Global financial governance: Need for a new approach

The post-pandemic economy is like the Mona Lisa. Each time you look, you see something different. Following chaos in the banking industry, many analysts are now convinced the world economy is heading for a “hard-landing” recession. Few seem to expect a “no-landing” scenario, in which the economy remains untroubled by rising interest rates—a fashionable opinion just weeks ago and one which itself supplanted a common view in late 2022 that a mild recession was certain. When the banking panic struck, no one had the slightest idea what the Federal Reserve would then do with interest rates in March—some investors expected a rate rise, some no change, some a cut—and the next few meetings looked equally unpredictable. Perhaps the world is simply more volatile. In the past year, Europe has seen its biggest land war in seven decades, supply-chain snarl-ups, an energy crisis, and a period of banking turmoil. Each recession teaches us something; global financial development evolves as we manage the various recessions. In this paper, we have found out that the recession of 2007-09 and the 2023 banks run had many things in common; e.g., unemployment rose, there were mass lay-offs and similar trends were there in respect of their effect on productivity. The earlier recession spread globally, but the recent banks run was limited to the US and Credit Suisse banks. The previous recession was caused because of risky mortgages but the current banks run was caused due to liquidity problem faced by the banks which held, the so-called, highly safe but illiquid treasury bonds, which were long-term bonds issued when the inflation was lower and the interest rates were lower but when the Central Bank raised the rates, there were no purchasers to buy those bonds, as at that time government bonds were available at a very discounted rate due to high inflation. This caused liquidity problems in the banks and they were not in a position to pay the money to the depositors who en-masse applied for withdrawal, following a sentiment of distrust in them. Yet there are also deeper, structural changes at play. The first relates to covid-19 disruptions. The world lurched from crashing to soaring growth as lockdowns came and went. This has played havoc with the “seasonal adjustments” common to most economic numbers. In February the Bureau of Labour Statistics changed the factors that it applies to inflation, which makes interpreting monthly rates much more difficult. Annualized core inflation in the final quarter of 2022 “increased” from 3.1% to 4.3%. It is also harder than normal to understand euro-zone inflation. Do not be surprised if the global economy remains sfumato for a while yet.