Posted on December 21, 2009 by iMFdirect
By James Boughton
The world economy is beginning to awaken from a nightmare. What hit us, and what was the tossing and turning all about? The popular simile is a comparison with the Great Depression, as in “This is the worst downturn since the 1930s.”
In fact, unless we get hit with another hammer before we fully wake up, the Great Recession is very unlike what the world went through some seven decades earlier.
The Great Depression, like the recent collapse, began with a banking crisis, but of a different kind. Instead of emanating from huge financial institutions in major money markets, the earlier one spread outward from small midwestern banks in the United States and led eventually to a near total loss of confidence.
Depositors pulled their money out into cash or gold, and the U.S. banking system shut down. Investors in other countries also moved heavily into “safe” assets.
Cars in line at U.S. gas station in 1979: the world in which consumption could flourish amid cheap and readily available energy was gone forever (photo: R. Krubner/ClassicStock/Corbis)
Filed under: Economic Crisis, Economic research, Emerging Markets, Fiscal Stimulus, Globalization, growth | Tagged: 1970s, Banking crisis, gold, Great Depression, Great Recession, McCracken Report, stagflation | 3 Comments »
Posted on December 17, 2009 by iMFdirect
By Sean Hagan and Jody Myers
The international community has made the fight against money laundering and terrorist financing a priority. The IMF is especially concerned about the possible consequences of money laundering and the financing of terrorism on our members’ economies and on international financial stability.
The IMF’s Legal Department has the lead on the Fund’s work in combating money laundering and the financing of terrorism, and our work includes assessments of countries’ compliance with the international standard on anti-money laundering and combating the financing of terrorism (AML/CFT), technical assistance, research, and policy development.
Investors in pyramid scheme company VEFA speak to official in Tirana, Albania, in 1998 (photo: AFP)
Building on the results of our recent work on the risks from money laundering and the macroeconomic impacts of money laundering and predicate crime, we are seeking to integrate AML/CFT more fully into the Fund’s surveillance and Financial Sector Assessment Programs (FSAPs).
Filed under: Economic Crisis, Financial regulation, Global Governance, IMF, International Monetary Fund, Multilateral Cooperation | Tagged: compliance, corruption, crime, governance, money laundering, pyramid schemes, surveillance, tax evasion, terrorist financing, transparency, underground economy | 3 Comments »
Posted on December 10, 2009 by iMFdirect
By José Viñals
The IMF held a high-level conference last week on unwinding public interventions in the financial sector. Insightful discussions took place among policymakers, academics, and the private sector, highlighting several areas where a broad consensus appears to be emerging, as well as some challenges that policymakers are about to face.
There was broad agreement that an exit strategy from monetary, fiscal, and financial sector interventions is essential. The pivotal goal of this exit process would be to arrive at a condition of price stability, fiscal sustainability, and financial stability, including a new financial landscape that is much safer than currently exists. This will provide the necessary underpinnings for stable, strong, and balanced growth.
It will be relatively easy to unwind financial interventions that have sunset clauses or have penal rates so they become unattractive as market conditions normalize (photo: Sajjad Hussain/AFP/Getty Images)
Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Financial regulation, Fiscal Stimulus, recession | Tagged: asset bubbles, exit strategy, fiscal sustainability, risky assets, spillover effects | 2 Comments »
Posted on December 8, 2009 by iMFdirect
By José Viñals
Over the past two years, disruptive failures, shotgun marriages, and government bailouts of some household names in the financial industry have placed the age-old issue of “too big to fail” at the center of financial sector policy discussions. As well, the Lehman bankruptcy and government support for AIG extended the “too-big-to-fail” notion from banks to include nonbank financial institutions. And in some cases, the financial institutions in distress were not even particularly big; rather, they were too interconnected, and too important for the functioning of the global financial system, to be allowed to fail.
We need to think about how to deal with such “too-important-to-fail” institutions for at least three reasons.
- When institutions are provided with implicit (and explicit) public support, they are apt to take on riskier activities than they otherwise would, with the knowledge that the government will step in if those risks turn out badly. This is called moral hazard.
- Well-run institutions are forced to compete with institutions that are implicitly guaranteed—or even directly financially supported—by the government. This makes for an unlevel playing field in the financial sector.
- Government support absorbs valuable public resources, arguably at the expense of more equitable and productive public spending; it could also endanger the fiscal stability of a country.
Filed under: Economic Crisis, Financial Crisis, Financial regulation, recession | Tagged: AIG, capital requirements, financial sector supervision, Financial Stability Board, G-20, José Viñals, risk | 1 Comment »
Posted on December 2, 2009 by iMFdirect
By José Viñals
Governments and central banks rose to the challenge as the 2008–09 financial crisis unfolded, taking unprecedented steps to avoid the collapse of the global financial system and avert a devastating impact on the global economy. Liquidity support, capital infusions, and public guarantees were provided to banks and other financial institutions; policy interest rates were lowered substantially; and fiscal stimulus packages were introduced.
On top of this, international institutions like the IMF enhanced their lending facilities to help emerging markets and developing economies better cope with the threats posed by the crisis.
Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Fiscal Stimulus | Tagged: capital infusions, Liquidity support, monetary accommodation, public deficits, public guarantees, quantitative easing, spillover effects | 1 Comment »
Posted on December 1, 2009 by iMFdirect
By José Viñals
Some countries with similar financial and regulatory systems fared differently during this crisis. What are the reasons for this? And what made some financial institutions with similar business models, and in the same country, better equipped to deal with the virulence of the crisis? To find the answers, we need to ask the following question: How well did the four key components of a sound financial system―good regulation, effective supervision, robust risk management, and credible resolution mechanisms―perform?
A lot of attention has been paid to improving regulation, the first key component. Sweeping changes are being proposed through new and enhanced rules of the game, such as higher capital, loan loss provisions, liquidity buffers, and limits on executive compensation. I believe that corresponding changes are also needed in the other three components if a crisis of this magnitude is to be avoided in the future.
Filed under: Economic Crisis, Financial regulation | Tagged: Financial regulation, financial sector supervision, resolution regime, risk management, systemic risk | 1 Comment »