## IMF Survey: Forceful Action Needed to Contain Crisis, Panel Agrees

_IMF News, October 14, 2008_

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## Bibliographic details
- Published: October 14, 2008

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### Urgency and coordination
- Policymakers "must act quickly and forcefully, with a coordinated and comprehensive package" to contain a crisis that has frozen credit markets in most advanced economies and threatens a global recession.
- "Time is of the essence," said George Soros; authorities have "consistently been behind the curve" and "now they have to get ahead of it."
- Panel consensus: talk is not enough — steps must be:
  - explained to the public,
  - coordinated among governments,
  - comprehensive in covering all problems,
  - perceived as forceful enough to succeed.

### Policy measures taken and recommended
- Recent announcements by authorities in the United States, the United Kingdom, and the European Union to:
  - inject capital into banking systems weakened by deteriorating asset quality,
  - remove many of the bad assets from the books of these institutions,
  - expand the provision of liquidity to the financial system,
  - provide guarantees to lenders and depositors.
- Shift in approach noted by Mohamed El-Erian: from reactive and sequential actions to simultaneous, packaged measures and from a U.S.-centric to a global solution.
- Policymakers must communicate measures clearly to build public confidence and restore market functioning.

### Economic outlook and countercyclical policy
- The IMF's World Economic Outlook (referenced by the panel) predicted virtually no economic growth for advanced economies and a sharp slowdown in developing economies over the next year.
- A recession "appears to be inevitable" but "can be made less severe by proper countercyclical economic policies," said Christine Cumming.
- Short-term market fragility: "Markets are extraordinarily frail and fearful and the short-term risks of a further implosion are high," said Lewis Alexander; liquidity strains (e.g., money market funds restricting withdrawals) can sharply amplify risk aversion and economic decline.
- Historical precedent: decisive action when demand declines (learning from the 1930s) can mitigate severity.

### Causes of the meltdown and transmission channels
- Meltdown traced to a confluence of global trends encouraging risk-taking and the spread of innovations such as asset-backed securities and structured credit products that markets and regulators did not fully understand.
- Structured products:
  - Designed to spread risk by slicing asset pools into tranches representing different repayment likelihoods.
  - Complexity led investors to fear even the least risky tranches, drying up markets and leaving institutions with securities they could neither sell nor value properly.
- Interbank market impact: banks curtailed lending to one another, confining lending to very short loans until the failure of Lehman Brothers, after which short-term credit markets largely froze.

### Capital injections, private participation, and transparency issues
- Hundreds of billions of dollars of private capital were injected into the system in late 2007 and early 2008; $60 billion of it came from sovereign wealth funds.
- These injections were "stunning" compared with previous crises but remained insufficient because the size of the problem was not initially understood.
- Lack of transparency and "inability to size the problem" hindered earlier policy responses.

### Regulation, supervision, and rebuilding the financial system
- Panel view on regulatory priorities:
  - "Regulation has to get back to basics—creating incentives for managers to behave prudentially and warning them when there are changes they are not taking into consideration," said Roger Ferguson.
  - Continuously assess the amount of leverage in the system.
  - Push on quality of information, transparency, and updating of risk-management tools.
  - Keep regulators up to date with market changes despite practical difficulties.
- Post-crisis financial industry characteristics anticipated:
  - Smaller,
  - More highly regulated,
  - More heavily capitalized,
  - "It will look much more like a utility," said Mohamed El-Erian, driven by societal rejection of socializing losses while privatizing gains.

*IMF Survey: Forceful Action Needed to Contain Crisis, Panel Agrees — October 14, 2008*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [In The News](https://www.imf.org/en/news/search)
- [Watch seminar webcast](https://www.imf.org/external/mmedia/view.asp?eventID=1282)
- [World must act together](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW101308A.htm)
- [Finance chiefs back plan](https://www.imf.org/external/pubs/ft/survey/so/2008/POL101108A.htm)
- [IMF presses 4-step plan](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW101008A.htm)
- [Quick, forceful action needed](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW100908A.htm)
- [Video: Crisis in perspective](https://www.imf.org/external/mmedia/view.asp?eventID=1284)
- [IMF warns on failure to act](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW100708A.htm)
- [Crisis to worsen downturn](https://www.imf.org/external/pubs/ft/survey/so/2008/RES100208E.htm)
- [Emerging markets pulled in](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW100708C.htm)
- [Interbank rates stay up](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW100708B.htm)
- [IMF urges more regulation](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW092908A.htm)
- [Crisis marks tectonic shift](https://www.imf.org/external/pubs/ft/survey/so/2008/NEW092508A.htm)
- [New channels spread crisis](https://www.imf.org/external/pubs/ft/survey/so/2008/RES092308A.htm)
- [World Economic Outlook](https://www.imf.org/external/pubs/ft/weo/2008/02/index.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sonew101408a_