The International Monetary System: Contagion and Spillovers
The global financial and economic crisis exposed huge flaws and fault lines in the international monetary and economic order. Fragility in advanced-economy financial systems, large imbalances in the global pattern of investment and saving (and so consumption), a ballooning of flighty international capital flows, and badly inadequate crisis-management capabilities — all this left the world economy horribly vulnerable to a turn in the credit cycle.
Lee Kuan Yew School of Public Policy, Singapore
Paul Tucker, Harvard Kennedy School and Harvard Business School
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The global financial and economic crisis exposed huge flaws and fault lines in the monetary and economic order. Fragility in advanced-economy financial systems, large imbalances in the global pattern of investment and saving (and so consumption), a ballooning of flighty international capital flows, and badly inadequate crisis-management capabilities — all this left the world economy horribly vulnerable to a turn in the credit cycle. When the turn came, it was violent, widespread and prolonged. Countries here in Asia were swept up in problems not of your making. With myopic hubris, the West (North America and Europe) had failed to learn lessons for itself from the medicine it had prescribed not so many years before for the Latin American and Asian crises of the 1980s and 90s.
Five years ago, at the London and Pittsburgh Summits, G20 Leaders put in train a large and obviously overdue overhaul of the international economic system that had proved so fatally frail. The official sector set up two programmes. One, entrusted to the Financial Stability Board 1 , was to rewrite the rules of the game for the financial system itself. That enterprise is international insofar as the aim has been to apply a common framework to countries’ regulatory systems — in particular, for banking — so that they cater for internationally active firms and global markets. The other programme was to reform the International Monetary System (IMS) itself, whose flaws had accommodated the unsustainable global macroeconomic imbalances. In the real world, the two sets of problems were linked. The drivers of current account imbalances also led to a compression of global real interest rates, influencing asset values and credit conditions. And when the US subprime bubble burst, contagious infection via banking systems and capital markets spread the damage globally, irrespective of current account positions.
Notwithstanding those linkages, the two reform programmes proceeded largely in parallel universes, and with rather different results. The collective reforms of the financial system have made good progress 2, while the top-down efforts on the IMS struggled. That is partly because G20 officials got stuck on how to codify a regime requiring more symmetric adjustment to cumulative current account deficits. Guess what, the surplus countries didn’t want to play ball. But, separately, reforms to IMF governance and resources also stalled.
My purpose this evening is to suggest that some of the most egregious faultlines in the IMS can, nevertheless, be mitigated by adapting the financial-reform programme to international macro-stability
1 The previous Financial Stability Forum was put on a slightly more formal footing to pursue this work.
2 See Tucker, “Financial reform, stability and central banking”, Brookings 2014a.