Skip to main content

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions

31aaac0046f86fa80bc95904_tb2824.jpg

Engineering Financial Stability

The severity of the global financial crisis that we have seen over the last two years has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence. To do that, we must advance the state of our financial technology.

NEW HAVEN – The severity of the global financial crisis that we have seen over the last two years has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence. To do that, we must advance the state of our financial technology.

In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy – if not the entire global economy – into a tailspin.

This problem is rather technical in nature, as are its solutions. It is a sort of plumbing problem for the banking system, but we need to fix the plumbing by changing the structure of the banking system itself.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/FFU1oxu;
  1. op_dervis1_Mikhail SvetlovGetty Images_PutinXiJinpingshakehands Mikhail Svetlov/Getty Images

    Cronies Everywhere

    Kemal Derviş

    Three recent books demonstrate that there are as many differences between crony-capitalist systems as there are similarities. And while deep-seated corruption is usually associated with autocracies like modern-day Russia, democracies have no reason to assume that they are immune.

    7