buona sera grazie good evening ladies and gentlemen thank you very much for being here my name is Ferdinand Oh Giuliano I work for the Financial Times tonight I have a pleasure to introduce Helen R a professor of economics at the London Business School we are both based in London Helen indeed traveled much more than I did she taught in Berkeley and Princeton universities she's a researcher and the center for economic policy and research associate researcher the National Bureau of Economic Research not only that she also won the burnisher prize for the best macro economist younger than 40 in Europe she mainly deals with international finance exchange rates capital flows and macroeconomics it's a great pleasure to introduce her full I think that she does something which is extremely important and I will try to tell you why she is key to the subject of this festival I eat sovereignty in conflict there is something which happened in Italy a which can answer this question is there a sovereignty a conflict of sovereignty in Italy and Alain can expand on that you might well remember that less than two years ago at the end of fall 2011 Italy went to a very critical period of time I had just been hired by the Financial Times in and I was asked to write something about that that was the time when investors had lost a confidence in Italy they were no longer buying government bonds from Italy and we're trying to get rid of them the spread went really caught the headlines of the sole veinticuatro aura stating hurry up something a title which was used after an earthquake we had a new government Silvio Berlusconi resigned and he was replaced by the technical government of mr. Mario Monti for economists that was due to market pressure at work others said that that was a coup d'etat by international powers and the banks the conflict of sovereignty at the heart of this festival was very visible at that time and this is one of the reasons why Alain has been invited here she will speak about international capital flows she will tell us about regulations there are two reasons why I'm also very happy to introduce her because she speaks of a very burning issue we know what happened in Cyprus with a restructuring of the banking systems some failures there was a very lively discussion on the what to do about the liabilities were they to be shared by taxpayers T bond holders or the owners of bank accounts it was decided to take part of that money from current accounts to avoid a capital flight some controls were imposed which is one of the main subjects researched by Helen it's pretty bizarre if we check the rules of the European market capital controls are illegal because we have free movement of capital in the European Union indeed some technical explanations justifications were raised at that time but that became at the century of the public discussion ie capital controls and Helen will expand on that the third reason I'm happy to have her here is because I am an economist I had concluded a PhD in British Univ in an English University and I was very much impressed when I was graduate student because the macroeconomic models I was studying never mentioned banks so we studied macroeconomics without considering the role of large international banks when I started to work as a journalist for the financial fans there were banks were the subject one-third of my writings so there was a major gap between what I had studied as a graduate student and what I was supposed to write in my daily articles Ellen puts the banks the center of macroeconomics and that's very interesting going back to what we said about capital controls for many years we were told that capital controls were outdated the IMF said well capital controls were banned as the Asian Tigers discovered at the end of the 90s with a lot of suffering well they had suffered the consequences of that decision by the IMF China decided to do something different they limit the excess foreign capitals domestically nobody admit nobody admits that the Chinese capital market works very well some people are saying that there are some growing babbles there that there are problems where the Chinese shadow banking however many economists do think that that is the right solution the IMF a few months ago wrote a paper reversing the trend stating that capital controls could be useful to be a useful recipe for governments so the economic debate in universities and large international organizations is being helped on the subjects and which Helen does a lot of research again I'm very happy to have here I'm sure then she will deliver a very very interesting lecture now some house rules she will speak about three quarters of an hour with slides at the end we'll have a discussion a Q&A session we'll ask questions you will have the opportunity to ask questions to her so without further ado the floor - Helen and thank you very much egghead Jamila Ferdinando for this very nice introduction and very thorough introduction Bongiorno I will stop here with the Italian so today we are going to discuss what financial globalisation is doing for us and by doing so I will discuss a lot of a topics but Sadananda as actually outlining is very nice review of a subject the outline of my talk is gonna be relatively straightforward I'm going to first ask so why are policy makers so keen or have policy makers been so keen in opening the borders for capital flows as we know for quite a few years the International Monetary Fund but also many central bankers have been pushing for more cross-border financial integration for more free capital movement so why is that what are the gains that we can expect from free capital flows what are also the costs and what can we say about where we are today with after a massive international financial crisis so can we can we have some kind of first discussion about whether the cost and benefits have played out the way we we thought they would and in the end so should we actually be in favor of more free flow of capital or should we maybe think about ways of monitoring better capital flows so let's go if we if we look at the record so far in terms of financial integration what is very impressive is what you see on this graph which means that if we look at measures of financial integration as recorded here by the International Monetary Fund that is to say our country is fully open to capital movements or not here in this graph if you are fully open to capital movements you're going to be going up so if you are on the on the left hand side here you have 2.5 if you are 2.5 and this blue line is close to 2.5 that's the developed countries it means you are fully open to capital flows so what you see is that developed economies are really open to capital flows these days and there has been a trend upwards meaning there is clearly a very very strong move internationally towards more capital flow openness the red line are the emerging countries and then in order to see hope and they are you are to look at the right scale which may be if you are far away you cannot see it's it's very very small compared to the to the developed countries they are not as open they they start from very low level of capital account openness and then as you go through time as you go towards 2008 2010 they become more open so again where two lines are going upwards it means both emerging markets and developed countries are actually becoming gradually much more open to capital flows for developed countries already very very close to full openness while the emerging markets are still a bit behind but the trend is the same so we have seen quite a lot of financial integration and the initial year here was 1970 wind up 2008 here so just just before the crisis a lot of financial account openness a lot of movements free movement of capital now you may think this is a recent phenomenon maybe maybe it's a new thing maybe it's a new fashion but you know we have been moving towards more financial account openness towards more capital flows but you would be wrong to think that actually not we are undergoing a second wave of financial globalization there was a first wave of financial globalization it was at the end of the 19th century beginning of the 20th century if we go back to the writings of a famous economist Keynes he writes in the economic consequences of a piece in 1920 he looks back at the years before the first world war 1914 and he says you know involves yer you could be inhabitant of London could order by telephone sipping his morning tea in bed for various products of a whole earth in such quantity that he might see fit and reasonably expect their early delivery upon his doorstep he could at the same time and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world and share without exhaustion or even trouble in their prospective fruits and advantages in other words if you lived in in London in 1914 you could invest everywhere so there was a lot already of both goods market integration of international trade and financial market integration at the end of a 19th century beginning of the 20th century so this is not the first time we see financial globalization we are on a kind of second wave of financial globalization in fact when economic historians try to talk about financial globalisation across the whole history we can document what we see is that it's moving what we see that it's moving over time indeed and of a 19th century financial integration goes up and up this is the time of the gold standard this is the time where the UK actually we're Great Britain was at the center of a colonial empire and London was a very powerful financial center so people are investing all over the place that's what Keynes mentioned this period of financial integration comes to an abrupt end with the first world war so you see with a big cliff a big drop during the first world war here and then we have interwar period in which we have relatively little financial integration relatively little international capital flows this is a period of protectionism this is the period where if you are trying to cross the Atlantic you are likely to be shot down if you're a ship so there is really not much trade going on during that period in the during the Second World War and then after the Second World War gradually gradually you see again some more financial integration some more international capital flows but it really accelerates after the 1980s and and more especially after the 1990s and so we are in the second wave of finish of globalization we are going up and up and you see that from the 2000 onwards in some sense we're in uncharted territory we have never been so financially globalized so we are going up and up and up now there are some economic historians who point out but these two waves of financial globalization have been made possible by technological breakthroughs so the first wave at the end of the 19th century was due to inventions such as the Telegraph the steam engine so you could invest faraway because you had the technology to get some information to do so because you could go check out your investments which were far away and the more recent currents have seen incredible amount of developments in the transportation technology and wicked communication technologies and this two breakthrough in technology have been accompanied by these two waves of of globalization now the first the first wave of globalization was a very important one if you if you look at the data in in 1913 for example in 1913 Great Britain had as much as one-third of its total wealth invested overseas so one-third of the total wealth of a country but but but very large in fact this is something that is probably larger than any country today and the numbers were similar for France and Germany so there were a lot of international capital flows and a lot of these flows we are geared towards the new world towards purchasing natural resources in Canada in Australia in Latin America a lot of these flows were invested in railroad constructions involve inverse economies there was foreign direct investment there was equity investment there was dead dead flows now what is maybe pretty remarkable about if I go back now to the recent period of financial globalization is so here you have again we start in 1970 we go until here it's 2004 and what we have here is a measure of all the foreign assets held by domestic people as well as domestic assets held by foreigners so this is a measure of a stock of assets but domestic people hold which are overseas assets and this is also a measure of a stock of domestic assets that foreigners hold so this is really a measure of international asset Holdings okay and this is divided by GDP if we look at industrial countries which have a blue line it is very remarkable to see the acceleration of financial globalization starting about in 1990 around here you see the blue line really curving up right so there is a kind of accelerate in speed of financial globalization started in 1994 emerging markets you see the red line it's going up but there's not this acceleration yet it's not going upwards as quickly as the industrial countries so what happened there were around this time a lot of the remaining restrictions to capital to capital flows a lot of capital controls we're lifted and also there was a lot of financial deregulation so it became a lot easier to trade in many types of assets even developed economies we moved any type of prohibition to to trade in some types of assets so that's led to this very very strong increase in financial globalization around the 1990s so it's pretty remarkable if you look at industrial countries in that time period roughly thirty years you have financial globalization being multiplied by seven that's that's a lot so a very very strong speed of of increasing financial globalization so now if we look at the world map and we ask ok who is financially open in the world when all the red countries the radar you are of a more open you are to financial flows so of a very in the dark red here you are a dark red you are very open to financial flows you see that the usual suspects are very red the United States Europe Australia and then you see some countries which are a little bit less red but still quite red like Brazil and then you see countries which are less open and where you see for example China and indeed China has still a lot of restrictions on financial flows as was mentioned by ferdinando now in Europe of course we have gone for full little mobility in in 1990 so we have a you know some degrees of redness but most of the developed economies as I pointed out before are are fully open or close to so why is that why have policymakers encouraged so much financial openness so this is what I'm going to discuss with you now so there are two main benefits that come with financial openness with financial globalization that have been put forward in particular by economists but also have been taken up by by policymakers so the first one is what we call the increased efficiency in investment and the second one is diversification of risk so surely we will have to do a data check a reality check later on because given the amount of financial flows that we have seen in particulars in the 1990s well some of these benefits should materialize so we will have to look back and and ask ourselves okay so do we see this increase efficiency do we see this with diversification or not so what is this increased efficiency when we think of it that way if you let the capital flow freely freely wherever it wants it will tend to flow to areas of the world to countries in which there is higher return so which are the countries in which you would have higher returns countries in which you have higher rate of productivity growth or where capital is scarce in other words in countries where there is not much capital countries which really need capital in order to grow so if you put capital where you will you will create a lot of growth and countries in which productivity growth is high usually we think of emerging markets as such countries we think of emerging Asia as countries like that low stock of capital capital is scarce so if you invest you get a high return and productivity growth is quick now we also think usually as advanced economies as mature economies which have already a large capital stock therefore a return to capital involves mature economy is not is not that large so in this view of the world if you let capital flow cross-border capital will go from mature economies which have a lot of capital already to emerging markets which need capital and this will be good for everyone why should it be good for everyone because the mature economies get a higher return on their investment and the emerging markets grow quicker we need the capital to grow so they can make good use of it that's the efficiency argument in favor of free capital flow so countries receiving capital should grow faster and mature economies should have a higher rate of return on their investment right so that's an improvement for everyone everyone is better off what's the first theoretical benefits efficiency the second one is very intuitive if we have money we want to invest in different parts of the world because we want to diversify our risk we don't want to put our eggs in the same basket right if if we are going to take risk we are trying to hedge ourselves a little bit so we want to we want to invest a little bit in some countries and in other countries in which the risk is different some countries are doing well why / are doing not so well so we want to diversify risk so that's the rich diversification benefit which is the second theoretical benefit of financial globalisation now all right so we are happy we have to very strongly well-defined theoretical benefits efficiency and risk diversification on these grounds we have done a lot of financial opening we have seen a lot of financial flows so what what is the outcome of that can we find these benefits in the data in the reality and this is where things get a little bit less rosy actually there are lots lots lots now of empirical studies trying to find these benefits in the data and there are researchers who have taken different samples of countries different econometric methods etc and actually it has been very very hard to find robustly any causal evidence between financial opening financial globalization and growth but the efficiency argument or diversification but of volatility in in consumption of volatility in GDP even this has been very very hard to find evidence for any of these two effects in the data so there are some studies which point maybe towards some of these games but usually they say okay it's not uniform these gains materialized only after a certain threshold effect is passed but is to say countries benefit from capital flows only after their institutions good enough if they have bad institutions then doesn't work there might be some evidence for that in some of a literature in some papers but it's it's not totally clear cut but there might be some of a special effect or it is possible that some type of capital flows are better than others it is possible that what we call foreign direct investment which is when you invest a lot in a company in a country if you buy more than percent of a share of a company we call that foreign direct investment okay so if you if you do foreign direct investment maybe there are benefits on the other hand if you look at short-term debt flows short-term capital flows maybe there are no benefits so it is possible that it really depends on the type of capital flows it's not the same if you do FDI if we invest in equity and if we invest in debt or if we are bank credit flows now again the empirical papers are not totally clear yet on this so at a minimum what we need to do as researchers is actually to try to precisely identify the channel through which these benefits is theoretical benefits on which policy is based actually realize themselves if they do if they do it at all and at this stage it's not robust what we find it's not it's not really conclusive so that's a little bit sobering that's a little bit you know is a pointing for sure and note what I have only talked about the benefits so far and not even about the cost so another interesting facts talking about this risk diversification if potential with diversification benefits is the geographical distribution of capital flows so what I have here you see is very nice cloud of blue points which is going downwards what is it well it says that the father you are from a country the less investment you get so here on the vertical axis you have an equity investment from a country into another country and on the oriental axis you have a distance between two countries so what is a little bit troubling when we think about this risk diversification potential benefit is that what investors seem to do in practice is to invest close to home they invest close to what they know they don't diversify their risk by investing far away and this is a bit strange from a point of view of is diversification because usually if we invest close to home well close to home is very similar to home so you don't diversify risk that much so in practice investors don't seem to be ready trying to diversify the risk by investing in economies which are less like their own economy which are less correlated with their own economy that seems to there is a strong bias sometimes we call about we talk about home buyers home buyers or strong geographical buyers but we can see in the data so this was for the potential gains and not here not clear we are there may be but no robust evidence yet the costs the cost of capital flows well I think what is very important about capital flows is that they tend to be really what we call procyclical procyclical means that we accentuate the economic cycles there is a lot of capital flowing into countries when there are booms in boom times you have a lot of capital inflows in bad times capital withdrawals capital goes out by doing that being very you know big big flows in boom times and and very low in bad times what you have is that you really accentuate the economic cycle so the economic cycle becomes even more volatile crises become worse boom times become serious booms really overheating so that's what international capital flows tend to do they are very volatile and we tend to fuel booms and to increase the busts now you can see that a little bit if we look at capital inflows which is the right the red line divided by world GDP services all the world capital inflows from 1975 to again 2002 for - for the nine here you see that this red line is going up and down so that's some volatility but I talked about that's accentuate the cycle you also see that it goes up a lot with financial globalization here is very picking up again so the flows are already moving up and the run-up to the crisis between 2003 and 2008 massive amount of international capital flows really a lot of capital flows flowing into many countries okay try this what happens complete drop very very brutal complete drop of capital flows so this is this volatility this Pacific a little I was I was discussing unfortunately so this is a general characteristic about a lot of a capital flows we talk about capital flows bonanzas there are periods in the world economy in which capital flows tend to be very very big very very large these are players of business periods of where asset prices go up a lot and at some point usually very suddenly you have reversals and at that point everything collapses at the same time so this is with volatility during capital flow bonanzas and we had the capital flow bonanza just before the velocities so 2006 2007 2008 we had capital flow bonanzas with emerging markets as well as we've in Europe into Spain into Ireland into many countries piece of a muster screams but into the periphery quite a bit and this capital flow bonanzas have side effects which can be very damaging so one side effect is that it tends to push the exchange rate up it tends to appreciate the currency okay so if you have a lot of capital flows moving into countries such as Brazil the Brazilian currency is going to appreciate a lot and that is going to put a lot of strain on the Brazilian manufacturing sector so Brazilians going to lose competitiveness this is the concern also of a switch Swiss central bank and of Switzerland lots of capital flows into Switzerland and the Swiss central bank has reacted by blocking the appreciation of a Swiss home because of concern about the manufacturing sector in Europe we have had a version of that so within the euro area we have had massive flows of capital which have fed real estate investment booms and bubbles in real estate markets by doing so this has contributed to diverging competitiveness between the periphery and the core in particular Germany so the propensity of banks to land in particular so this the capital flows which are the most post cyclical tend to be banking flows the credit flows they are the most volatile flows they tend to be the most volatile and the most for cyclical flows why so the banks create credit they buy assets by creating a lot of credits we can buy a lot of assets this push the price of assets up decreases the spreads on all types of assets we have seen all the spreads on all risky assets moving downwards between 2004 2005 2006 2007 all the spreads moving downwards a lot of asset purchases prices are set very very high everything looks good in such a world the balance sheets of all the banks of all financial intermediaries look good therefore the bank's measured risk is low and the banks can expand credit father they can expand even more so this is like a vicious loop if you want a vicious feedback loop with bank credit you create credit you buy assets price go down measured risk is low so you can expend credit more by more assets and this is like a self-reinforcing loop it can go in Reverse of course and and when things can go very very wrong so we have seen a lot of ads with Spain with Ireland with Iceland where a lot of the real estate boom was fuelled by credit flows domestic credit and international flows everything looked good for a while and when it crashed but that's a very pernicious mechanism that can that can take place the base is the mechanism of bubbles so in these countries we've seen massive bubbles and this is in the United States as well of course but the bubbles Envy in Ireland in in Spain any night when were also very very large bubbles in the real estate market of course in economics we have been looking at bubbles for many many centuries one of the most famous bubble is it's not starting yesterday one of the most famous bubble was the Chile bubble in the 17th century Holland where at some point in the 17th century you could you could actually buy tulip bulbs for something like 10 times the annual income of a skilled craftsmen that was a real bubble as well it crushed of course like all bubble do crush is just a matter of time but while the bubble develops everything looks good just like in 2005 2006 2007 in fact we could all create a bubble together and be very happy so for example if I were to to take my Trento ID here and to sign it you see this beautiful piece of paper it now has my signature in it now I am a famous economist but I will be even more famous in five years or in 10 years for sure so in in 10 years it might be worth several millions of euros so it would be awfully smart of you Ferdinando to buy this piece of paper for 100 euro that would be a real bargain so because Hadean Ando is a very smart guy he will do it he will buy it for a 100 euro which I will happily pocket and I'll be very happy he'll be very happy because there will be people among you we will be willing to buy it from him for 500 euros I can see people nodding on before fro here very good so you will find someone you will be able to set it to someone for 500 euros but you would be very happy you've bought it because you'll sell it to someone else for 1000 euros and that person will in turn sell it to someone else for 7000 euros and so on and so on and we might go up if there are some French people in the audience we might go up to something like 50000 euros somewhere and at what point we will all be very very happy because I will have made a hundred euro you will have made probably 200 euro so you will have made the same amount or even more and everyone else will have made a lot of money we've met my beautiful little piece of paper actually we might even have borrowed against this using this as collateral so maybe we will invest in in our housing markets putting this at the collateral and buy and expand our real estate and buy some some more housing so everyone will be very happy and will consume based on this great wealth that is contained in this piece of paper until maybe this piece of papers arrived somehow I don't know to my husband within the room we will say wait a minute here the fundamentals the fundamental price of this piece of paper is really not right maybe it's not because the fundamentals the fact that I will be a famous economist is a wrong statement however my husband may have a lot of these pieces of paper already so this is actually not worth that much maybe and as soon as we start reprising and recalculating thinking maybe this is not worth that much money that much money in fact then when we start realizing that all these similar piece of papers will very much drop in value and the person who is stuck with this piece of paper in hands who is long without assets who owns this will lose a lot of wealth may be paid fifty thousand euros for this and now it's down to ten euros whereas too bad so in the meantime we looked all very happy and credit was maybe you know extended and so on but at the end there is a massive amount of wealth being destroyed so that's that's what happened in the real estate sector in the United States but also involves your area economies and this is what always happens with bubble when this bubble burst the consequences are pretty much devastating within the euro area we had quite a bit of this type of phenomenon going on and in particular in terms of fueling real estate bubbles banks in the core countries such as Germany and France we're playing a key role so here what I have is the investment of German banks in Ireland Portugal Spain and Greece as a percentage of Irish or Greece or Spanish or Portuguese GDP and you see that this amount of credit that was flowing from the from the core countries to a periphery was just enormous so for most country this it's about 50 percent of GDP of the host of the host country in the case of Ireland it went up to two hundred and fifty percent of our GDP at some point so we are talking about massive credit flows fueling was housing bubbles around the world if we look at domestic credit growth between 2003 and 2007 there has been a lot of that so that was the expansion phase the bubbly phase in which everyone was happy for the reasons that we just discussed and here if you are red it means there's a lot of credit growth again so the red countries are countries in which varies a huge amount of credit growth as a percentage of GDP we see that in the UK in Ireland in Iceland in Spain in Portugal we seen quite a little lot of credit growth in France and Italy we are just below that varies quite a bit of credit growth but not as much as in the other countries on the other hand the green countries didn't see as rapid credit growth as the red ones now if we map that into the world map of Bank Rises which is here you'll see that the red countries again are ones in which we saw massive bank rises so if you are very red it means you had a systemic system each Bank Rises where did we have a systemic bank rises in the United States in Spain the UK Ireland Iceland Italy I'm afraid and where did we see somewhat of a bank crisis interesting years where we saw we saw some in Germany so in France we had less severe Bank Rises but that's still one Portugal so you see that varies quite a bit of a correlation between the areas in which we had massive credit growth and in which we saw subsequently financial meltdown okay so we we now need to - say what - we can do about that there is this vicious cycle there is this this credit loop but I I described extension of credit I said price go up bubbles etc and everything was good we extend more credit and we it can all end up in tears so this is ready Vidisha sloop well how do we cut this vicious loop well the first thing that I think we need to to do that we have forgotten to do largely during the the pre-crisis period is to continuously stress test our financial sector so what does stress test mean stress test is to take some assumptions about possible movement in asset prices for example in housing prices for example saying 20% decline in housing prices is possible if there is a 20% decline in housing prices what happens to our financial system we do a stress test we put the financial system under stress and we see what happens if the 20% housing prices decline is not sustainable by the financial system then we have to intervene we should not wait to be sure there is a bubble in the housing market in order to intervene it's too late when we are sure there is the bubble so we need to continuously stress test our financial system and how do we intervene once we see there is a problem well so as was mentioned that Ferdinando capital controls are no longer taboo for many countries in the world the IMF is quite happy for them to use some capital controls when we deal with credit flows we've hot money short-term debt flows so this is something that is back as a policy tool but there is a new policy tool that becomes very important among central bankers these days that is very much discussed and that starts to be used and this is the so-called macro-prudential tools so what are the macro-prudential tools these are tools in order to be prudent in order to avoid crisis that relates to the whole economy that's why they are macro if we think there is a problem potentially with a real estate market we need to intervene using a macro prudential tool such as putting a limit on loan to value ratio for example learn to value ratios can be decreased that means we are not going to learn up to 90% of the value of a house we are going to learn only up to 60% of a value of a house and this is going to be for the whole real estate market of a country this is a macro prudential tool and this is what central bankers currently are discussing about exactly how to impose these things in which context etc we should of course not forget that whenever there is excess borrowing excessive borrowing in one country such as Ireland that means raise excessive lending by other countries potentially such as Germany or France therefore macro-prudential tools should be applied equally in the boring countries and in the book in vir landing countries ok so I'm almost done we've seen the benefits of financial globalisation we've seen because financial motivation there is a father I think problem with financial globalization that is becoming very important or more important or maybe it's more visible now than it was and this is a problem of disappearing wealth the mystery of disappearing wealth in the world if you look at international accounts of countries and you try to see whether they match in other words if a country reports that it's it has equities or debt which is owned by someone else in the world can we find that someone else in the world is there someone else in the world with reporting but it actually owns assets in that country or not so do the data on assets and liabilities match in the world the answer is no so there is a mystery of disappearing wealth of missing wealth is it a big deal yes there is a lot of disappearing wealth it's not a few billion in fact where is a recent paper by zucman who estimates the amount of disappearing wealth in the world economy and its large it's 8% of a global financial wave of households which is held in offshore centre and out of these 8% we have 6% which is totally unrecorded now 6% of global financial wealth is a big number it is not trivial at all the bulk of this disappearing wealth seems to be invested in mutual funds for example in example in countries are examples if you look at the examples mutual funds about 50% of the accounts there which are reported we we cannot find any owner for his accounts we don't know who owns 50% of a mutual funds in the exam world if we look at Iran it's about 70% of the accounts that we we don't know where they come from they are there but nobody is owning them apparently so we are talking here about potentially big big numbers here is some for example evidence data evidence on missing wealth invested in equity in billion of US dollar and here are the countries in which is missing equity well-filled invested so a lot of it is in looks on bond in became an island it's going to be Ireland the United States Witsel and Japan and other countries you see the numbers on the vertical axis we are talking 3.5 here 3,500 billion or more so this is and this is only inequity so this is not trivial at all now of course it is reasonable to believe that a lot of is unrecorded transactions have to do with tax evasion of we cannot prove it but it seems a reasonable hypothesis so conclusions what is actually financial globalization doing for us well in the states of the empirical literature and the theoretical literature and international finance so far I think the answer has to be the way it has been practiced so far not much thank you about 45 minutes okay but learn English you're a perfect little yellow book on halong Queen I speak English so here's the headsets in English I have two questions for you on the back of of your talk and the first one is in a book related to your final slides the first one is about the eurozone and as we've seen there is one of the cub areas of the world where at the moment International Finance has been most disruptive before it was Asia Latin America away from us now it's it's very very much here and part very much in the south of Europe is of course is Ireland as well so I would like you to elaborate a bit I know it's a long and complicated question but what do you think the eurozone should do in particular in order to limit first of all in order to deal with with the mess which is still with us and secondly how we avoid this type of heavy suits from happening again keeping in mind that we want to preserve international movement of capital within the euro zone because that's one of the definitions some would say of the currency union so that's my first question for you second question is related to your final slide which I thought was very interesting it's a very hot topic at the moment countries are in great stress because their public finances are in stress you're looking for money because you don't you you know you can't borrow as easily many countries find of course I'm talking about in particular countries like Italy or or Spain countries where they have to pay a lot of money to finance their their deficits others are like here so they're under a lot of pressure to find new sources of revenue and one of the things which have exploded is this missing wealth now part of it can be individual tax evaders people like you and me you know have a bank account in Switzerland don't really say where that we have won and managed not to pay much taxes one of the problems is with multinational corporations and in particular companies like Apple or Google or which can locate or Amazon which can locate almost anywhere in the world their headquarters and make it and are very hard to and clearly claim that they will be paying taxes in that particular country at times they manage to find ways to not pay taxes anywhere in the world that's one example it was Apple which was arbitrage in between the the Irish and the US banking system so it's very hard because as soon as you try and block this country somewhere at this company somewhere they just escape somewhere else and clearly there are countries like Luxembourg which don't really want people to very happy with the status quo because maybe they extract 5% of taxes from this company so how do we deal with the multinational corporations problem which i think is part of your missing wealth story thank you very much so the first question about the eurozone what should the eurozone do and in particular if we want to preserve his capital flows within value area the financial integration which we wanted which we had adopted in the 1990s so I think so we had two issues there first of all the issue of excess credit flows that materialized in 2005 2006 to 2007 we're really the excess credit growth and excess credit flows were completely unchecked because they were below the radar screen of the supervisor of e-r v-i-c-b v-i-c-b like most central banks like the Fed like the Bank of England was completely focused on inflation targeting on on getting inflation under control on keeping inflation under control and had no focus at all on financial stability so this huge capital flows that materialized to countries like Spain with massive current account deficits in the order of eight nine percent of GDP which are very large numbers we have seen as actually a proof that financial integration was proceeding as we wanted we wanted free capital mobility we wanted the periphery countries to catch up with the core and we got that it was happening so actually it was business massive flows which in the end fueled V realistic bubbles were seen as a positive and the financial stability threat was not seen at all so I think the first thing to do look going forward is to put back financial stability at the center of the concerns of central banks or whoever is the macro Prudential Authority with in charge of financial stability it is possible to keep a financially integrated area and to avoid this excessive credit growth one just should monitor the amount of credit growth one should monitor the situation in the real estate markets this is why I invested so much on stress testing this is something that has to become you know much more standard and but much more continuous and one has to use these new tools in order if necessary to decrease credit growth in order to control financial stability in the different countries of all even the different regions of the euro area so one can use you know tools for an overheating real estate market in Spain while maybe the real estate market is not however heating in Germany fine so you use a macro prudential tools in Spain but not a cell in Germany so you can modulate that so you can keep the financial integrated framework differentiate the macro-prudential tools across across markets so that's the first thing that really needs to become kind of standard now what should the eurozone do more generally was your was your question so there I think as we all know we are in a we have a deep problem between the interaction between the banking system in the you area and the sovereigns the banks in the euro area are far too big in many countries for fiscal capacity of states but is to say when the banking system goes down the drain because of a real estate bubble like in Ireland like in Spain the banking system brings down the sovereign as well the Irish state was perfectly solvent in 2007 there was no problem at all real public finances in Ireland nor in Spain but the banking system being so large in Spain and in Ireland it really brought down the public finances its bankrupted the states in both countries conversely in Greece the sovereign was not solvent and when a sovereign is not solvent usually the banks go bankrupt because the banks are very very very exposed to the risk of a sovereign so we have this again very bad loop is very bad interaction between the sovereign and the banks in value Aria the only way to break that loop is to implement finally the banking union that was proposed in July 2012 but that is now being implemented only by little steps and very reluctantly it seems this is the only way we can actually in my view have a euro survive the banking crisis are so bad in the euro area because of the oversized banks but if we don't take this risk of banking crisis of the table euro will always be in danger of exploding so we have to have a banking union which incorporates for sure so the common supervision that's fine but also a common resolution fund which is what is a bit tricky apparently to to implement as well as eventually also come on the polygon T scheme potentially we've read reinsurance at the national and and when European level so we have to do that in order for the Euro to survive and in order of a financially integrated area to survive that's the first my answer to your first question the second question so definitely the multinational corporation tax is also an issue however the numbers I showed you the six percent missing wealth which is an huge huge amount already was only household wealth so this is not even included so I actually do not know whether multinational wealth missing what would be the amount of it what would be the the total amount of that what all I know is that these numbers are for households so they're already huge right so this this is why also it seems quite plausible that some of these some of this wealth is is indeed rich households avoiding taxes now the multinational corporation rate anecdotal evidence suggests that often the effective tax rates are terribly low so there are different ways of looking at that and one can think may be indeed along the lines that I think now are being discussed in some quarters which is to to associate with the tax of corporations to the markets in which we operate not to you know to let them transfer profits in a jurisdiction of a very low effective tax rate but to actually take into account the geographical distribution of the markets in which those multinational corporation operates so I think again if countries get together and cooperate this is something but but be done and and that would be certainly important in these days where tax revenues are very very scarce mana or search sonoda and república lending group ltd triela Volta a supported directly she netted are there questions from the audience Juana Sarah good evening I have a question I'm not an expert I apologize I hope that the question will be well placed and well formulated it is a question that often comes to my mind I think it is correct to say that the economy is an extension of barter I am a farmer I want to buy meat I go to cattle grower and I make a barter but when something happens in your example you explain that I sign a badge and value is created from nothing and that value can go very high also before the bubble explodes who works for all the money that is generated well if now before the bubble explodes if I had to ask someone to work for that five hundred thousand euros which has been created for nothing well I haven't really understood how the mechanism works if you can explain it Garcia glut see beyond Lucca Lubyanka I am an expert in development policies don't you think that you are too optimistic you made a very beautiful example but I'll make another one in Italy we have the most dangerous volcano in the world a volcano for which we are sure that it will explode but nevertheless there are people who build their houses along the slopes of that volcano and to go back to the economy while despite the crisis despite the fact that new rule has been changed there are people who continue to buy investment funds now I'm afraid that when your husband takes out the 200 badges that he has in the shelf and your signature is not worth anything anymore there will be your colleague who will start to do the same things so my question is don't you think that we should reintroduce those rules that were eliminated by the deregulation process and then given the outcome of free trade or free circulation of capitals then it is not so good and then what about finance shouldn't we try to limit it because nowadays it is eight times bigger than the real economy thanks for being here I found your speech very interesting I have a question about the topping tax there has been a big debate about it do you think that this could discourage bad speculation Thanks thank you very much for your questions so let me start in reverse order the topping tax so tax on financial transactions but is to say each time you are going to buy a financial assets you're going to pay a small amount as a tax that's the principle of Tobin tax and actually something like that has been under discussion in Europe so would that work to discourage space speculation I don't think so so why not because so if you're already doing speculative trading you your excess returns that you you hope from to get from from doing a transaction is going to be vastly superior to the X amount of basis points that are usually contemplated for this type of tax so effectively you will do a trade it's not going to be you know your return will will go down a bit and on top of it actually you may be able to force with these tax on your customer so it is a common thing that you know when a tax is imposed on on a transaction the person was more market power between the seller and and the purchaser will force at least some of the tax on the other party so this tax will be passed through potentially to other people so I don't think such such attacks will work now the the only case where maybe that could you know make a difference to transactions could be in with in the case of something like algorithmic trading so when we are very very many transaction which are done each milliseconds where this type of activity may not be may not be profitable anymore if you do if you put these fees tax but it is the right way to to burn algorithmic trading you could burn it out right for example of a new French banking law bans algorithmic trading right away on on the grounds of financial stability so I don't I'm not I'm not a big fan of these tax for this reason because I don't think it's it's certainly will I don't think it will help from a financial stability side and if it is a tax to raise revenue which you know it's it may be a good purpose as well to have just to have a financial tax to raise revenue but something that is absolutely possible then we are other ways of raising revenues that may be more more effective so we could you know think of more taxes on profit of financial intermediaries we could think of taxes on the size of balance sheet of financial intermediaries of various possibilities there that could do the job probably better all right when was the question about B the houses on on the slope of volcanoes and rolling back the regulation in finance so I I think the first of the message am i was giving so far was indeed but you know we've the benefits for all these free capital movements were not that clear and that we had to control excess credit flows in particular and excess flows when they were too volatile so I was actually arguing in favor of more management of these of these flows via various tools capital controls or macro-prudential tools these are all my tools that enable you to decrease the volatility of these flows and probably to decrease also Versailles so I I would agree with you that the deregulation process in finance has probably gone too far and what is disturbing is that with this massive increase of finance it will be massive increases of size of of banks of size of flows we haven't seen much benefits value added for society that's what I was showing in the data on international capital flows is that we are trying to find those benefits we're trying to measure something that has gone right when both financial flows multiplied and and banks become became very large financial sectors with a very large and so far at least it has been very very hard to find the value added so there is a very big outstanding question here in in finance is where is the value added of all these increased financial flows and this increase financial activity I agree with you it's hard to find now people are always building houses on the slope of volcanoes in fact whenever is a bubble this is why I always bubble that was bubbles with virtue lip-service bubbles in various states at many point in times because when there is a bubble we all like it we all become wealthier and if I become wealthier because of this but you don't become because you don't buy it you look stupid compared to everyone else everyone else is becoming wealthy riding the bubble around you and you are the only one not taking in the capital gains you look stupid so you want to do it but of course at some point the game stops and the people were stuck with this are hurt so you are taking a big amount of risk but there's a lot of pressure for you to take that risk this is also true by the way for financial investors fund managers if we don't ride the bubble while we're competitors by ride the bubble they look stupid and their returns are very low compared to their competitors so they have a lot of peer pressure to ride the bubble as well we find it very hard to beacon trying to take the opposite position the timing is very important and we don't know when the bubble burst this is something which we cannot predict so that is why people ride those things and build houses on volcanoes indeed so the flat money think so it's not yet money per se but that creates bubbles I mean fiat money since we went off Bretton Woods and the gold standards you know we we have had a system with with fiat money and the system actually doesn't bring a catastrophe upon us it was a good thing to get off the gold standard and to get off by tonewoods because the world economy was growing faster than the stock of gold and so we would have had a very deflating Airy economy if we hadn't done that so that money per say is a good innovation bubbles are are different from some of the process of of price or vases it's kind of different from you know working for fiat money here what matters is that the value of this piece of paper deviates from its fundamental value from whatever of this thing may be worth because of our beliefs but we will all be able to make a capital gain while while saying this if I believe that you believe at everyone in the room believe it for a while we keep that thing going and the price diverges from the fundamental price and then it's hop from comes back very brutally and we are and we are caught but this is quite a different things from from fiat money okay and the rule to it trade Amanda said she saw wanna quit Nicole pharmacy yeah thank you I just would like to question your main assumption that capital mobility has increased most of the evidence that you have shown related to an increase in growth flows I assets increasing or liabilities increasing but it would be very interesting to analyze if net flows have increased by which I mean real cap of mobility there is net transfer of resources and second question is what what is the problem with the missing wealth except for lack of the taxation base Thank You citizen or trade Amanda okay Allah informed only a pair of loppers I got Sally boy to the ammo buona sera Sona Reza good evening my name is Alessandro I have a point of curiosity and I have a point of curiosity I repeat I have a point of curiosity and I would like to know your opinion about that very rapidly can we say that with the 2008 crisis there has been the end of an economic system whose main representative is the United States I'm speaking about the market-based system the fall of the Berlin Wall marked the end of the planned Soviet economy and with the crisis of 2008 we saw the collapse of the capitalistic system but countries such as Brazil China and other Latin American countries have adopted controls on flows of capital and they were able to face off the crisis so my question is do you think that we can say that capitalism is dead and so we need to think about a new system and perhaps a Brazil and China have shown the way to us leopar Lotto professor a Cedella they come from you mentioned macro-prudential tools can you please make a practical example of that I'm not an expert in this discipline but by reading newspapers I read that the king of Qatar comes to Milan to build millions of cubic meters in an area of Milan knowing very well that there is a real estate crisis so it will be very difficult for the image to sell them even though there will be the exhibition still there is a very high unemployment in the building sector in Milan and workers are not working so if we implement the controls how can they tolerate that is that fair in terms of monetary stability of a country well isn't there risk to destabilize the stability of a country we can entertain a final question there I would like to know if you can tell us something about the operators I mean you explain the effects of cash flow of capital flow but during the increase of this flow probably there were some companies and subjects that operate in this sector that would have got benefits upon this this flow may you explain us what have been happening in the Gertz thank you Grazia Hellenic you can answer right okay so let me be relatively brief but these are again very good questions first one on measurements of capital mobility growth flows versus net flows so a lot of what I showed you indeed is about growth position that is to say purchases of assets by a country into foreign economies or the opposite which is foreigners buying some domestic assets and these are gross amounts they go in opposite direction so what about the net is a question first of all if you think about which diversification it's about the growth flows it's not about when it flows but irrespective of that if we were to look at the net flows which are the current accounts effectively you do see in the periods from 1990 up to the crisis the widening of a current account deficits of a number of countries at the world level which is indeed the phenomenon that has been called global imbalances if you look in particular the United States current account it has widened tremendously and on the opposite side of us you have a lot of net lenders which have had a lot of current account surpluses and these are China Japan the oil exporting economies so if you look at the net flows as measured by the current account you also see a widening so that's the global imbalance phenomenon so it's also it's also we're missing wealth why is it a problem well I think at the minimum it shows that we have bad international accounts but the minimum it's a statistical problem but I think it's it's much deeper than that I think it's not a big if it's a big deal especially these days with tax evasion business when you know tax revenues are so scarce and it is hard not to think that a big proportion of a six percent of household household wealth is not about tax evasion you see that because there are these very suspicious movements when there are bilateral tax treaties which get signed between Switzerland and some European countries you see that a lot of the flows that you imputed before between France and Switzerland or or Italy and Switzerland or suddenly become flows from the Cayman Islands because there's been a bilateral tax treaty being signed between Switzerland and other countries so this smells like tax evasion in a big part 2008 crisis is at the end of the capitalistic market-based system no in fact if you was in China a few days ago actually if anything China is moving towards more market-based economy but China does have capital controls and this has not you know the policy on capital control so far as as has been relatively positive for China however were trained in China is to gradually again lift the capital controls and this accompanies the development of a financial sector in China so China is not moving away from a market economy is moving more towards a market economy the fact that there has been some capital control in Brazil doesn't mean that the Brazilian economy is not also a market-based economy it is very much a market-based economy capital controls in Brazil where temporary and there are actually some some papers which show that they had some effects in decreasing capital flows other papers which are little bit more skeptical about how effective they have been so capitalism is not the end of capitalism it's let's hope it is the end of badly regulated capitalism let's hope it is the end of disregarding financial stability issues and there's a lot more you know intelligent regulation of financial markets that can be done so let's hope that's that's what is happening instead example of macro prudential tool so here is one a macro financial tool when there is a boom so when the economy is overheating what banking supervisors are able to do with Basel 3 is to increase the capital requirements for the banking system in a country so it's to have an additional capital cushion is to say we have a boom it looks like it could lead to unsustainable situations maybe to bubble what we want is to increase the capital cushions for all the banks in a country you can you can do that that's a macro prudential tool which is supposed to dampen credit growth and to increase lost absorption capacity for banks that's an example butts in butts in bizarre free the katara investment so right now we are in in a depressed economy in Italy so I guess we we wouldn't want to decrease investment in fact we would hope that we want more aggregate demand we want more investments so macro-prudential would not tell you to decrease investment at this point it would if anything you would want more investment it's only when the economy is booming is overheating that you want actually to to impose potentially some controls and to decrease credit growth so you would have want to do to do that in 2006 in Spain you would have wanted to impose additional capital constraints on banks you would have wanted to use micro financial tools in 2006 in Spain you don't want want it now where the situation is is very depressed and what are these operators but that makes a lot of money yes so all these capital flows and a lot of the you know there's a lot of development of financial markets which was also mentioned before over-the-counter market development of derivatives market tremendously big CDs credit default swaps markets all these things have increased exponentially since the 1990s and a lot of financial intermediaries are making money out of that so the VOT see market you have a cotton markets are well known for being quite opaque and you know there is a lot of concentration among operators there well what in fees or on these markets so of course if you so some people are definitely benefiting from all these flows and these people are also usually lobbying against any reforms or any controls of these of these transactions so there is a political economy element and a lobbying element there which is you know we have to take into account when we think about this absolutely then create okay well we can call it date gratzi boy prodigious and thank you for being here good night you