Friday, October 17, 2008

Credit Crisis a Hot Topic at IMF/World Bank Annual Meeting

Sources: IMF Survey Online, World Must Act Together to Limit Crisis Damage—IMF; IMF/World Bank, 2008 Annual Meetings Boards of Governors; 2008 Annual Meetings, Program of Seminars;

On October 13th, IMF Managing Director Dominique Strauss-Kahn reflected on this year's World Bank/IMF Annual Meeting, which took place from October 10th to October 13th in Washington D.C. Since 1946, the IMF and the World Bank have met annually to discuss their work. These "annual meetings" are usually held in Washington D.C. for two consecutive years and in one of the other member countries every third year. Among the topics discussed at this year's Meeting were high oil prices, the food crisis, and climate change. Meeting coordinators also dedicated a full day to discussing the global credit crisis.

Unsurprisingly, Strauss-Kahn's reflections on the Meeting centered around the credit crisis. Though he stated several times that the world has a "very long way to go" before it recovers from the crisis, Strauss-Kahn seems to think that "things are beginning to turn around." While many fear that this has been, or will be, the worst crisis that the world has faced since the Great Depression, Strauss-Kahn maintains that the international community has learned much since the Depression and is now armed with the tools that are necessary to respond to the current crisis.

Much of the discussion at the Meeting's credit crisis seminars seems to have focused on what the international community should do to limit the damage that the crisis has caused to the real economy, as opposed to the market economy. Strauss-Kahn stressed the idea that countries should coordinate their reactions to the crisis, so as to make sure that their acts do not negatively affect other countries' prospects of recovery. He emphasized that he does not expect countries to act uniformly, but that he merely hopes that they coordinate so that they don't harm each other.

Based on discussions at the Annual Meeting, Strauss-Kahn also formulated specific recommendations to countries depending on their level economic development. In his view, advanced economies should use fiscal policy to ease pressures in the financial and housing sectors. Emerging economies, on their end, should be prepared to finance temporary shortfalls in capital flows. He also advises developing economies to be prepared for decreases in demands for export goods and for reduced access to trade credit. He pointed out, however, that neither emerging nor developing economies should alter their aid budgets as a result of the crisis.

Strauss-Kahn concluded his statements by sharing his views on the factors that he believes caused the credit crisis. In his view, the crisis was caused by the convergence of three failures: (1) the failure of advanced economies to regulate and supervise their financial institutions, (2) the failure of private institutions to manage risk, and (3) the failure of market discipline mechanisms, which are the mechanisms by which both investors and banks ensure that they are properly managing risk.

Strauss-Kahn's assessment of the rise of the crisis is sure to be the topic of discussion as international actors react to the ideas drawn from the Annual Meeting and, specifically, the policy recommendations that Strauss-Kahn has issued regarding the credit crisis.

Discussion Questions:

1- What do you think of Strauss-Kahn's theory that countries should act in a coordinated, though not uniform, fashion in response to the credit crisis? What is the distinction between the "uniform" and the "coordinated" approach? Is it realistic to distinguish between the two?

2- The Annual Meeting dedicated a full day of discussion to the global credit crisis. Do you think that this was an appropriate time allocation? Should the Meeting's coordinators have dedicated more time to the crisis, given its magnitude?

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