roger w ferguson, jr : globalisation - evidence and policy implications remarks by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, to the association for financial professionals global corporate treasurers forum, san francisco, california, ( via videoconference ), 12 may 2005. * * * thank you for inviting me to address the association for financial professionals global corporate treasurers forum. given that this is a global forum, i have chosen economic and financial globalization as my topic today. proponents of globalization cite a wider array of goods and services available for consumers, greater market competition and lower prices, new financial instruments for savers, possibilities for greater and more - productive investments, and strengthened market discipline of government policies. all of these benefits could translate into faster economic growth and higher real incomes for most people. opponents point to lost manufacturing jobs in advanced economies and financial crises in emerging - market nations. some have argued that it is better to put sand in the wheels of the world economic and financial system to prevent such apparently undesirable and unstable outcomes. notwithstanding these concerns, i believe that globalization is, on balance, a positive development for the world economy. perhaps more to the point, i think that globalization is here to stay and that further globalization is inevitable. today, i want to review where we are in the process of globalizing product markets and the factors of production - capital and labor. i also want to speculate about some implications of globalization for policymakers. as always, my views are not necessarily shared by my colleagues in the federal reserve system. globalization of financial markets let me begin with capital or financial markets. as financial professionals, most of you have probably experienced changes in your professional lives arising from financial globalization. besides such experiences, statistics, too, imply big changes. for example, cross - border investments are far larger now than they were twenty years ago. from 1984 to 2003, u. s. investment holdings abroad more than tripled after controlling for inflation, while real u. s. gross domestic product did not quite double. foreign investments in the u. s. rose proportionately much more, by almost a factor of six. 1 because of increased market turnover, cross - border transactions have grown even faster than cross - border holdings. in 2002, the gross value of cross - border equity trades was 80 percent of worldwide equity market capitalization, whereas in 1989 cross - border trades equaled only 18 percent of a much smaller

the core activity of the financial industry. a point was reached where the main role of the financial system was no longer to hedge existing economic risks and assist trade within and between countries, but increasingly to create and propagate new risks. to be clear, i do not deny that financial liberalisation and financial innovation over the past two decades have made important contributions to the overall productivity of our economies. for example, the securitisation of assets – the transformation of bilateral loans into tradable credit instruments – had tremendous potential for the diversification and efficient management of economic risk. but securitisation also meant that banks and non - banks were able to sell loans – or place them off - balance sheet – immediately after they had been extended. this weakened lenders ’ incentives to conduct prudent screening and constant monitoring. the resulting decline in underwriting standards and lending oversight fuelled excessive credit growth starting in the second half of the 1990s. at the same time, it created the conditions for its reversal. the credit boom was exacerbated by three multipliers. first, incentives : ill - designed compensation schemes for loan managers and traders reinforced the shortening of their time horizons. second, complexity : increasingly complicated and opaque financial instruments made it difficult for holders of securities to assess the quality of the underlying investments. and third, global macroeconomic imbalances : a chronic shortage of savings in some industrialised economies was made possible by an excess of savings in other parts of the world, a multiplier that was exacerbated during the years immediately preceding the crisis by the sharply rising prices of oil and other commodities. from financial turmoil to financial panic in mid - 2007, suddenly though not unexpectedly, the interactions of perverse incentives, excessive complexity and global imbalances threw the credit boom into reverse. the asset cycle turned, and many of the missing links in the financial chain were exposed. investors suddenly lost confidence. after years of high profits and exceptional risk tolerance, markets became extremely discriminating about financial risk. funding costs for borrowers increased. the spreads on the debt of financial institutions – seen as being clogged with assets of dubious value – widened considerably. uncertainty about the extent of credit write - offs and the future earnings capacity of financial institutions took a heavy toll on the valuation of many revered names. the collapse in mid - september last year of a major financial player, which was directly involved in about 30 large payment and settlement systems worldwide and disposed of a