Friday, June 5, 2009

Saving us From Ourselves

. Friday, June 5, 2009

At the IMF's request, Barry Eichengreen has produced 8 "out of the box" proposals to reform the international financial system (full paper).


  • 1) Replenish the IMF’s bankroll annually. [Governments] should fork over enough money every year to assure that the IMF’s lending kitty grows around 3% annually after accounting for inflation, so it has plenty of money to fight global downturns.
  • 2) IMF taxes on surplus countries. Countries that run steep current account surpluses or build vast currency reserves — and thus throw the international financial system out of whack — would face an IMF-imposed tax.
  • 3) Make SDRs a global currency. Mr. Eichengreen would ...commercialize SDRs to turn them “into a true international currency.”
  • 4) Global Glass-Steagall Act. The financial crisis was caused, in part, by regulated banks taking risky flyers on new financial instruments. Why not reimpose the Glass-Steagall Act, which separated commercial banking from investment banking — but make the rule global.
  • 5) Global risk insurance. Require banks to purchase catastrophic risk insurance. They would do this by issuing financial catastrophic bonds — Cat bonds –which would make large payouts in the event of systemic failures.
  • 6) International bankruptcy court. “International Court of Insolvency” comparable to the International Court of Justice. The bankruptcy court would be a “universal venue where cross-border insolvencies of internationally active financial institutions can be administered.”
  • 7) World Financial Organization. The WFO would establish principles of financial supervision and resolves cases where countries violate the principles.
  • 8) Remake the IMF. Scrap the 24-member executive board, which acts slowly and ineffectively, and give IMF management a much freer hand “in the manner of a monetary policy committee of a central bank,” Mr. Eichengreen suggests. Management would be overseen by a higher level council that meets periodically and could fire top officials.
I have great respect for Professor Eichengreen. Yet, I struggle to see which of these proposals has even a remote chance of adoption. Full adoption would mean: governments create independent international organizations (6, 7, and 8) capable of intervening in national economic policy (8 and 3) and taxing national governments (2), create a mechanism whereby they automatically fund this international body annually (1), and then cede almost all regulatory authority to these bodies (4 and 5).

How many governments are likely to buy into this?

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