Friday, May 13, 2016

Claudio Borio (BIS) - More Pluralism, More Stability?

We have covered a number of presentations by BIS Official Claudio Borio here on this blog such as this one we looked at earlier this year. Mr. Borio often discusses topics that relate directly to what we cover here regarding potential change to the international monetary system. In a new speech, Mr. Borio looks at the question of whether a more pluralistic system (where the US dollar is not as dominant) will actually result in a more stable system. Below I have pasted in the three "takeaways" from his presentation and the conclusion section. After that are some added comments.


"There are three takeaways from my presentation. 

First, there is no doubt that the dominance of one currency creates challenges for the IMFS (International Monetary and Financial System). Fundamentally, the domestic interests of the country of issue need not coincide with those of the system as a whole. 

Second, it is less clear, though, whether a more pluralist system, even if it was achieved, could help address the IMFS’s main weakness. To my mind, that weakness is its inability to prevent the build-up and unwinding of hugely damaging financial imbalances, or outsize financial cycles, thereby amplifying weaknesses in national arrangements (Borio (2014a)). This is what, with a colleague, Piti Disyatat, we have termed its “excess (financial) elasticity” (Borio and Disyatat (2011)). Think of an elastic band that you can stretch out further and further but that, as a result, snaps back more violently. 

Third, addressing this weakness would require stronger anchors at national and international level. Some progress has been made, especially at national level. But much more needs to be done."

. . . . . . .


"I have argued that the Achilles heel of the IMFS is that it amplifies the key weakness of domestic monetary and financial regimes, ie their inability to prevent the build-up and unwinding of hugely damaging financial imbalances (outsize financial cycles) – or “excess (financial) elasticity”. If so, the main problem is the lack of an effective anchor for the system as a whole. It is not clear to me that more pluralism is the answer. Rather, the answer would be to establish stronger anchors at national and international level. This means not just putting one’s house in order, but also putting our global village in order. Some progress has been made, especially at national level. But much more needs to be done, especially in monetary regimes and internationally."

My added comments: I was interested in the call by Mr. Borio for "stronger anchors" for the monetary system in light of what we have covered here on this blog. (note: Mr. Borio talks some about the SDR on page 6 in this presentation, so please read the full speech to see what he says - see followup blog article here).

In this presentation, Mr. Borio explains what he means by stronger anchors as follows:

". . . . the solution requires stronger anchors for domestic regimes and their interaction. To be sure, there is scope to improve international crisis management arrangements (BIS(201)). But, as they say, one ounce of prevention is worth a pount of cure. And, while putting one's house in order is essential, it is not enough (Padoa-Schioppa (2008)): there is also a need to put the global village in order. 

Domestically, as discussed in greater detail elsewhere, this means more systematically tackling financial booms and busts through a combination of monetary, prudential as well as fiscal policies, strongly supported by structural policies (BIS(2015b)). The key is to have policies that are more symmetrical over booms and busts so as to mitigate them without the risk of running out of policy room for manoeuvre over time.

Internationally, this means better internalising the possible spillovers and spillbacks of national policies. Three possibilities can be envisaged, ranked on a scale of increasing ambition (Caruana (2015), BIS (2015a)). At a minimum, enlightened self-interest, based on a thorough exchange of information, should be feasible. This would mean that, when setting domestic policies, countries would individually seek to take spillovers and spillbacks more systematically into account. Large jurisdictions that are home to international currencies have a special responsibility. Going one step further, cooperation could extend to occasional joint decisions, on both interest rates and foreign exchange intervention, beyond the well honed responses seen during the crises. The third, most ambitious, possibility would be to develop and implement new global rules of the game that would help instil greater discipline in national policies (egRajan (2016)).

Based on this analysis, how far away is the international community from finding adequate solutions? The answer is "still a long way". True, progress has been substantial in the prudential domain. But much more would be needed regarding monetary regimes. Even at the national level, it has proved difficult to incorporate systematically financial stability considerations, which are generally left to prudential policy. And these problems are simply compounded at the international level. The preconditions for progress are consensus on diagnosis, which would put financial imbalances at the heart of the problem, as well as a strong sense of urgency and shared responsibility internationally. At present, neither precondition is met."


My comments: Please note that Mr. Borio says the international community is "still a long way" from finding adequate solutions and so he lists three possible scenarios for improving the situation based on a "scale of increasing ambition." This suggests that Mr. Borio recognizes that achieving global consensus is very difficult to do so he orders his three proposals from the easiest to accomplish to the most difficult. He says developing and implementing "new global rules of the game" would be the most ambitious plan. The BIS has talked about the idea of "new rules for the game" for some time now and we have covered that here.

Clearly, the concept of new rules of the game which could lead to major monetary system change is an ongoing topic of discussion around the world. However, it seems that most of the time these changes are viewed as something not likely to happen in the short term. It appears that some big questions are not yet resolved. This is why we stay on "crisis watch" here. A new major global financial crisis is the event most likely to speed up any proposals for major systemic change that we watch for here.

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