It was a junk world economy; a bad moon
Olly B [Olivier Blanchard] was on the beat, trying to consume
Some hedge funds so he could get some funk
Just rollin' in DC, chillin' all alone
Ah, the troubles IMF homies (gangstas?) have dissociating themselves from the excesses of neoliberalism. The document referred to in the post below is now up on the IMF site. Here we have a somewhat more honest discussion from the IMF crew about the troubles with securitization, derivatives, and the rest of it. However, it seems they're not telling us much new here. This being the Lenten season, I kind of expected more penitence. After all, this is the organization that (still) employs the David Lereah of international finance, its First Managing Director John Lipsky. This taken from the summary -
The IMF’s analysis points to failures at three different levels:
- Financial regulators were not equipped to see the risk concentrations and flawed incentives behind the financial innovation boom. Neither market discipline nor regulation were able to contain the risks resulting from rapid innovation and increased leverage, which had been building for years.
- Policymakers failed to sufficiently take into account growing macroeconomic imbalances that contributed to the buildup of systemic risks in the financial system and in housing markets. Central banks focused mainly on inflation, not on risks associated with high asset prices and increased leverage. And financial supervisors were preoccupied with the formal banking sector, not with the risks building in the shadow financial system.
- International financial institutions were not successful in achieving forceful cooperation at the international level. This compounded the inability to spot growing vulnerabilities and cross-border links.
- First, the regulatory perimeter, or scope of regulation, needs to be expanded to encompass all activities that pose economy-wide risks. Regulation should also remain flexible to keep up with innovation in financial markets, and it should focus on activities, not institutions. Risk concentrations should not be allowed to develop beyond the regulatory perimeter. Clarifying the mandate for oversight of systemic stability would be an important first step.
- Second, market discipline needs to be strengthened. The failures of credit rating agencies to adequately assess risk have been criticized by many, and initiatives to reduce their conflicts of interest and improve investor due diligence are underway. Other steps could include less reliance on ratings to meet prudential rules, and a differentiated scale introduced for structured products. Also, the resolution of systemic banks should include early triggers for intervention and more predictable arrangements for loss-sharing.
- Third, procyclicality in regulation and accounting should be minimized. Increasing the amount of capital required of banks during upswings would create a buffer on which banks can draw during a downturn. An international framework for provisioning is needed to reflect expected losses through-the-cycle rather than in the preceding period. Supervisors should also routinely assess compensation schemes to ensure they do not create incentives for excessive risk-taking. In addition, there is a strong case for improving accounting rules by acknowledging potential for mispricing in both good and bad times.
- Fourth, information gaps should be filled. Greater transparency in the valuation of complex financial instruments is needed. Improved information on off-market transactions and off-balance sheet exposure would allow regulators to aggregate and assess risks to the system as a whole. Such measures would also strengthen market discipline.
- Fifth, central banks should strengthen their frameworks for systemic liquidity provision. The infrastructure underlying key money markets should also be improved.
This paper does not seek to prescribe the specifics of various policy measures,since these will need to be defined by national regulators and international standard setters. Nonetheless, the Fund, given its unique mandate and broad membership, is well placed to both help define priorities and assist in implementation, and the following appear to warrant particular attention:And if your *ss is a buster--IMF will regulate.