IMF Survey: IMF Head Urges Greater Regulation of Financial Sector
September 29, 2008
- IMF head calls for global reform of financial system
- Welcomes U.S. authorities' plan to "put out the fire"
- Urges systemic response to crisis affecting global economy
IMF Managing Director Dominique Strauss-Kahn called for a global solution to the U.S. financial crisis, saying coordination of the reform effort "is a job for the IMF." .
U.S. FINANCIAL CRISIS
Reform of the international financial system could begin when finance ministers and central bankers convene in Washington next month for the IMF-World Bank Annual Meetings.
In an interview with France's Journal du Dimanche newspaper—one of several he has given to international media over the past few days—he said a proposed U.S. $700 billion bailout plan should be a first step toward reform of the global financial system, and called for greater regulation of financial institutions and markets.
"It's because there were no regulations or controls, or not enough regulations or controls, that this situation was born," he said. "We must draw conclusions from what has happened—that is to say regulate, with great precision, financial institutions and markets."
"This (U.S.) plan is welcome because it's comprehensive. But it has to be the first step of international political action," said Strauss-Kahn, a former French finance minister who took over as head of the Fund in November last year
IMF-World Bank Annual Meetings
He said the IMF would be happy to coordinate the global reform process, which could begin next month when finance ministers and central bankers convene in Washington for the annual IMF/World Bank meetings on October 11-13.
Without the will to reform, there was a danger that the state would be seen as running to the "rescue of incompetent managers and greedy speculators", he said, noting the criticism in parts of Europe about banking profits being privatized but their losses being nationalized.
Defending the IMF's role in the crisis, Strauss-Kahn said the Fund had estimated in April that there would be $1 trillion in financial sector losses and had predicted a sharp slowdown in the global economy. "But people did not want to listen to us. We were criticized for being pessimistic," he said. The IMF has recently raised this estimate to $1.3 trillion.
Proposed multilateral consultation
The interview with the French weekly was one of a series of media interviews on the financial crisis over the past few days.
Speaking to the New York Times, Strauss-Kahn called for a multilateral consultation—involving the United States, Europe, China, and other financial powers—to develop a coordinated response to the crisis.
"We're facing a systemic crisis, and it needs a systemic response," Strauss-Kahn told the paper last week. "The IMF is the right place to organize a global response to weaknesses in the global financial system."
His remarks built upon his call in an op-ed in the Financial Times for a systemic solution to the crisis.
Understandable U.S. response
In other remarks, Strauss-Kahn spoke about the speed and effectiveness of the U.S. response to the crisis to the Singapore Straits Times:
"It's absolutely understandable that the government in any country, when the first wave hits, says that it's a small wave and we'll manage. And then comes a bigger wave and they say we'll fix it. And then when the tsunami comes, it's too late. So I understand the way the American authorities wanted to address this step by step.
"Of course it's easier to say now that the Americans should have chosen a more comprehensive plan earlier. The IMF did, in June, propose to the U.S. a more comprehensive plan. It is in the report we made on the American economy under the Article IV consultations. We said things are going that badly that you should organize a comprehensive solution—like they are talking about today. And that was only three months ago."
On the difference with the Asian crisis
"What originated in Thailand and spread to Korea, Indonesia, and other countries was mainly a balance of payments problem. That was our core business. This crisis, even if it is a huge crisis, is different. It has had almost no impact on the exchange rate, on the dollar. You could have expected the dollar to fall but it did not. This is a different kind of crisis, so the solution to be applied is not the same. The main actors today are the central banks and treasuries; the main actors in the Asian crisis were institutions like the IMF."
Speaking to the Brazilian news magazine Veja, he spoke about the likely impact of the crisis on the financial sector:
"It will look very different. For the first time, the crisis did not originate at the periphery, but at the center of the system. This crisis has originated in the U.S. housing market, but it has deeper roots. The expansion in the financial market has far surpassed the growth in the real economy in the last decades, with a complexity never seen before, while banking supervision and regulation have not been prepared for such a challenge.
"Most investment banks lowered their risk analysis criteria to increase their profits, without proper oversight. Therefore, one of the probable outcomes of this crisis will be to have a smaller financial system, more compatible with the real economy and in a more controlled and regulated environment."
On the dollar
"The curious thing is that, even with the US economy today facing many different blows at the same time, there is no panic with regards to the dollar, which would have been expected. On the contrary. The dollar's status has remained intact."
Finally, in remarks to the Straits Times, Strauss-Kahn looked at the impact on the real economy.
"One of the effects on the real economy has been a sharp slowdown. Nevertheless it is only a slowdown, not a recession. Two or three years ago, if you had asked the experts, `We will have a trillion dollars of distressed assets in the financial sector—what will be the consequences on the world economy?', many would probably have said there would be a huge recession. But we don't contemplate that; we contemplate a slowdown.
"The linkages between the financial sector and the real economy are not as easy to understand. The IMF is in a unique place to try to take into account this connection, and that is probably the reason why our forecast is more accurate.
More resilient economy
"We see recovery in 2009. The economy is more resilient than expected. Our forecast is that commodities will stabilize in 2009: oil and food prices will not be as high as their peaks in past months. We see the U.S. housing market finding a bottom in the coming months.
"So we have good reason to expect that growth will come back. There are some downside risks, of course, from the financial sector and the (lack of) confidence in the corporate and housing sector. That's why it was important to propose a comprehensive solution which appears reliable to people. When you are sorting the problems one after another, you don't give the impression you are managing the whole problem. I hope the plan now being proposed in the U.S. will restore investor confidence next year."
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