What G20 Leaders Must Do To Stabilise our Economy and Fix ... - Vox

Europe's two priorities for the G20Daniel GrosDirector, Centre for European Policy Studies (CEPS)G20 members should boost IMF independence so it can act as a global 'whistleblower' to helpcall the next crisis. They should also start to bring the reach of banking supervisors more inline with the reach of banks. The failure of regulators to exchange confidential informationled national agencies to miss the systemic risk that arose when banks across the globe followedsimilar strategies.Generals, it is said, design their armies to fight the last war. Regulators, by analogy,design rules to prevent the last crisis.This explains today's focus on securitisation and rating agencies; attention whichis misdirected. The securitisation market has ground to a halt and the market viewsall ratings with a healthy dose of scepticism; these two areas should not figure highon the agenda for the reform of the global monetary system.The current crisis had a number of causes, some of which cannot be addressed –much less prevented – by even the best designed global monetary system. For example,the under-pricing of risk in almost all financial markets until 2007 was a globalphenomenon; regulators could not have prevented it. Nonetheless, something couldhave been done.• Monetary policy should have reacted earlier to the boom in house prices, and• Regulators should have forced banks to accumulate larger reserves for thetougher times that had to come sooner or later.The root causes of these two macroscopic failures need to be understood properlybefore we try to create a new Bretton Woods.Root cause of the macro failuresThe failure of central banks to react to the rising bubbles was not due to a poorlydesigned global system. It represented the dominant ideology over the last decade. Anideology which held that bubbles could be correctly diagnosed only after they burst.The job of central banks was to minimise the damage to the real economy by loweringinterest rates.This approach is now totally discredited. While we are unlikely to see another bubbleemerging anytime soon, 800 years of financial crises teach us that there will beanother. At that point, the global monetary system will need a 'whistleblower' – anorganisation which has the expertise to diagnose a bubble and the clout to make itsvoice heard.The BIS did repeatedly warn about the build up of risk in financial markets, but itswarnings were not heeded. The IMF is much better placed to be the world's whistleblower,i.e. to look at the macroeconomic dangers resulting from an excessive accu-33