World Economy: What Went Wrong

The IMF concludes that a lack of regulation – not global imbalances – led to crisis, and “the distinction has important consequences for whether macroeconomic policy or more regulation of financial markets will provide the solutions to the mess,” reports the Economist. Economists examine the root causes, comparing problems to previous crises to develop solutions and prevent repeats. “The IMF argues that imbalances could not have caused the crisis without the creative ability of financial institutions to develop new structures and instruments to cater to investors’ demand for higher yields,” notes the Economist. Investors mistakenly relied on credit analysts, and regulators assumed that investment firms and mortgage lenders carried less systemic influence than banks. Minimal regulation increased the attraction, size and influence of bit players, transforming them into behemoths that dragged down the entire global economy. The IMF – which encouraged Asian nations to build up reserves more than a decade ago – encourages more international cooperation and regulation on leverage, cross-border banking, disclosure requirements and indices of systemic risk. “Nothing stops financiers from finding ways to evade the plethora of regulations that the fund is proposing,” warns the Economist in conclusion. “It is hard to shoot a moving target.” – YaleGlobal