Financial markets regulators have had a big problem: the globalization of finance means that regulation in one country can be sidestepped by financiers operating in countries that don’t have those regulations.  For example, ban currency speculation in South Korea, and one can speculate on the Yen-Won exchange rate from one’s desk in Moscow.

Turkish-American economist Dani Rodrik has long advocated for capital controls as a way to prevent financiers’ circumvention of regulators’ intent.  Put more simply, if the flow of capital into and out of a country were controlled, speculative excesses and the consequent volatility in labor markets would not affect so many countries:

One justification for capital controls is to prevent inflows of hot money from boosting the value of the home currency excessively, thereby undermining competitiveness. Another is to reduce vulnerability to sudden changes in financial-market sentiment, which can wreak havoc with domestic growth and employment. To its credit, the IMF not only acknowledges this, but it also provides evidence that developing countries with capital controls were hit less badly by the fallout from the sub-prime mortgage meltdown.

Of course, the obvious response here is that regulators may not get it right, or capital controls may have unintended consequences, such as lower economic growth and dynamism. Rodrik concedes there are problems with the proposal:

We currently don’t know much about designing capital-control regimes. The taboo that has attached to capital controls has discouraged practical, policy-oriented work that would help governments to manage capital flows directly. There is some empirical research on the consequences of capital controls in countries such as Chile, Colombia, and Malaysia, but very little systematic research on the appropriate menu of options. The IMF can help to fill the gap.

Emerging markets have resorted to a variety of instruments to limit private-sector borrowing abroad: taxes, unremunerated reserve requirements, quantitative restrictions, and verbal persuasion. In view of the sophisticated nature of financial markets, the devil is often in the details – and what works in one setting is unlikely to work well in others.

Rodrik’s bottom line here seems to be that regulators don’t know much about capital controls and how they work, but capital controls ought to be used because there is no alternative mechanism with which to prevent financial market volatility. Although the idea is gaining steam, this seems a rather thin basis on which to propose new regulation.

Do you think international bodies should sync up on capital control regulations? Let us know in the comments below …

The IMF’s International Financial Statistics show the US holding the lion’s share of global gold reserves:

(Source: Zero Hedge)

Wow. The US is holding a huge hedge against fiat currency. This exhibit doesn’t really say much about their faith in people’s faith in paper (or, the Fed’s ability to manage that paper properly).

This chart also says a few more things:

1) At these levels, the world would have to be clinically insane to accept any move where gold represents a global currency;

2) That pile of rock merely pays off a portion of the US Debts;

3) Like paper, gold is just another derivative (i.e., symbol) of reality which does not reflect true value of value added to society; and,

4) Now I’m sure Cash4Gold is a US corporation.

I would also add that if there is a raging river of inflation waiting to break past bank vault dams, gold prices will fly much higher …

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