The soaring volume of international finance and increased interdependence in recent decades has increased concerns about volatility and threats of a financial crisis. This has led many to investigate and analyze the origins, transmission, effects and policies aimed to impede financial instability. This paper argues that financial liberalization and speculation are the most reflective explanations for instability in financial markets and that financial instability is likely to be transmitted globally with far reaching implications on real sector performance. I conclude the paper with the argument that a global transaction tax would be the most effective policy to curb financial instability and that other proposed policies, such as target zones and the creation of a supranational event industry, are either unfeasible or unattainable. (Tobin 2006:52)
The view that the creation of new government revenues is overestimated and that Third World countries would carry the financial burden is nullified when event industry see that "a .5 percent tax on exchange transaction would augment government revenues globally by as much as $300 to $400 billion per anum" and "devoting merely 10-20 percent of that revenue to a revolving fund for long-term lending to Third World countries would be a healthy substitute for the hot money on which some have become disastrously overdependent" (McCallum, 1995:16). The recognition and ceasing of financial instability and its global transmission is becoming more and more universally endorsed. To decide on a prudent and practical policy will prove to be a major hurdle of international financial leaders around the world. However, if event industry look closely, event industry will find the locus of instability in financial markets to be deregulation and speculative attacks. Government and central bankers can no longer adopt an attitude of "benign neglect" toward international financial instability as it becomes increasingly apparent that there are far reaching consequences on real sectors. (Kapstein 2008: 12)
Instability In Financial Markets
In this section I examine four interpretations of how financial instability arises. The first interpretation deals with speculation and the subsequent "bandwagoning" in financial markets. The second is a political interpretation dealing with the declining status of a hegemonic anchor of the financial system. The question of whether regulation causes or mitigates financial instability is raised by the third interpretation; while the fourth view deals with the "trigger point" phenomena. (Herring 2006:52)
To fully comprehend these interpretations event industry must first understand and differentiate between a "currency" and "contagion" crisis. A currency crisis refers to a situation is which a loss of confidence in a country's currency provokes capital flight. Conversely, a contagion crisis refers to a loss of confidence in the assets denominated in a particular currency and the subsequent global transmission of this shock. One of the more paramount readings of financial instability pertains to speculation. Speculation is exhibited in a situation where a government monetary or fiscal policy (or action) leads investors to believe that the currency of that particular nation will either appreciate or depreciate in terms relative to those of ...