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Building an International Monetary and Financial System for the 21St Century: Agenda for Reform

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Building an International Monetary and Financial System for the 21st Century: Agenda for Reform Building an International Monetary and Financial System for the 21st Century: Agenda for Reform eBook published by the Reinventing Bretton Woods Committee Proceeedings of the conference organized by the Committee in New York City, November 24–25 2009 Marc Uzan Founder and Executive Director www.rbwf.org eBook ©2009 Reinventing Bretton Woods Foundation. All rights reserved. The Way Forward Over the last fourteen years, The Reinventing Bretton woods Committee has closely been involved in the debate of improving and reforming the global financial architecture. Our name speaks for itself. In 2008, call for a new bretton woods, Bretton woods 2 has been mentioned by Prime Minister Gordon Brown, President Nicolas Sarkozy among others. Since the heads of State Summit in Washington in November 2008, the global economy is decelerating at an unprecendented level and a sense of disarray, and a loss of confidence world wide is now spreading. This crisis is not any more a crisis of the center versus the periphery, it is a global crisis, economic, financial and political. This crisis is our collective failure not to have taken decisions to improve and change the paradigm during the period of emerging markets crisis of the 1990’s and during the debate of the best way to resolve the global imbalances in the world. In fact, the external imbalance and the internal imbalance of major countries in the world between surplus countries and deficit countries are at the origin of this debacle. So how to explain that Heads of state mention a new bretton woods where at the end, there is no mention at all not even the word exchanges rates or currencies in the G20 heads of state communique? Are we missing something? Maybe we are realizing that the world is not ready for globalisation. Markets went ahead believing that the political structures will follow. In fact, this crisis demonstrate more than ever that national level is the only level that matters. No one is ready for a global financial regulator, for a global central bank, for a global single currency. So we will need to live with a patchwork of cooperation wich are going to be more and more complicated to manage. That transition will be complex as we don’t really have a global financial macro theory to understand the episode of the last 12 months. From our perspective, 1. On the architecture, G20 should serve as the forum formally for countries to agree to adopt best practices/international standards. The IMF should provide its advice, support to the G20. The Financial Stability Forum should be made into a permanent body, with a broader membership, reporting to G20. 2. On lender of last resort functions, regulators should rethink the global approach to liquidity management and develop guidelines for lender of last resort policies. There is an urgent need to clarify and institutionalize central bank swap arrangements. 3. On bank regulation, a complete revision of Basel 2 is needed, including tighter leverage ratios, and the regulatory arrangements must be made compatible with incentives to private actors to discipline the market better. 4. On exchange rates, work should begin immediately on how to restore discipline in the international monetary system. If this is deemed to be “unrealistic”, then we have to face the fact that the world faces a succession of crises, each one worse than its predecessor, and that these are beyond out scope to manage with existing instruments. At present the stark choice is between another Great Depression, another bigger New Asset Bubble, and a return to International Socialism, including rigid controls on international exchanges and bank credit. The only way to preserve freedom for a liberal financial and trading order is to build a new financial architecture. Marc Uzan Founder and Executive Director Reinventing Bretton Woods Committee Building an International Monetary and Financial System for the 21st Century: Agenda for Reform Contents Conference Summary Edited by Sandrine Merckaert . 1 Avoiding International Financial Crises Mark Allen . 11 Building an International Monetary and Financial System for the 21st Century: Agenda for Reform Sven W .Arndt . 21 Could Another Currency Provide Liquidity To Financial Markets? Christopher Avenarius . 25 Responding to the Financial Crisis: An Agenda for Global Action Amar Bhattacharya, Kemal Dervis and José Antonio Ocampo . 29 The Past and Future of IMF Reform: A Proposal Michael Bordo and Harold James . 43 A New Bretton Woods? Lawrence J Brainard . 75 Building an International Monetary and Financial System For the 21st Century: Agenda for Reform Martin Castellano . 83 Improving the International Financial Architecture Richard N . Cooper . 93 How to Prevent Future Crises: Create a World Financial Organization Barry Eichengreen . 101. International Financial Architecture Erich Harbrecht . 107 The Icelandic Banking Collapse: A Story of Broken Promises Tryggvi Thor Herbertsson . 115 Building an International Monetary and Financial System for the 21st Century: Agenda for Reform Olivier Jeanne . 127 Solutions to Restore International Financial Stability Dino Kos . 133. A New Bretton Woods? Ronald McKinnon . 141. Financial Disaster Recovery Ira Millstein and George Vojta . 151 After the Turbulence – Where to next for Emerging Markets? Jens Nystedt . 161 South Centre calls for Revamping the Global Financial Architecture José Antonio Ocampo and Board Members of the South Centre . 173 Will the Crisis Trigger a Revival of the IMF? Jean Pisani-Ferry . 183 Ten Fundamental Issues in Reforming Financial Regulation and Supervision in a World of Financial Innovation and Globalization Nouriel Roubini . 197 Global Financial Crisis and Restructuring the International Monetary System Li Ruogu . 213 Restoring International Financial and Monetary Stability Jeffrey Shafer . 223. Stable Money Is the Key to Recovery Judy Shelton . 233 Restoring International Financial Stability: Five Guidelines for Regulatory Reform Alexander K . Swoboda . 245. International Financial Institutions Reform Proposals George Vojta . 255. APPENDIX CFA Institute Memorandum to the Treasury Select Committee: Accounting and the Banking Crisis CFA Institute . 263. Proposals on the Financial Crisis Club Praxis . 283 Conference Agenda . 293. List of Authors . .297 List of Participants . 301 Sponsors . 309. Building an International Monetary and Financial System for the 21st Century: Agenda for Reform Conference Summary Edited by Sandrine Merckaert What we are witnessing today is not just a crisis in the system, it is a crisis of the system. The global financial framework is broken, and the level of trust in capital markets is at all time lows. As a new step in the globalization process, there should be a focus on enhancing world trade and financial flows, in a way consistent with sustainable economic growth. On November 24-25, 2008, the Reinventing Bretton Woods Committee held a conference in New York City aimed at addressing solutions and proposals to restore international financial and monetary stability. The following summary of the conference emphasizes three fundamental points: 1) financial regulation, oversight and role of the Financial Stability Forum (FSF); 2) emerging economies, lender of last resort; and 3) global imbalances, exchange rate regime. International Coordination on Financial Sector Regulation Participants welcomed the decision to shift discussions from the G7 to the G20. The latter could play the role of an umbrella authority for groups of countries coming together on different issues. With a more policy-oriented approach and a clear focus on financial stability, the G20 should not only recommend, but also monitor implementation of the recommendations. It was proposed that the G20 serve as a forum for countries to formally set an agreement about their commitment to adopt best practice and international standards. The idea that the International Monetary Fund (IMF) provide analysis and recommendations 1 to the G20 was also put forward during the conference. The question was raised whether some form of global authority is needed to look after the stability of the financial system as whole, the same way national regulators look after the safety and soundness of their own system. One speaker proposed the creation of a World Financial Organization, analogous to the World Trade Organization. However, participants mostly viewed a global regulator as too ambitious. On the other hand, the idea of making the FSF into a permanent organization was welcomed. As one panelist pointed out, the FSF, which is a body without statutes, staff, procedures, and formal decision-making powers, has emerged as a powerful organization and has been able not only to design but also to monitor the implementation of some early responses to the crisis. The focus remains on giving more legitimacy to the FSF, which will have the task of producing recommendations, while the IMF will be responsible for implementation. There was a large consensus to broaden the membership of the FSF. Participants encouraged the G20 to follow through on its communiqué and appropriately expand the Forum to include emerging market economies. In a world of nation-states, there is a legitimacy of national decisions which does not exist at the supra-national level. As one speaker highlighted, the current crisis has demonstrated the limitations on global coordination and global cooperation for the regulation and supervision
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