Originally published on the CGS blog on October 8, 2008.
With the crumbling of the nation’s largest banks, national governments like Iceland on the edge of bankruptcy, and the recent failure of the trans-national interest rate lowering scheme, the governments of the world are in a panicked frenzy to stop the bleeding.
Each nation is conjuring up its own go-it-alone nationalistic response plan, but the leaders of the world are failing to recognize one of the most fundamental and obvious facts about the crisis: its global dimension. The world economic system is integrated. What happens in one country is likely to affect the rest of the world. To address this global problem – many have called for a coordinated international response.
French President Nicolas Sarkozy articulated the need for “a wholesale reform of the global financial system, urging major economic powers to meet before the end of the year to examine the lessons of the crisis.”
Britain, France, Germany and Italy have all demanded an international conference “as soon as possible” to consider comprehensive reforms of the global finance system.
John Lipsky, First Deputy Managing Director of the International Monetary Fund, called for “globally coherent and consistent policy interventions.” In fact, the IMF is among the first and only institutions to really bring an array of policy prescriptions to the table. Among their proposed suggestions is a way to render the deleveraging process more orderly by concentrating on “insufficient capital, falling and uncertain asset valuations, and dysfunctional funding markets.” The Fund also suggested that governments can “offer the use of public balance sheets, or allow more flexible use of mark-to-market accounting rules to reduce pressure on valuations.” The private sector can also take action, the IMF said, urging financial firms to “shore up balance sheets with new capital, strengthen risk-management practices, improve valuation techniques and create better clearing and settlement mechanisms for over-the-counter securities.” But these suggestions are vague at best.
Others like C. Fred Bergsten, director of the Peterson Institute for International Economics, have suggested everything from a global stimulus program, to a coordination of the national efforts to recapitalize tottering banking systems, to the national expansion of coverage of their deposit insurance programs to discourage bank runs.
Across the world, the financial movers, shakers and policy-makers all seem to be calling for the same thing: a unified global response. They all talk about reforming existing global financial institutions and developing policy responses which reflect the interdependence of the world economy, but few seem either willing or able to make these global policy suggestions.
What we need most now is not just a convening of international leaders, but a plethora of real nitty-gritty details to work with. If we’re ever to have a global solution, we will need specific global ideas for both institutional reform and policy. Let’s get to work.
