Monday, February 11, 2008

IMF managing director defends funds role in financial monitoring

Source: IMF Chief backs crises alert calls

The G7 finance ministers, meeting in Tokyo, called on the IMF to work more closely with the Financial Stability Forum, jointly reporting on “identifying potential vulnerabilities and enhancing early warning systems.” Officials at the meeting reasoned that the IMF is in a much better position to monitor, and in some cases prevent, global financial crises. However, Dominique Strauss-Kahn, the IMF’s managing director, insists that the fund can only play a small, primarily analytical role in such a monitoring system.

Although the G7 would like to see an increased involvement from the IMF, Strauss-Kahn stated that in his opinion “the specific work to be done by the IMF is mainly in the analysis of linkages between the financial sector and the real sector.” In defense of this position, he offered that the IMF identified US subprime lending as a potential flashpoint a year ago. However, by his own admission, the IMF could have been more vocal in persuading the US to reconsider its policy. Mr. Strauss-Kahn highlighted the reality that financial imbalances can spread through diverse channels, pointing to the worldwide fall in asset prices as an example. “Today the linkages are much more complicated. This has to be clearly identified and early warning is absolutely necessary.”

He also defended his call for a more coordinated action between countries on the issue of fiscal stimulus. While agreeing that countries are “masters of their own policy” he added that economies representing 20-25% of global GDP “had some room to do something.” “It will need some coordinated action. It will be a long way before we have this idea accepted by everybody: that what is good for one country can be good for the world economy.” But, it is opinion that the solution lies in a “correct policy mix” and a “targeted, timely and temporary fiscal response.”

Questions for Discussion
1. Is the IMF wise in focusing on maintaining a primarily analytical role, or are they better positioned to take a more active monitoring role in global finance?

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