Summary: Amid talk of a new“Bretton Woods,” leaders of advanced and emerging economies
met for the rst time in November2008 to discuss the global nancial
crisis. The crisis has clearly demon-strated the potential weaknesses of
the existing nancial and regulatoryarchitecture. Capital crosses borders
instantaneously and virtually seam-
lessly, but it is national bodies thatare tasked with ensuring the nan
cial system’s stability. International
cooperation is required.
The solution lies in better coordina
tion between national supervisors
and a strengthening of existing international institutions—not a
global regulator. The challenges are
not easy and as the crisis is slowlyresolved, the political pressure towork internationally may lessenover time. However, this is an argu-ment for sustaining momentum—not an argument against trying.The effort of European leaders toinvoke the spirit of Bretton Woods
is not a bad place to start.
Economic Policy Program
Amid talk o a new “Bretton Woods,”leaders o advanced and emerging econo-mies met or the rst time on November15, 2008 to discuss the global nancialcrisis.
One meeting was never going tosolve the huge problems acing the globaleconomy, but they have made a solidstart, providing a oundation upon whichto build when they meet again in April2009. This crisis demands internationalcooperation.The nancial crisis has demonstrated alltoo clearly the potential weaknesses o theexisting nancial and regulatory archi-tecture. This is a world in which capitalcrosses borders instantaneously andvirtually seamlessly. And let’s be clear:there is signicant economic benet tothe global economy rom that integration.It raises growth through more ecientcapital allocation, through lowering thecost o capital, and by acilitating cross-border trade and investment.But the regulators and supervisors taskedwith ensuring the nancial system’sstability are national, rather than global—making it dicult to identiy andguard against systemic risk acrossnational borders. Thus, a ailure toprovide adequate regulation or supervi-sion in one country can easily spill over tomany others, and a crisis that develops inone part o the world can spread withalarming and devastating speed.That is exactly what we now witness.Even businesses and countries with littledirect exposure to the toxic securities atthe heart o the crisis
have been draggeddown by the tightening in credit marketsthat ollowed. Now, as the real economy eels the ull orce o these shocks anddemand alls, the problems are spread-ing wider still. Growth has altered in thedeveloped world, with Europe, the UnitedStates, and Japan tipping into reces-sion; emerging markets, meanwhile, aceshrinking demand in their major exportmarkets, and are particularly vulnerableto the turmoil in global capital marketsthat has seen investors running or cover.The leaders meeting in Washington wereacutely aware o the need or immedi-ate action to boost growth in the ace o these problems; signicant monetary and
Fixing the Global Economy: Why a BetterFuture Requires International Cooperation
by Richard Salt
1744 R Street NWWashington, DC 20009T 1 202 745 3950F 1 202 265 1662E email@example.com
International Regulatory Cooperation
Richard Salt, a transatlantic fellow with the German Marshall Fund of the United States (GMF) since 2006, is an expert on the trans
-atlantic economy and international regulatory cooperation.
The views expressed here are those of the author and do not necessarily
represent the views of GMF.
The “Summit on Financial Markets and the World Economy” has widely been described as a meeting of the G-20 group of nations.Strictly speaking, however, the G-20 is a meeting of nance ministers and central bank governors – not a meeting of Heads of Government. Furthermore, this Summit also included countries not normally present at G-20 meetings: Spain, the Netherlands, theCzech Republic all participated, albeit as representatives of the European Union, which is a G-20 member.
This is, of course, not the same as saying that all problems can be traced to sub-prime lending or weaknesses in regulation of thenancial innovation that appeared, for a time at least, to reduce the risks of such lending. For example, global imbalances, thatresulted in capital ooding into the U.S. and engaging in a search for high-yield investments, doubtless contributed to the scale of the problem. For an overview of the origins of the sub-prime crisis, see, for example: Goldstein (2008) “The Subprime Credit Crisis:Origins, Policy Responses, and Reforms,” Peterson Institute for International Economics, http://iie.com/publications/papers/20080612goldstein.pdf.