IMF Position Paper

The 2008-09 global financial crisis was a period of global economic turmoil that experienced many asset pricing bubbles, especially within the housing market. Understanding the underlying causes of the crisis is necessary to correct the global financial system and broader economy. The IMF has identified main problems as “a failure in the global architecture in providing adequate warnings prior to the crisis and regulatory failures at a number of levels” (IMF Annual report, 9). Among these regulatory failures are excessive risk taking driven by low long-term interest rates, poor financial regulations in individual countries and globally, and weak crisis management response mechanisms. Another concern is the focus on keeping inflation down, while not recognizing that asset price bubbles pose a similar inflationary risk. The ensuing recorrection of asset prices demonstrated gross overvaluing and speculation characterized by the crisis.

The main cause for concern, however, is the ensuing credit crunch and global lending freeze. The IMF hopes to enact a number of policy changes to stimulate global lending. Most important was recapitalizing the banking sector and providing stimulus packages for countries that required it. The IMF has also created a device called the Flexible Credit Line (FLC), which allows quick lending to member nations in the event of a crisis. Along with the increased general lending capacity and expanded Special Drawing Rights (SDRs) capacity, the IMF now has increased lending power and liquidity to offer its member nations.

The combination of regulatory failure and the need for increased international lending points to a necessary expansion of the IMF’s role. The lack of international cooperation before and during the crisis signals that a global regulatory system is necessary, and the IMF should expand to ensure cooperation. If the IMF were to act as a global regulator, it would be able to mitigate risks by ensuring its member nations follow sounds macroeconomic policies. In IMF parlance, a “new international financial architecture” is needed moving forward, and the IMF should play a key role in this new structure.