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Wanted: a guardian of the world’s financial system

Wanted: a guardian of the world’s financial system
It is time for a fundamental discussion about updating the 1944 Bretton Woods agreement
John Grieve Smith, FT April 12 2007

The writer is a fellow of Robinson College, Cambridge

Today, with free movement of capital and floating exchange rates, crises tend to be international and can have widespread effects on both financial markets and the real economy.

The Fund must work closely with the Bank of International Settlements and its Financial Stability Forum to improve financial regulation.

The Basel II Accord has improved bank regulation, but there is still too much leverage in the financial system with the growth of hedge funds and derivatives.

The most obvious threat today is the belief that a key currency, the dollar, is overvalued and that a sudden flight from the dollar could lead to sharp falls on Wall Street and a widespread recession.

The IMF should be devoting its attention to means of achieving an orderly devaluation of the dollar and a better pattern of important exchange rates.

This leads to the question of whether continued reliance on floating exchange rates will ensure adequate stability or whether we should move to some form of managed system or systems. At the moment the fashion is for either currency unions – such as the euro, or tying a rate to the dollar or some other important currency – at one extreme, or floating freely at the other. We should consider so called “inter­mediate systems” that limit daily currency fluctuations to predetermined bands, but make provision for adjusting parities and bands from time to time in relatively small steps.

Comment by Rolf Englund:
Oh, The Return of The Crawling Peg and The Moving Bands, which I wrote about many years ago.....

Full text

Let dollar fall or risk global disorder
Is it possible to reduce the US deficit substantially without exchange-rate changes?
The answer is that it would be possible, but catastrophic for all participants, because it would demand a deep US recession
Martin Wolf, Financial Times, May 9 2006

The optimists will be right until they are wrong.
I am not sure this scenario is any less likely than the optimists’ case, according to which global imbalances either never adjust or adjust in a benign way. Wolfgang
Wolfgang Munchau, FT 11/12 2006

Internationella valutafondens roll i krishantering: fallet Asien
Ekonomisk Debatt nr 2/1999

"Asiens skuldkris hot mot världsekonomin"
Rolf Englund i VI-direkt, mars 1998.

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