To overcome future crises, the global financial architecture had to be changed. There have been some proposals for a new, non-Bretton Woods type of financial architecture. The most widely-agreed upon suggestion was that additional regulation of the financial sector must take place. Economists all over the US and all over the world believe this is absolutely fundamental to preventing future crises. But this is minimal and, alone, will likely be unable to stop the influence of financial reversals. Other proposed reforms were hotly debated, however. Some issues under debate with respect to both the US domestic and international economic systems include:
1. What the global reserve currency should be--continue to be the dollar? Basket of currencies? One global reserve currency? (This did not happen at the G-20 in March 2009 and likely will not.)
2. How to deal with financial vehicles--what restrictions should off-balance sheet vehicles face?
3. Role of the IMF--should it become a global lender of last resort? Can it be reformed to better reflect the composition of its members? How can it better deal with global financial instability?
4. How to deal value bad assets on banking books?
5. How to reduce the magnitude of economic expansions and contractions--how to control short-term capital flows such as the carry trade? How to avoid creation of an asset price bubble during an expansion?
Here are some recent proposals on the crisis:
Alexander, Kern, John Eatwell, Avinash Persaud, and Robert Reoch. (2007) Financial Supervision and Crisis Management in the EU. European Union Policy Department Economic and Scientific Policy Study IP/A/ECON/IC/2007-069.
Jane d'Arista and Stephany Griffith Jones discuss financial regulatory reform: http://www0.gsb.columbia.edu/ipd/pub/DAristaGriffithJones_Financial.regulatory.reform.pdf.
Adrian Blundell-Wignall recommends the following reforms to prevent another sub-prime mortgage crisis (or similar) (quoted directly): (1) Reform of the International Monetary System, (2) Western monetary policy more global focus, (3) Downplay complex rules & models, (4) Greater focus on concentration of risk, (5) Consolidation of on and off-balance sheet bank exposures, (6) Competitive structures increase efficiency &, independence (7) A clear definition of what the bank-financial regulated sector is, (8) A single overarching regulator for prudential standards, (9) Lender-of-last-resort and comprehensive market liquidity provisions, (10) Recognition that bail outs & government guarantees on private assets cause moral hazard. The Subprime Crisis: Causal Distortions and Regulatory Reform, OECD: http://www.amf-france.org/documents/general/8442_1.pdf.
William Buiter discusses lessons from the crisis: http://www.nber.org/~wbuiter/NAcrisis.pdf.
Buiter, Willem H. and Anne Sibert. (2008) The Icelandic Banking Crisis and What to Do about It: The Lender of Last Resort Theory of Optimal Currency Areas. Center for Economic Policy Research Policy Insight No. 26.
An edited volume, The First Global Financial Crisis of the 21st Century, put out by CEPR, discusses both the causes, direction and policy proposals of the crisis: http://www.voxeu.org/reports/subprime/report.pdf.
Pedro Nicolaci da Costa in Shaky Foundations: Policy Lessons from America's Housing Crash puts forth the suggestion that the Fed should monitor housing price bubbles: http://www.levy.org/pubs/ppb_95.pdf.
James Crotty and Gerald Epstein discuss Proposals for Effectively Regulating the US Financial System to Avoid Yet Another Meltdown using a nine point regulation policy. October 2008 Download epstein.pdf (0.0K)
Paul Davidson, "How To Solve The U.S. Housing Problem and Avoid A Recession: A Revived HOLC and RTC" Download Davidson2008.pdf (0.0K)
China will propose a new world reserve currency at the April 2009 G-20 meeting: http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html.
Bary Eichengreen, May 2009, Out of the Box Thoughts about the International Financial Architecture, http://imf.org/external/pubs/ft/wp/2009/wp09116.pdf.
James K. Galbraith, Policy and Security Implications of the Financial Crisis, Challenge. October 2008. Download galbraith.pdf (0.0K)
Jan Kregel discusses the crisis and Treasury Secretary Paulson's bailout package in Will the Paulson Bailout Produce the Basis for Another Minsky Moment?, http://www.levy.org/pubs/pn_08_05.pdf, and writes about the need to incorporate off-balance sheet affiliates under financial supervision in Minsky's Cushions of Safety: Systemic Risk and the Crisis in the US Subprime Mortgage Crisis, http://www.levy.org/pubs/ppb_93.pdf. Changes in the US FInancial System and the Subprime Crisis: http://www.levy.org/pubs/wp_530.pdf.
Federal Reserve Board Governor Kevin Warsh, The Promise and the Peril of the New Financial Architecture: http://www.federalreserve.gov/newsevents/speech/warsh20081106a.htm.
L. Randall Wray, in The Commodities Market Bubble: Money Manager Capitalism and the Financialization of Commodities, discusses the need to minimize boom and bust cycles: http://www.levy.org/pubs/ppb_96.pdf.
Here are some previous, relevant proposals:
Jane d'Arista and Stephany Griffith-Jones discuss the buildup of US debt and its role in creating international financial instability, as well as policy implications. The Dilemmas and Dangers of the Build-Up of US Debt: Proposals for Policy Responses. November 2006. http://www.fondad.org/product_books/pdf_contents/6/Fondad-Global-Imbalances-Chapter04.pdf
John Eatwell. (2002) The New International Financial Architecture: Promise or Threat? Cambridge CFAP Lecture May 22.
Diane Elson, "International Financial Architecture: A View from the Kitchen" Download Elson.pdf (0.0K)
Charles M. Kahn and Joao A.C. Santos discuss properly coordinating regulatory behaviors of the lender of last resort and deposit insurance scheme. Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit Insurance and Supervision. February 2001. http://keiken8.kier.kyoto-u.ac.jp/~osano/Oct10.pdf
Here are suggestions for financial sector reform in specific countries:
Lekha Chakraborty critiques proposed Indian financial sector reforms: http://www.economicsofcrisis.com/Readings/lekha.pdf. Comments on the report can be viewed at:
http://planningcommission.nic.in/reports/genrep/report_fr.htm#comm.
