Out of the Box Thoughts about the International Financial Architecture – IMF Working Paper


Interesting read from IMF: Take aways

1) Replenish the IMF’s bankroll annually. True, increases in IMF resources requires congressional approval in the U.S, which is always hard to obtain. Suggests nations should fork over enough money every year to assure that the IMF’s lending grows around 3% annually after accounting for inflation, so it has plenty of money to fight global downturns.

2) IMF taxes on surplus countries. Countries that run steep current account surpluses or build vast currency reserves — and thus throw the international financial system out of whack — would face an IMF-imposed tax. The goal: “ratcheting up the pressure on central bank and government to adopt policies of adjustment.”

3) Make SDRs a global currency. The IMF has a kind of quasi-currency called “special drawing rights,” which aren’t used for anything especially useful. The Chinese suggested having SDRs one day replace the dollar. He would commercialize SDRs to turn them “into a true international currency.”

4) Global Glass-Steagall Act. The financial crisis was caused, in part, by regulated banks taking risky flyers on new financial instruments. Why not reimpose the Glass-Steagall Act, which separated commercial banking from investment banking — but make the rule global. “A relatively light-handed approach” would incorporate the requirement into the Basle Committee’s core principles, he suggests.

5) Global risk insurance. Require banks to purchase catastrophic risk insurance. They would do this by issuing financial catastrophic bonds — Cat bonds –which would make large payouts in the event of systemic failures. He figures hedge funds would be willing buyers of the bond and the IMF could help get the market going.

6) International bankruptcy court. This idea was all the rage after the Asia crisis, but interest petered out as the global economy recovered.

7) World Financial Organization. There’s a World Trade Organization to resolve international trade disputes. The WFO would establish principles of financial supervision and resolves cases where countries violate the principles.

8 ) Remake the IMF. Scrap the 24-member executive board, which acts slowly and ineffectively. Management would be overseen by a higher level council that meets periodically and could fire top officials.

#3 is a big one, basically devaluing the US dollar as the reserve currency. Not sure that is a good outcome for the U.S.


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