Insurance Article

Financial crises are generally enormously costly, and we are currently in the midst of a crisis that could turn out to be the worst of them all. Evidently, financial crises are the by-product of liberalised financial systems.
Let me state upfront that the answer is not simply to re-regulate and to repress the financial system, as was the case in many countries for many decades after the Second World War. Rather, what has to be done is to find ways to address shortcomings in the current system.
International efforts directed at crisis prevention to date have been largely focused on the health of the financial system, and have been based on the principle of national sovereignty.
That is to say that the procedures suggested for international implementation have been agreed to by committees of national 'experts', working to produce a 'level playing-field'. This work is essentially based on a 'bottom-up approach', which tries to ensure the good health of the various pillars that make up the international financial system.
In recent years, there has been growing interest in a more 'top-down' approach that emphasises the macroeconomic roots of most national and international economic crises.
The need for sensible fiscal policies has been understood for many years, with the IMF often playing the role of enforcer, particularly in emerging-market economies. This was based on the observation that so many of the crises in the 1960s and 1970s were associated with fiscal excess.
Similarly, in the light of more recent crises, growing attention is now being paid to how credit growth fosters pro-cyclicality in the economic and financial system, through its influence on asset prices and spending behaviour.
To date, however, these heightened macroeconomic concerns have not elicited any serious attempts to establish an international framework for trying to resist pro-cyclicality.
On the one hand, this might seem odd given the accumulating evidence that problems which arise in one country are often reflected in others.
In particular, efforts to peg exchange rates to countries in the 'boom' stage of the cycle will generally import similar symptoms to the pegging country, though here perhaps the simplest answer is to cut the peg.
On the other hand, international cooperation can only happen if the important countries share the same assessment (paradigm) of the underlying problem.
At the moment, there is no such shared assessment, with the Europeans and Japanese being generally more inclined to worry about the monetary and credit cycle, but the US and some other English-speaking countries rather less concerned.
The US authorities, in particular, have been adverse to the suggestion of resisting 'bubbles', preferring for various plausible reasons to clean up the debris afterwards.
Further, among those who share a similar view of the underlying problem, there is still no agreement as to when or how countervailing action might be taken, even at the national level.
For example, views differ as to whether it would be technically possible to gross up (under Pillar 2) the capital requirements estimated under Pillar 1 of Basel II to reflect system-wide variables. At the international level, these kinds of problems become even more difficult.
Finally, there is the 'will to act' problem.
Policymakers at the national level have explicit responsibilities and accountabilities, yet for all sorts of reasons are still often hesitant to tighten. This would be even more the case in international fora where no explicit international mandate exists.
This said, John Taylor of Stanford University has recently suggested an increased degree of international monetary cooperation to resist global inflationary trends, noting that many domestic authorities treat food and energy prices as 'external' even though they are fully 'internal at the global level'.
This kind of thinking gives hope for enhanced international cooperation with respect to other kinds of macroeconomic problems as well.
This evidently leads on to the question of whether more authority should be shifted from the national sovereigns to some international agency that did have an explicit mandate for crisis prevention.
Suggestions have been made that the BIS should become a kind of 'super-regulator'.
Suggestions have also been made that the IMF's role in crisis prevention be enhanced. In particular, the Fund should more actively encourage exchange rate changes to avoid exchange rate crises.
While a far cry from suggestions around the time of Bretton Woods that the Fund take overall responsibility for the growth of the world money supply, it goes in the direction of increasing the IMF's powers.
It has also been suggested in recent years that the Fund play a bigger role in assessing when countries' debt positions (both internal government and net external debt) have become dangerously high. None of these suggestions has so far come to much.
Movement
Why has there been so little movement on this front?First, there is the difficult issue of legalising the mandate. Changes to the Articles of established institutions such as the IMF and BIS are not easy and would take ages. Creating new institutions might be even more difficult.
But perhaps the most difficult issue is that the countries exercising their sovereign power simply do not wish to give it up. This applies to small countries (think of the 'chairs and shares' issue at the IMF) as well as large.
In particular, the US still wields a significant degree of influence behind the scenes, at the IMF and the World Bank in particular, which it does not wish to see diluted.