Project Overview

The Future of the Global Financial System

For over six decades the global financial system has served governments and society exceptionally well. Among the accomplishments to which it has contributed: Japan and Western Europe recovered from the devastation of World War II, many former colonial societies developed into thriving sovereign nations, a fast growing global middle class and a sophisticated transportation and communications infrastructure have developed, and global poverty has been dramatically reduced. 

Indeed, the interlocking framework of central banks, commercial banks, international institutions such as the IMF and World Bank, investors and other participants in capital markets – what we are labeling “The Global Financial System” – has contributed to a level of prosperity far greater than any in history. In fact, the financial system itself has grown so large, so interconnected and so technologically complex that it is not clear that any regulatory structure can harness its destructive excesses. Today, however, this system is under enormous strain. Over the last three decades the world has experienced several financial crises, each more global and more devastating in terms of human lives. In addition, the regulatory framework – nationally and globally – has been shown to have fallen far short of what is required. On top of all that, the fundamental governance of the system is moving from one that has been entirely U.S. and European-dominated to one in which a number of up and coming emerging market economies, China most importantly, are demanding an influential voice in the rules of the game. 

Over the next decade a number of major challenges, many stemming from the response to the 2007-2008 financial crisis, loom especially large. Central banks are in uncharted waters in having lowered interest rates to zero and injected trillions of dollars into their economies, and will at some point have to reverse course, with massive implications for economic and financial policy. Anemic growth and stubbornly high unemployment characterizes the U.S.; economic and political tensions prevail in Europe, which is undergoing its longest recession since World War II; Japan is fighting to emerge from twenty years of stagnation; economic momentum has been slowing in key emerging market nations, including the three biggest and most systemically important ones – China, India and Brazil. On the currency front, we could face the possibility of competitive devaluations. In the regulatory arena, the world is trying to design and implement the largest number of new laws and regulations to constrain financial institutions and trading operations ever seen in history, with no consensus about whether it all amounts to too much, too little or the wrong direction altogether.  Around the world, income gaps within countries are rising to politically and socially dangerous levels. In one way or another, these issues are intertwined with the global financial system.

Identifying these problems is not difficult in a world saturated by news and commentary. But garnering the political will to fashion new policies, and the leadership and managerial skills to implement them – well, that’s a different matter. In the largest sense, the prospects for deep-seated international collaboration are problematic. While the one bright spot, however, has been extraordinary coordination of central banks during the financial crisis of 2007-2008, we should recall that the last major global currency accord was in 1985, the last major global trade negotiation in 1995, and that in other arenas, such as climate change, the international community has failed to get off the starting blocks.

Taking these geopolitical, economic and social factors into account, the website and the panel dealing with The Future of the Global Financial System will look ahead a decade and ask the question “What kind of financial system should be evolving in light of today’s dynamic trends?” A number of discussion issues would follow: What defects of the current system should we be most worried about, can they be fixed, and how? What will the financial system of tomorrow be called on to do that it is not equipped to do today – such as financing trillions of dollars of new infrastructure, or satisfying the needs of the 3 billion-plus emerging global middle class, or creating the means for a globally aging population to have financial security, or dealing with growing income inequality in all capitalist societies? Are the existing institutions and arrangements such as the IMF, the World Bank, and the Financial Stability Board in Switzerland sufficiently flexible and capable of doing what is vitally required – such as rescuing a major global bank that fails without tapping massive amounts of taxpayer funds, or channeling savings into the essential infrastructure the world will need to make the transition to a low carbon age – or are powerful new organizations necessary? What are the respective roles of the public and private sectors, and what changes will be required of each? How should future leaders for the global financial system be educated and trained – what kind of knowledge will they need, what kind of experience, does the proper research and curriculum exist?

The January 10 panel and the interviews on this web site are designed to address these kinds of issues.

Jeffrey E. Garten

Juan Trippe Professor in the Practice of International Trade, Finance, and Business
Yale School of Management