B5

J. COLIN DODDS
GLOBAL insiGHT

Stumble Upon

del.icio.us

Digg

Facebook

Print

Email

Speak Up

The fundamental underpinning of traditional banking is the maintenance of confidence and trust. There will be an imbalance between the timelines of the deposits, which are generally short, and loans, which are often long, particularly in the case of mortgages. So if there is a run on the bank, no matter how solid the book of assets is, in the absence of external support, it will fail - Banking 101.

Enlarge Photo

Kirsty Wigglesworth/the associated press

Although the IMF is currently assisting some countries, its resources are meagre. It was no surprise then that Prime Minster Gordon Brown of the U.K., acting as global financial saviour, was in the Middle East with his begging bowl earlier this month, with others making similar overtures to China. If policy makers are looking at a reformatted IMF, it will need a radical rethink and commitment of resources by many countries

And as we have seen in this current crisis, with cross border linkages, bank failures in one country can lead to regional and global financial and economic contagion - no decoupling here!

In the 1946 movie, It's a Wonderful Life, Jimmy Stewart prevents a run on the bank in Bedford Falls. In real life, however, it is governments who have to restore confidence and they can have conflicted roles. What might be right for one country may not fit the system as a whole. Certainly the measures adopted by the U.S. government and many governments in Europe to rescue banks have not been coordinated and have been seen by some as rewarding risky behaviour and management incompetence.

However, governments have had to hold their noses as the alternative was systemic failure and a certain slide into a severe global recession the likes we have not seen since the 1930's.

This financial crisis is taking some taming, but assuming we are at the beginning of the end of the crisis itself, but not its economic and social aftermaths, then to prevent any further aftershocks we have to ask ourselves the question "What can we learn from this?"

The upcoming G20 Summit does, if it leads to a more formalized and inclusive conference, have parallels to the 1944 Bretton Woods Conference for which there was two years of planning not a weekend. The outcome saw the establishment of the IMF and the World Bank.

However, there are key differences as the U.S.was the axis of the world economy. It is therefore not surprising that it was the U.S. plan of Harry Dexter White for the IMF that was adopted and not the more radical British plan of John Maynard Keynes.

The world is now more complex than it was in 1944 with a vast array of emerging economies and many centres of wealth and financial muscle, including the EU, Asia and the Middle East. Whether we like it or not, we are all inextricably linked together through our trade and investment flows and divided we all fall.

While the planning for the post 2008 financial tsunami has a shopping list that is relatively easy to develop, it will be more difficult to structure, finance and implement. To be specific, policy makers will have to develop coordinated regulatory reforms to attempt to prevent a future crisis and establish effective surveillance systems to warn of an impending crisis. Finally, post crisis co-ordinated policy responses are needed if we are hit with another financial sector meltdown.

The current institutional framework inherited from Bretton Woods is not structured to provide for such a radical and multilateral response. So although the IMF is currently assisting some countries, e.g. Iceland, Hungary and Ukraine, its resources are meagre in comparison to what governments have spent so far and what will be needed the next time.

It was no surprise then that Prime Minster Brown of the U.K., acting as global financial saviour, was in the Middle East with his begging bowl earlier this month with others making similar overtures to China.

If policy makers are looking at a Bretton Woods Mark II with a reformatted IMF, it will need a radical rethink and commitment of resources by many countries and perhaps a change of location from the U.S. But, experience has shown that public policy initiatives tend to be more incremental in nature. If we add the dimension of trying to develop international consensus, which would involve ceding some monetary authority to a new supra national authority, this will be difficult.

Much as we might yearn for the return of the 1940's, unfortunately there is no Jimmy Stewart equivalent today to replace the Pax Americana order. But wait, perhaps a dusting off of some of elements of the alternative plan by Keynes for the IMF, which included an international reserve currency could, even 64 years later, provide a basis for a new more inclusive monetary world order!

J. Colin Dodds, is president of Saint Mary's University and a professor of finance in the Sobey School of Business.