Finance & Development, June 2008 - Contents - Volume 45 - Number 2

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The Financial Market Crisis

A Crisis of Confidence... and a lot more

Laura Kodres
What can be done to prevent future crises like the one that began in the U.S. subprime mortgage market? This article argues that the source of the problem lies in incentives. But the remedies may be difficult to implement because faulty incentives are entrenched in the marketplace and in regulatory and supervisory systems.

Outbreak: U.S. Subprime Contagion

Randall Dodd and Paul Mills
The authors examine the origins of the subprime mortgage crisis and the reasons for its large spillover effects. They suggest policies to deal with such problems should aim to moderate leverage, improve liquidity management, foster market liquidity, promote due diligence, and increase transparency in the public availability of price and trading information.

Point of View

Asia: A Perspective on the Subprime Crisis

Khor Hoe Ee and Kee Rui Xiong
The authors, from the Monetary Authority of Singapore, examine the current crisis through the lens of the financial crisis that hit Asia in 1997. They discuss lessons industrial countries can take from the Asian crisis and lessons Asian countries can learn from the subprime crisis. They also explore the reasons for Asia's resilience, so far, to the current crisis.

Banking on More Capital

Jaime Caruana and Aditya Narain
New guidelines on the capital that banks need to put aside to deal with current and potential financial and operational risks are fast being adopted by bank regulators. The authors warn that capital requirements cannot prevent banks from making mistakes, or substitute for banks' own responsibilities for assessing and managing risk.

Point of View

Will Basel II Help Prevent Crises or Worsen Them?

Jesús Saurina and Avinash D. Persaud
The authors offer opposing views on whether the Basel II capital adequacy guidelines are too procyclical—that is, too lax on capital requirements during good times and too strict when conditions deteriorate.

Also in This Issue

How Much Decoupling? How Much Converging?

M. Ayhan Kose, Christopher Otrok, and Eswar Prasad
Recent dramatic changes in the global economic landscape—driven by rising economic integration and the increasing prominence of emerging market economies—have raised questions about global business cycles. The authors conclude that business cycles among industrial countries and among emerging market economies seem to be converging, but that the two groups also seem to be decoupling from each other.

Turning Currencies Around

Atish Ghosh
With major currencies fluctuating sharply in recent times, the possibility of exchange market intervention has come to the fore. This article discusses how central banks can influence exchange rates and what they would have to do to make intervention work.

A Capital Story

Thomas Dorsey
Private capital flows to low-income countries around the world have grown dramatically over the past quarter century. Although a development success story, the increased flows have implications that policymakers must be prepared to address.

In Sight, but Not Yet within Reach

Zia Qureshi
The author gives a progress report on countries' efforts to achieve the eight UN Millennium Development Goals. Although the picture thus far is mixed, he argues that if countries and their development partners redouble their efforts, the MDGs are achievable for most countries.

Departments

Letter from the Editor

In Brief

Melting mountains; Counting the cash; Greater voice; Smaller is better; More women working; Events calendar

People in Economics

A Legacy of Model Elegance

James L. Rowe
Jacques Polak joined the IMF in its infancy in 1947 and, through his path-breaking research, helped shape how the IMF goes about its business. He is best known for developing an economic model in 1957 that explained a country's balance of payments in monetary terms.

Back to Basics

Over-the-Counter Markets: What Are They?

Randall Dodd
Over-the-counter (OTC) markets are one of two basic ways that financial markets are organized—the other is exchanges. OTC markets are less formal but often well-organized networks of trading relationships centered on one or more dealers.

Picture This

Bridging the Technology Divide

Andrew Burns
Although technological progress has helped reduce the share of people living in absolute poverty, developing countries must radically improve their capacity to absorb technology if they are to catch up with high-income countries.

Book Reviews

The VAT in Developing and Transitional Countries, Richard M. Bird and Pierre-Pascal

Gendron The Logic of Life: The Rational Economics of an Irrational World,
Tim Harford

Country Focus

Algeria

This north African country has managed its hydrocarbon wealth soundly and achieved strong growth and macroeconomic stability. Its top priorities now include boosting productivity and diversifying the economy away from hydrocarbons.

Straight Talk

Automatic "Destabilizers"

Simon Johnson
Normally, says the IMF's Economic Counsellor, when growth slows in a major economy, the demand for and prices of commodities decline. In the current turmoil, however, the prices of food and fuel have remained high and are having a destabilizing effect on the world economy.

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F&D welcomes comments and brief letters, a selection of which are posted under Letters to the Editor. Letters may be edited. Please send your letters to fanddletters@imf.org

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