Since the outbreak of the 2007-2009 global financial crisis, epicentered in the US and triggered by the subprime mortgage mess, there has been a flurry of effort to understand its causes and learn the necessary policy lessons from it so that a similar future crisis can be mitigated, if not avoided.
Determined to be at the forefront of that effort, the International Monetary Fund (IMF) held last Monday and Tuesday an academic conference with the theme “Macro and Growth Policies in the Wake of the Crisis” to extract the first set of policy lessons from the global crisis, based on the premise that the crisis had revealed the limits to both markets and government intervention.
The conference was organized as six panel discussion sessions by Olivier Blanchard (the IMF's economic counselor and director of research), David Romer (University of California, Berkeley) and two Nobel laureates, Michael Spence (Stanford University) and Joseph Stiglitz (Columbia University). The six session topics, aimed at answering the question of how the crisis should affect our views on those topics, were: I. Monetary Policy, II. Fiscal Policy, III. Financial Intermediation and Regulation, IV. Capital Account Management (especially relevant for emerging market economies such as Turkey confronting hot money inflows), V. Growth Strategies, and VI. The International Monetary System.
The conference panelists and attendees came from both developed and emerging market economies, including Turkey's Kemal Derviş, who chaired the session on Fiscal Policy. The conference was highly ambitious in its “wholesale re-examination of macroeconomic policy principles,” trying to cover across the board the policy lessons of the recent crisis. In his opening remarks, IMF Managing Director Dominique Strauss-Kahn stressed that “the last few years have not only been a crisis for the global economy, but also a crisis for economists.” The panel discussions generated occasionally lively debate, stimulated by penetrating questions and challenging comments from attendees at the end of each session.
This exploratory conference did not result in a new set of policy prescriptions (Washington Consensus II), as noted by Professor Blanchard in his closing remarks. It did, however, set the stage for further debate required to continue learning the policy lessons from the crisis. The conference proceedings, which were webcast live, are available as video files and several presentations as documents on the IMF website. The website also has background notes as well as a bibliography, consisting of several relevant papers on each of the six session topics.
Last Wednesday, the day after the conference, the IMF issued a discussion note titled “Crisis Management and Resolution: Early Lessons from the Financial Crisis,” with seven co-authors, including Turkey's Ceyla Pazarbaşıoğlu, assistant director in the monetary and capital markets department. This note explains how and why policy choices, their mix and sequencing, varied in 12 countries in the recent crisis and 17 more in past financial crises dating back to 1991, including Turkey's 2000 banking crisis. It also evaluates the present state of financial and operational restructuring as well as institutional reform.
Its troubling conclusion is that thus far the policies, reflecting a muddling through approach, in coping with the recent crisis -- unlike those more effective ones in the past crises, especially in developing countries -- have dealt largely with its symptoms instead of tackling its underlying structural causes. Therefore, the complex and interconnected global financial system, suffering from incomplete and inadequate financial sector repair and reform in developed countries, not only threatens global economic recovery but also remains vulnerable to future crises.
On April 7, there will be another IMF academic conference, organized by the macro-financial unit of the IMF research department, on the theme “Macro-Financial Stability in the New Normal.” This conference will reassess monetary and regulatory policies to reduce systemic risk and avoid severe financial crises. It will focus on the weaknesses in macroeconomic and regulatory policies as well as market failures that had raised the systemic risk in the buildup to the recent crisis.
Among the questions it will try to answer are: To what extent did monetary policy and financial regulation cause the crisis? How can monetary policy be used toward greater financial stability? How can more effective macro-prudential and regulatory policies be designed based on the lessons learned from the global crisis? How can emerging market economies benefit from those lessons in coping with volatile foreign capital inflows? Based on those lessons, what should the limits to financial liberalization be?
Acknowledged as “a humbling fact” by Mr. Strauss-Kahn, the IMF failed to warn about the global financial crisis “in a sufficiently early, pointed and effective way.” (See my column “The IMF's surveillance stumble in the run-up to the global crisis,” Feb. 14.) We should be pleased that the IMF has been trying to redeem itself through its commendable efforts to distill the necessary policy lessons from that crisis.