Sub-Prime Crisis Needs Multilateral Solution

Source : The Business Times, September 13, 2007

NORMALLY, when there is a major financial crisis of one kind or another, it is easy to find someone to blame. In the case of the Asian crisis 10 years ago, for example, fingers were quickly pointed at the International Monetary Fund (IMF). When Japan's bubble economy collapsed, the Bank of Japan (BOJ) was identified as the villain. Also, former US Federal Reserve chairman Alan Greenspan blamed 'irrational exuberance' among investors for the rise and fall of the IT bubble.

But whom are we supposed to blame for the crisis that is still evolving out of the sub-prime mortgage market debacle in the US? No one has mentioned the IMF this time and the BOJ has been only indirectly implicated for allowing the yen carry trade phenomenon to swell to proportions where it contributed to a global liquidity bubble. As for irrational exuberance, stock markets can scarcely be blamed this time around.

It is no use pointing fingers at the likes of any single institution. The truth of the matter is that none of these institutions has been given the authority to deal with a 'new style' financial crisis such as the current one. I was chatting about this the other day with Japan's former vice-finance minister for international affairs, Eisuke Sakakibara and he was quick to go to the heart of the matter. The IMF, he declared has become 'irrelevant' as an agent for dealing with global financial issues and so has the G-7/G-8. Both should be 'abolished', he (only half) joked.

What does this have to do with the sub-prime crisis? A good deal, because the same kind of outdated mentality which allows seven or eight countries (half of them European) to pronounce upon global economic issues, and control the IMF, is also responsible for allowing problems for global fall-out to develop within national borders.

On top of that, there is the arrogance of financial markets which until recently were bold in declaring that multilateral institutions such as the IMF were no longer necessary and that the markets could police the new world financial order by themselves.

If the current financial crisis does not convince both governments and markets of the need for a 'new financial architecture' then surely nothing ever will. Money moves around the world nowadays in amounts that make official resources look puny and with a speed and complexity that is matched only by rockets and rocket science. Financial engineering produces products of such complex nature that they can be understood only by rocket scientists. The potential that these developments have to do harm as well as good is enormous, and yet the 'control centre' is still in the steam age.

True, there are institutions such as the Bank for International Settlements (BIS) to deal with central banking issues on a global basis and there are any number of national financial and accounting regulatory bodies. But none of these has the power to demand the kind of information that might have indicated just what kind of risks were developing in the sub-prime mortgage market, the financial derivatives market, the yen carry trade area and so on. What then of the IMF? Mr Sakakibara has little doubt about what is wrong there. 'The IMF is too macro-oriented', he told me. 'It needs to go deeper into finance. World finance has changed and they need to address issues like sub-prime issues or systemic risks in international financial markets, rather than sticking to outdated macro-economic analysis.' Some might add that since the days of former managing director Michel Camdessus, the IMF has become too preoccupied with Third World issues of poverty and development, to be able to focus on global financial market and exchange rate issues.

But this is not so much the fault of the IMF as of the G-7 governments who insisted that they could manage complex issues of global finance on their own, forcing the IMF to find new activities at the margin. This is as absurd as it is presumptuous. No national government has the intellectual resources (or the budget) to analyse the global financial system in all its evolving complexity, let alone the authority to intervene when problems arise. In Mr Sakakibara's view, the only hope is a new and expanded government group, such as the G-20, to consider global policy issues and a more focused IMF to provide the analytical and research back-up needed.

Yet, the kind of arrogance which allows so-called superpowers to ignore the United Nations in security matters and to prefer unilateral solutions would surely doom any such initiative from the outset. Perhaps the failure of military intervention in Iraq - based on the doctrine of pre-emptive strike - to secure any lasting solution to the problem of 'terrorism' might induce sufficient humility to consider reverting to multilateral solutions. But that won't happen before the sub-prime crisis has done a lot more damage than it has already.