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What the G20 should do on November 15th to fix the financial system

This column introduces a collection of essays by leading economists from around the world on what the G20 leaders should do this weekend. Four priorities are identified: nations should act quickly to strengthen and coordinate their firefighting responses; they should immediately reinforce the IMF’s ability to fire-fight the crisis as it spreads to emerging markets and vulnerable developing nations; they should 'above all, do no harm'. Finally, they should start 'thinking outside the box' when it comes to long-run fixes.

Leaders of the G20 nations are meeting this weekend to discuss financial markets and the world economy. Announced just a few weeks ago, this summit is both very unprepared and very important. The world economy and world financial markets are in a delicate state.

Governments and central banks staunched the bleeding in their financial systems, but they seem unprepared for the next round of difficulties. Difficulties that will arise as the recession deepens and widens, and financial crises spread to emerging markets. Economically and financially, there is a sense that things are spiralling out of control again.

The G20 meeting in Washington next weekend is an opportunity for the leaders to show that they have the will to get out ahead of the global crisis; to assure firms, workers, savers, consumers and investors that governments are able to fix the world economy.

In anticipation of this meeting, we asked world-class economists from around the globe to write 1000 word essays on what the G20 leaders should do.

The authors – Alberto Alesina, Erik Berglöf, Willem Buiter, Guillermo Calvo, Stijn Claessens, Paul De Grauwe, Wendy Dobson, Barry Eichengreen, Daniel Gros, Refet Gürkaynak, Takatoshi Ito, Vijay Joshi, Yung Chul Park, Raghuram Rajan, Dani Rodrik, Michael Spence, Guido Tabellini, David Vines, Ernesto Zedillo and Jeromin Zettelmeyer – identify four priorities for action:

  • In the financial sector, leaders should act quickly, strengthening and coordinating the emergency measures to staunch the bleeding; in the real sector, they should use fiscal stimulus to get the patient’s heart pumping again;
  • They should act immediately to strengthen the ability of the IMF and other existing institutions to deal with the crisis in emerging markets;
  • They should start thinking outside the box about longer term financial and monetary reforms; and
  • Do no harm.

Political conditions are not favourable for this meeting. The US is changing its leadership, the EU presidential mantle is soon passing from France to the Czech Republic, the Japanese government is weak politically as is the Indian government. Yet it is important that the leaders get it right. An empty declaration will signal to investors that the future will resemble the recent past. Such an outcome could do real harm to the world economy in its current state.

The book is full of ideas of things that could be agreed. Nobel Laureate Michael Spence suggests that a variety of coordinated interventions from central banks, the IMF, large holders of reserves and others could help reduce the extent of an asset-deflation overshoot and reduce the burden that is placed on fiscal stimulus to restore economic growth. Former Mexican President Ernesto Zedillo (Yale Phd), the man who guided Mexico through the 1997/8 crisis, fears nothing on the financial side can be agreed at this meeting, but the Summit could be saved if the leaders agreed to re-energise the WTO Doha Round talks.

The E-Book can be freely downloaded here


Here are the titles, authors and short summary of all 17 essays.

Quick action for the real economy; sober reflection for financial regulation
Alberto Alesina and Guido Tabellini

Regulatory reforms are surely needed, but this is not what G20 leaders can or should decide at this meeting; hasty new regulations could easily make things worse. The urgent need is for coordinated action to stimulate the global economy with fiscal and monetary measures. Allowing for varying national situations is essential.

Coordinated responses versus identical responses
Refet S. Gürkaynak

The G20 leaders face two related but distinct problems: mitigating the economic damage of the global recession, and reducing the chances of future financial crises. The recession requires coordinated macroeconomic stimulus, but coordinated need not mean identical. The leaders should also discuss financial regulation, but a unified financial regulatory framework for the whole world is unreachable and undesirable. Leaders should waste no time on this; national financial systems vary too widely and some are already over-regulated.


Agenda for the next few months
Michael Spence

Leaders should focus first on limiting the damage from this crisis in developed and developing nations. Coordinated interventions to prevent asset-price overshoot and provide fiscal stimulus are important. The longer term regulatory issues should await a careful analysis of the causes of the crisis.

Making international finance safe for the world economy – not the other way around: What should the G20 communiqué say?
Dani Rodrik

G20 leaders should unite against unilateral actions that could tip the world into a vicious cycle that deepens the global recession. This should include: (i) coordinated fiscal expansions that include consumption-expanding measures by nations with large trade surpluses; (ii) commitment to abstain from protectionist measures; and (iii) commitment to expand funding of the IMF’s Short-Term Lending Facility as needed. Finally, leaders should establish a high-level working group to design new ‘traffic rules’ for international finance.

Some suggestions for the G20 on November 15th
Willem H. Buiter

G20 leaders should better coordinate their crisis ‘firefighting’ efforts including recapitalisations, lending guarantees, fiscal expansions, and toxic-asset valuations. They should also set in motion institutional reforms: (i) establishing a new G7/8 (US, EU, Japan, China, India, Brazil, Saudi Arabia and possibly Russia or South Africa) with the IMF as its secretariat; (ii) boosting IMF lending capacity, and; (iii) creating a uniform global regulatory framework for rating agencies and for large, highly-leveraged institutions with significant cross-border activities.

Reforming global economic and financial governance
Raghuram Rajan

G20 leaders should focus on global governance and should boost the IMF’s financial firepower. Global financial coordination requires a broader group than the G7 or G20. The EU should get only one chair in the “G20+” to allow broader representation. The Secretariat for this group should be a reformed IMF. The IMF’s lending capacity should be immediately increased by allowing the Fund to leverage its member quotas at a ratio of between 5 and 10 to 1.

Not a New Bretton Woods but a New Bretton Woods process
Barry Eichengreen

The November 15th meeting should explore the idea of a new “World Financial Organization” that, like the WTO, would blend national sovereignty with globally agreed rules on obligations for supervision and regulation. It should agree to immediately boost the IMF’s lending capacity, with nations like China contributing in exchange for a revamping of the old G7/8 group into a new G7 (US, EU, Japan, China, Saudi Arabia, South Africa and Brazil) that would provide a proper global steering committee.

The new international financial architecture requires better governance
Stijn Claessens

New rules and institutions are needed to reduce systemic risks, improve financial intermediation, and properly adjust the perimeter of regulation and supervision. This could mean an “International Bank Charter” for the world’s largest, most international banks with accompanying regulation and supervision, liquidity support, and remedial actions as well as post-insolvency recapitalisation funds in case things go wrong. The starting point, however, has to be a change in the governance of the international financial system.

Europe’s two priorities for the G20
Daniel Gros

G20 members should boost IMF independence so it can act as a global ‘whistleblower’ to help call the next crisis. They should also start to bring the reach of banking supervisors more in line with the reach of banks. The failure of regulators to exchange confidential information led national agencies to miss the systemic risk that arose when banks across the global followed similar strategies.

Returning to narrow banking
Paul De Grauwe

Bubbles and crashes have been part of financial markets for centuries. Allowing banks – which inevitably borrow short and lend long – to get deeply involved in financial markets is a recipe for disaster. The solution is to restrict banks to traditional, narrow banking with traditional oversight and guarantees while requiring firms operating in financial markets to more closely match the average maturities of their assets and liabilities.

G20 Summit: What they should achieve
Takatoshi Ito

Four issues demand G20 attention: (i) improved surveillance mechanisms to avoid future crises, (ii) reinforced liquidity support for small nations hit by shocks originating from other nations, (iii) better coordination of national financial supervisory and regulatory frameworks, and (iv) international agreement on bankruptcy procedures for large banks with extensive transnational involvement. Reform of the IMF is critical to all of these.

Delivering change. Together.
Wendy Dobson

Leaders should observe several key principles: (i) do no harm; (ii) avoid finger pointing; (iii) moderate expectations of global action; (iv) be unanimous in selecting a few goals and then deliver. The priorities should be to agree a coherent regulatory framework (new rules, not a new institution), hasten IMF restructuring, stimulate the real economy and permanently replace the old G7 with the G20.

East Asia’s Self-managed Reserve Pooling Arrangement and the global financial architecture
Yung Chul Park

The G20 leaders should recognise the stabilising role that Europe’s regional financing arrangements play in the global structure and encourage the completion of a corresponding arrangement in East Asia. G20 nations should collaborate to make the SRPA a credible regional lender. This requires enlarging the SRPA’s reserve pool, ensuring that attached policy conditions are no more stringent than the IMF’s SLF, and making the disbursement process straightforward and expeditious.

The New Bretton Woods agreement
Guillermo Calvo

The crisis is spreading to the ‘South’. To offset ‘sudden stop’ disruptions, multilateral lending capacity should rise fivefold. Credit lines, like those extended by the Fed to struggling nations, need to be paired with regulations to discourage capital flight, and capital controls more generally should be viewed as useful tools for particular circumstances. Finally, in the longer run, serious attention should be paid to the creation of new or extended common currency areas.

A New Bretton Woods system should curb boom and bust
Vijay Joshi
David Vines

Today’s crisis has roots in a risky international monetary system as well as a risky financial system. Current international monetary arrangements encourage boom and bust cycles. G20 leaders should aim to build a system that induces nations to manage their macroeconomies in ways that produce neither financial bubbles nor large external imbalances and inappropriate exchange rates.

Targeted improvements in crisis resolution, not a New Bretton Woods
Erik Berglöf
Jeromin Zettelmeyer

The current crisis reveals two major flaws in the world’s crisis-resolution mechanisms: (i) funds available to launch credible rescue operations are insufficient, and (ii) national crisis responses have negative spillovers. One solution is to emulate the EU’s enhanced cooperation solution at the global level, with the IMF ensuring that the rules are respected.

Save Doha to save the G20 Summit
Ernesto Zedillo

A meaningful agreement that starts to reduce the world’s global economic governance deficit is simply not possible at the G20 meeting. But the G20 Summit need not be a disappointment. Plan B should be to save the Summit by saving the Doha Round.

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