Debating the IFIs
One of the most notable features of the financial crisis for me has been the almost complete absence of international financial institutions (IFIs) like the IMF and World Bank from the debate. Neither institution had the money to mount rescues on its own, and evidently neither has the respect or authority among senior policymakers in the big economies to take on a leadership role.
Which makes a growing debate over how to reform the two all the more interesting. There have been rumblings about doing something new with the institutions for years now. Just a year ago, some claimed that it might be time for the two to wind up their lending functions and focus on providing advice and serving as a data clearinghouse. Now, though, it looks like reforms might go the other way - strengthening the Fund and Bank so that they could act to head off international capital imbalances.
Some see a missed opportunity in recent years, with the Fund's inability or refusal to do more to bring capital flows between the US and China - which were one factor fueling the bubble in the US - under control.
Nancy Birdsall, blogging at the Center for Global Development, sees potential in some upcoming talks:
That raises the question of what Gordon Brown and Nicolas Sarkozy said to President Bush at Camp David this past weekend, where they presumably wanted to pursue Brown's idea of a Bretton Woods II. Ted Truman argues that this is not the time to be rewriting fire department rules -- while the fire is raging. Sebastian Mallaby argues that global coordination is not the priority, since most financial system reforms have to be done at the national level. Is it possible that Brown and Sarkozy were not discussing the technical details of global coordination on a derivatives clearinghouse and Tarp vs. bank recaps, but actually suggesting to Bush that in his final days he could propose a dramatic reform of the governance of the IMF -- along with the World Bank? (Robert Zoellick and the World Bank Board are inching toward some changes there.) Wishful thinking, perhaps, but it would make for a more lasting legacy!
I'm skeptical that these institutions will ever be able to rein in the big economies, which after all are pursuing their fiscal and monetary policies presumably for some purpose; it will be difficult to really affect the incentives for economies as large as the US. Still, if Bush, Brown, and Sarkozy can hammer out a new international economic architecture in the waning days of the Bush Administration, it will be interesting to see what they come up with and how it's received.
