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2013 Wis. L. Rev. Online 1 (2013)

handle is hein.journals/wlron1 and id is 1 raw text is: COMMENT ON PROFESSOR SCHWARCZ'S ARTICLE CONTROLLING FINANCIAL CHAOS EMILIOS AVGOULEAS* INTRODUCTION With the devastating impact of the Global Financial Crisis still reverberating around the globe, the Eurozone sinking ever deeper into a sovereign debt and banking crisis, and the developed countries struggling to climb out of the recession trap they have fallen into since 2008, original thinking, like that offered by Professor Steven Schwarcz in his Wisconsin Law Review article' is very welcome and timely. The academic and policy-making communities share an unusually widespread consensus regarding the causes of the Global Financial Crisis. However, views on the right policies that will restore stability to the global financial system tend to differ sharply. Professor Schwarcz proposes a global liquidity mechanism for the wholesale banking sector, since, in his view, most other measures to contain systemic risk in the global financial system are likely to fail. I find the remedy intellectually elegant and with strong theoretical merits. In principle, building a liquidity provider of the kind suggested by Professor Schwarcz, especially if the source of liquidity could be at least partly privatized (as he proposeS2), could go a great deal towards averting unnecessary propagation of systemic risks through a liquidity crunch and thus reduce the scope for bank bailouts, which entail intolerable costs to society and the taxpayer. It is also an effective formula to counter the effects of fat tails, which are based on tiny correlations of seemingly uncorrelated risks and thus probably impossible to predict and guard against. In practice, however, such a proposal would have to overcome very difficult political and practical obstacles. I. ARGUING THE CASE FOR A PRIVATIZED GLOBAL LIQUIDITY SCHEME Professor Schwarcz notes in his article that [rlegulation could protect the financial system in at least three ways: by limiting the triggers * Professor Emilios Avgouleas holds the chair in international banking law and finance at the University of Edinburgh. 1. Steven L. Schwarcz, Controlling Financial Chaos: The Power and Limits of Law, 2012 Wis. L. REV. 815. 2. Id. at 829-30.

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