A new job for the IMF: as global policeman

29 November 2008

The International Monetary Fund was beginning to look like a has-been, says Elliot Wilson, but in the aftermath of the current crisis it may find an important new role

The IMF and the World Bank, or perhaps a combination of the two, would need to be capable of monitoring and supervising the world’s now horrendously complex financial markets. They would need to identify and eradicate the sort of internationally tradable financial products — credit default swaps, collateralised debt obligations, bundles of subprime mortgages — that got us into this mess, while approving new instruments that create wealth and act as a positive force for stability.

A single multilateral acting as a proper global institution, with greater input from the likes of China, Brazil and India, would also need to decide on the degree of leverage permissible in financial services, and on the licensing of new financial regulators. The IMF would also look more ‘international’ if it scrapped the super-veto that America, its largest donor, regularly wields. Other 1940s anachronisms — the right of America to appoint the World Bank president and for Europe to impose its choice of managing director, usually French, on the IMF — must also surely go. Finally, the new body would need to incorporate some sort of Defcon-style system warning of bubbles forming in world markets, from level five (say, an overheating Latvian housing market) right up to Defcon 1, for maximum readiness precipitated by massive international financial meltdown.

‘We need to have a way of knowing when things are going wrong,’ says Bottelier. ‘[Former US Fed chairman Alan] Greenspan’s prescription that a cure is better than prevention is now totally discredited. We need to know when bubbles are being created and when they are becoming dangerous. We need a warning system, and there’s no better institution set up to do that than the IMF.’