The view was nearly unanimous: collective action involving co-ordination among central banks is a must to prevent another crisis from re-emerging.
While central bank governors from seven countries and the finest economics brains such as Nobel laureate Andrew Michael Spence and financial sector wizards such as Stephan Roach, who were here for the first international research conference organised by the Reserve Bank of India (RBI), might have suggested another round of co-ordinated action, in practice, the situation would have been different.
“Every country is at a different stage of getting out of the crisis. Advanced economies are getting out of the crisis slowly, while emerging economies are getting back to high growth rates,” says Jorgen Elesmov, acting head, economics department of the Organisation for Economic Co-operation and Development (OECD).
Every central bank has to make policies and take action keeping in mind country-specific challenges despite the lack of a consensus. But, that is not enough in a globalised world to ward off cascading effects of the troubles in one financial market.
Governor Miguel Fernandez Ordonez of Banco de Espana said, “We must emphasise the significance of unprecedented coordinated action led by G20 in avoiding another great depression, and in view of the expected difficult years ahead, we must sustain the global approach despite domestic differences in policies.”
The theme of the conference was “Challenges to central banking in the context of financial crisis”. More than 50 international dignitaries, including seven central bank governors, several deputy governors, academicians and eminent personalities from the IMF, the World Bank and the Bank for International Settlements participated in the two-day conference.
While each speaker made a strong case for global coordinated action, inefficiencies in the present international monetary system and organisations did not escape their attention.
Subbarao was categorical in his remarks that the international monetary system was inadequate to prevent a major structural problem, that is, global imbalances, which had to manifest in the form of some crisis or the other at some stage. He noted that even though India did not contribute to global imbalances, it had to face the consequences.
There was no consensus on the role of monetary policy for directly doing anything about asset prices and no one view could be reached on whether financial stability could be an explicit mandate of monetary policy.
The lender of last resort (LOLR) and regulations were seen as potential instruments to safeguard financial stability. But many pointed to limits of looking at them, as only these tools for dealing with complex situations. The discussions gave a clear message that macro-prudential regulations should be next step among an array of policies to sustain financial stability.
The aversion for supporting efforts to develop new financial products due to the ill-effects of excessive use of derivatives in the present crisis still gripped the mind of most. But many speakers cautioned against such excessive pessimism. Financial innovations with appropriate safeguards could contribute to high global growth, more particularly in emerging markets and developing economies.
John Lipsky, first deputy managing director of International Monetary Fund (IMF), said, “Without a renewed effort to foster financial innovation in the global economy, all countries, including emerging market economies, will underperform their potential.”
Innovations could perform three important tasks: First, open up new markets such as markets for long-term financing and efficient risk sharing; second, deepen liquidity in existing markets; and third, raise the quantity and quality of investments, he said.
Huge liquidity pumped into global financial system post financial crisis may balloon debt levels in developed world. Its effects on independence in policy-making, a matter close to heart of central bankers, topped the mind of many at the conference.
The broad view was that the different dimensions of central bank independence might come under threat if high debt levels of governments persisted over a protracted period of time.
