Global Governance: New Players, New Rules Why the 20th-century model needs a makeover

I n the summer of 2007, millions of homeowners in the United States discovered that the terms on their mortgage loans had worsened at the same time that the market values of their homes were declining. The squeeze quickly led to a sharp rise in foreclosures, and many families lost their homes. Within weeks, the turmoil spread to other advanced economies with complex financial systems, where businesses and individuals found that loans were harder to obtain and were unexpectedly expensive. Suddenly, the solvency of major banks and other financial institutions was being questioned. What is surprising about this episode is that most people seem to have thought that advanced financial systems were sophisticated enough to absorb risks and to spread them widely enough to prevent a sudden drying up of liquidity. Bank runs happened in the 1930s. They were not supposed to happen in the 21st century. What is not so surprising is that once the problem began, it spread around the world before any one country could resolve the matter or protect itself from contagion. What began as a banking crisis spilled over into equity markets, destabilizing stock markets in industrial countries and raising fears that emerging markets could also be at risk. The financial turbulence of 2007 illustrates—not for the first time—both the benefits and the risks of financial globalization. The global pooling of money has made it possible for companies in Tanzania, for farmers in Vietnam, for entrepreneurial women in villages in Bangladesh, and for young families in American cities to realize dreams that were beyond the reach of earlier generations. But it also has made them vulnerable to shifts in invisible forces that they cannot be expected to understand, much less influence or control. In this instance, quick responses by major central banks may have isolated the shock before it spread too widely. The episode thus illustrates another important point: in a world of globalized financial markets in which a systemic weakness in one country can affect many other markets, oversight and regulation should be acknowledged as a global responsibility. Of course, the international community needs to grapple with much more than financial governance issues. The removal of barriers to international trade creates new employment opportunities, but it also raises thorny questions about labor standards and other social concerns. The destruction of old-growth hardwood forests to meet a growing world demand imposes environmental Global Governance: New Players, New Rules