International finance, pointed out R. Z. Aliber, is a game with two sets of players: the politicians and bureaucrats in national governments and the presidents and treasurers of businesses of all sizes. 1 The government officials want to win elections and secure a niche in history. The corporate presidents and treasurers want to profit ( or at least avoid losses) from the changes in exchange rates that are inevitable in a world with more than 200 national currencies and over a million firms. With so many players in the international financial game, the number of possible combinations is astronomical.
When a system that is inherently so complex undergoes frequent and drastic changes, its behavior becomes unpredictable. As Irwin D. Sandberg, Senior Vice President of the Federal Reserve Bank of New York, put it, "The pace of innovation is so rapid and new products so complex that I have some concern whether the institutions themselves can manage it, much less the regulators, who always lag behind. These days, hardly anybody is safe from instant disasters." 2
Indeed, the very elements of an integrated, worldwide financial markethuge sums of free-moving capital, high-speed communications systems, complicated new financial instruments, the opening of national markets to outside competitors-have made the system more vulnerable to unexpected shocks. Hans Baer, Chief Executive of Bank Julius Baer & Co. in Zurich, Switzerland, maintains that new financial instruments "aren't understood by central bankers, bank management or the people who trade them. We create things and then watch them with fascination. This is like being on the outer fringes of hightech; you do it till it blows." 3 Nobody knows how many new financial instruments are created every day, and nobody knows which of those created are "sound international trade facilitators" and which are international "junk stock and bonds."
How big is the international financial market? Two U.S. payments systemsone operated by the Federal Reserve Bank and the other by commercial banks-together clear an average of $1.3 trillion in transactions daily, up from $175 billion in 1974. Advances in telecommunications have "obliterated all traditional concepts of time, space, geography and transaction capacity," noted Robert R. Bench, U.S. Deputy Comptroller of the Currency. 4
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