 2012 on capital account liberalisation and the management of capital flows. the institutional view recognises that full capital account liberalisation may not be an appropriate goal for all countries at all times, and that under certain circumstances capital flow management measures can have a place in the macroeconomic policy toolkit. it has done much to change the public image of the fund as a doctrinaire proponent of free capital mobility. the fund thus now endorses, though in a limited way, the perspective of many emerging and developing countries. the imf now recognises that capital flows carry risks, and that the liberalisation of capital flows before nations reach a certain threshold of financial and institutional development can accentuate those risks. it also acknowledges that under certain circumstances, cross - border capital flows should be regulated to avoid the worst effects of capital flow surges and sudden stops. it further says that nations that are the source of excessive capital flows should pay more attention to the potentially negative spillover effects of their macroeconomic policies. finally, the imf notes that its new view on capital flow management may be at odds with other international commitments, such as in trade and investment treaties that restrict the ability to regulate cross - border finance. the world bank has also advocated the use of capital control measures as a last resort to help mitigate a financial crisis and stabilise macroeconomic developments. 11. it may be contextual to recall that when the