Sub-Prime – IMF wants more involvement

Dominique Strauss-Kahn

The IMF’s remit is to create cooperation between nations to secure economic stability and growth. This used to be mainly domestic crises as large scale capital movements between countries were relatively rare. Strauss-Kahn commented that that was no longer the case and a problem in a single sector in a single economy—the housing market in the United States—has become a global problem.

Strauss-Kahn likened the present crisis to the perfect storm: “a macroeconomic environment with a prolonged period of low interest rates, high liquidity and low volatility, which led financial institutions to underestimate risks, a breakdown of credit and risk management practices in many financial institutions, and shortcomings in financial regulation and supervision. This environment fuelled the US housing boom and encouraged banks and other US and foreign institutions to take on excessive leverage to generate high returns.”

“Supervisory and regulatory frameworks have also not been up to the task” said Straus-Kahn criticising both the preventative frameworks and the solutions proposed. The US regulators received particular mention but he asked whether other countries’ supervisors and regulators had adequate frameworks.

Straus-Kahn sees monetary policy as the first line of defence and that a first priority was to restore confidence - with central banks continuing to provide liquidity, and financial institutions providing full disclosure of exposures to sub prime and related securities. He went on to outline proposed changes in the IMF’s remit, concentrating on macro impacts of interlinking economies rather than simply producing more and more general economic statistics and advice. He said that the fund is the only global franchise that can satisfy this demand.

Do we see a changed IMF taking a more authoritative global role in crisis management?