Tackle Roots of Crisis, Not Just Symptoms, Says Weber

Global crisis had specific underlying causes that should be dealt with

Authorities have enough tools already to deal with crises

IMF brings global expertise to financial crisis management

The global crisis was not a random event but “can be traced back to specific causes such as inadequate institutional arrangements or mistakes by market participants and policymakers,” Weber said in a lecture at the IMF in Washington D.C. Therefore, the objective should be to tackle the roots of the crisis by formulating good monetary, fiscal, and regulatory policies rather than “creating ever more instruments to fight the symptoms.”

As devastating as the global economic crisis was, authorities were able to manage with the array of tools they had, said Weber, who headed the German central bank from 2004 until last April. In the annual Per Jacobsson lecture, Weber rejected proposed new instruments, including several that would involve an expanded role for the IMF.

But Weber said the crisis also demonstrated “that the IMF is an indispensable global institution” that played a crucial role in fighting the crisis at the global level by bringing its unsurpassed analytical skills to bear on the crisis and its root causes, for its provision of resources to distressed countries, and its technical advice.

Global scope

Weber said that globalization means that there will be no more purely regional economic crises and that the IMF is the only institution that brings a global scope to financial crises. The IMF’s great strength, he said, is its unsurpassed analytical ability.

In the ongoing sovereign debt crisis in Europe, Weber said, the IMF is playing an important role in encouraging the political process to deal with the underlying cause of the problem—excessive debt—and to impose conditions on loans that require borrowing countries to take steps to reduce their indebtedness.

Weber, in his address on September 25 titled “The IMF and the International Monetary System: Lessons from the Crisis,” also cited the problems caused by large inflows of foreign capital into emerging markets and said the IMF should play an enhanced role in monitoring the flows and advising countries on proper policies to deal with them.

Undesirable expansion

Weber said he would not take a single item in the toolkit away from the IMF. But he said proposals to enhance IMF capacity for financial management are undesirable—such as creation of a permanent international liquidity mechanism...