Global Imbalances and Liquidity-Induced Bubbles: Reflections on the Great Recession and the Need for International Monetary Reform

Economic analyses vary with respect to the extent to which deregulation contributed to the financial crisis of 28-29, but coalesce on one major cause: excessive leverage and risk-taking. Yet, excessive risk-taking was nearly ubiquitous and occurred despite different levels of regulatory stringency across nations, suggesting that regulatory failure, though a contributing factor, ought not to be singled out as the sole cause of the current crisis. This commentary discusses how some features of the international trade and monetary regime have played a major role in producing the recent crisis. It maintains that persistent underlying global imbalances in exchange rates, trade, savings and consumption create the liquidity conditions ideal for the development of bubbles in several countries. Because the existing WTO/IMF legal infrastructure was designed to address balance-of-payment crises in narrow contexts, only a set of cooperative, multinational exchange rate adjustments would prevent the destabilizing effect that accumulation of massive currency reserves can have on world trade flows and national economies. Such global macroeconomic coordination would require surplus and deficit countries to accept monetary, budgetary and geopolitical trade-offs if they wish to forestall the rise of protectionism and promote a stable international economic environment