On two of these conclusions we can agree. There is a crisis looming: not necessarily a catastrophe, or even a slump. But you cannot have half the world in recession, and at least half the Western banking system over- exposed in Russia and on hedge funds, without there being serious ramifications. At the most basic level, companies can now expect to find it more difficult to raise finance, as the banks pull in their horns to cope with their losses elsewhere, while countries in the Third World will be pushed to the background when asking for new loans. At the worst, a systemic crisis will gather pace, moving from Asia to Russia to Latin America, pulling down the global financial system with it.
It is also self-evident that the institutions that should have warned, if not actually coped with, this gathering crisis - the IMF, the World Bank and the Bank of International Settlements - have singularly failed in their task.
But, to the question "what is to be done?", the answer has to be more cautious. The UK Chancellor, Gordon Brown, has talked of creating a new global supervisory body out of a partial merger of the World Bank and IMF. President Clinton has suggested creating a new pool of liquidity with which to absorb crises before they get out of hand. The French, with the backing of the new German Chancellor, Gerhard Schroder, want a radical reworking of the terms of reference of the IMF and World Bank. Little wonder that the Japanese, the "bad boys" of the world's economy, have raised an eyebrow. These were the very suggestions that they made a year ago, when the Asian financial crisis was just emerging, only to be dismissed by American officials.
The US was right then and wrong now. There is no case for throwing good money after bad in a banking crisis. As the Russian debacle showed, easing the terms of loans for political reasons only increases the problem. To say that, however, is not to encourage the creation of Clinton's "pool", nor to raise the Fund's position, as Gordon Brown would seem to wish, to a position of final sweeper-up of financial disasters. It cannot be that, and it shouldn't.
The crucial point is that this is a banking crisis, set off by over-lending by the banks, and threatening because it could easily lead to a credit crunch everywhere. The most important regulatory response is to find out just how great the exposures are and to ensure that they are properly supervised. For that, you don't need a new World Financial Authority, but greater co-ordination of national authorities, and a radical toughening up of overview by the Bank of International Settlements. Equally, the most effective response by governments should be a reduction in interest rates in the Western countries. The US has now led the way, albeit with too small a reduction, and very directed to its own domestic needs. Britain should follow. If anything has come out of this crisis it is a recognition that the balance of risk has moved from inflation to recession.
But there is something else that should be considered, if the lessons of yesterday are to be learned today to prevent problems tomorrow. If the international institutions have failed us, it is has been as much a problem of leadership as of structure. This week sees the annual meetings of both the IMF and the World Bank. It is time that their chiefs, Michel Camdessus and James Wolfensohn, were called to account, and, in the former's case, replaced.Reuse content