Wednesday, 26 September 2012

IMF on More Money Printing and More Regulation

The IMF yesterday published its "Transcript of a Press Conference on the Analytic Chapters of the Global Financial Stability Report". Here are some of the comments from the press conference by Laura Kodres, Assistant Director, Monetary and Capital Markets Department (my bold),
The good news is that globalization has not been seriously harmed as yet except in crisis hit economies in Europe. But this also means that in the absence of proper policies, bad outcomes from one country can easily affect the financial system in another.
Why do we see so little progress? It is worth recognizing that we are still in the crisis in some regions and crisis intervention measures to prevent deeper financial system distress and those to bolster nascent economic growth remain in place.
The recent introduction of further central bank efforts along these lines, QE3 from the Fed, OMT from the ECB and similar quantitative easing from the Bank of Japan, attests to the need for ongoing crisis fighting efforts. While these need to be in place, this is also the time to think about their inadvertent side effects on financial stability. Some of the cleansing of the financial system has not yet taken place, preventing a reboot along a safer path. Even if the needed restructuring had taken place, financial structures tend to move slowly and the reform agenda had built in rather generous implementation schedules in part to allow the economy to recover. So we want to emphasize that while we cannot definitely say financial systems are safer than 4 years ago, we want to emphasize the somewhat part of our answer. Going forward, we provide in this chapter a framework that can be used to assess the effects of reforms on the structure of financial intermediation when the dust has fully settled.
Lastly, what can we learn from the analysis about what we can do? Taking stock of all the regulatory reforms to date, we can see some areas that still need to be addressed. These areas include, one, more discussion on what it takes to break the too-important-to-fail conundrum including a global level discussion of the pros and cons of direct restrictions on business models. We can already see that the Volker Rule in the United States which aims to force banks to divest their trading businesses and the Vickers Commission proposals in the United Kingdom which would -- retail banking from investment banking activities will have effects beyond their respective jurisdictions and a global perspective is sorely needed.
You wouldn't expect anything different from the IMF and from somebody working for the IMF with a background from the Fed (see here). We can only advise her to stop looking, at least for a few days, at all the data underlying their research (including looking for causal relationships) and read up on some economics 101 terms such as "moral hazard" and "free market economy" and having respect for tax payer money (including inflation) and applying some common sense (easily forgotten sometimes in bureaucratic environments). Oh, and one last thing, the "too-important-to-fail" is not a "conundrum" at all. Just let such companies ("too-big-to-fail" banks mostly of course) fail whenever they are insolvent, end of story.
Here's the whole transcript if you struggle falling asleep tonight.

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