Thursday, October 09, 2008

United We Recover, Divided We Recess: IMF Director Commends Central Banks For Coordinated Response to Crisis

Sources: International Monetary Fund, "Statement by IMF Managing Director Dominique Strauss-Kahn on Coordinated Interest Rate Cuts and Further Policy Action"; Financial Times, "ECB Offers Banks Unlimited Liquidity"; Financial Times, "Asian Central Banks Cut Interest Rates"; Business Standard, "Dominique Strauss-Kahn: A comprehensive and global solution needed"

On October 8th, IMF Managing Director Dominique Strauss-Kahn commended Western central banks for their unified approach to the global credit crisis. On that same day, six Western central banks, including the Federal Reserve and the European Central Bank, coordinated to reduce their interest rates by half a percentage point. The central banks acted together in hopes that their coordinated move would have a stronger effect on the economy than the independent measures of national governments. Strauss-Kahn, who recently advocated for a unified European reaction to the global credit crisis, viewed the banks' joint effort as a sign that the world's financial leaders are ready to restore order and growth in the international financial system.

Strauss-Kahn also issued several recommendations for a unified response to the crisis. His recommendations reflected his belief that restoring confidence in the market is essential to remedying the current state of the economy. One of Strauss-Kahn's principal recommendations was that international actors adopt a uniform approach to protecting depositors. In his view, countries that are guaranteeing deposits in their own banks are only achieving short-term solutions, and in the long-run, are harming other countries' financial systems by "stealing" depositors.

Strauss-Kahn also suggested that institutions provide liquidity to financial institutions to facilitate movement in the market. The European Central Bank has apparently already responded to this suggestion, as it announced on October 9th that it would offer unlimited liquidity to eurozone banks during its weekly auctions.

Notably, since Strauss-Kahn issued his statements, Asian central banks have coordinated to cut their interest rates. On October 9th, Central banks in South Korea, Hong Kong and Taiwan all lowered their interest rates in hopes of reducing the risk that the credit crisis will spark a global recession. As events related to the global credit crisis continue to develop, it will be interesting to see how international financial organizations respond to Strauss-Kahn's recommendations.

Discussion Questions:

1- Strauss-Kahn has consistently called for a uniform response to the credit crisis. Is it reasonable to expect that independent countries, who often act in their own self-interest, will act for the good of the international financial community rather than for the benefit of their own institutions?

2- Shortly after Strauss-Kahn issued his statements regarding the coordinated efforts of the central banks, the European Central Bank took the unprecedented step of offering unlimited liquidity to eurozone banks. What role, if any, do you think Strauss-Kahn's statements played in the central bank's decision?

3- Spokespersons for the central banks stated that they hoped that their coordinated acts would have a greater impact on the state of the global economy than the individual acts of national governments. Do you agree that a cooperative approach to the crisis will lead to better results?

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