Global Financial Reform Hits a Roadblock

Two years after the global financial meltdown and collapse of Lehman Brothers, world leaders seem to have reached an impasse over crucial proposals designed to prevent the same devastating scenario from occurring in the future.  The stalemate is so serious that there may be little chance that needed changes will be made. Executives at the World Bank and the International Monetary Fund (IMF) are disappointed with the slow movement and analysts warn that national interests could undercut badly needed real reforms.  Tension over currency rates is growing, and there is an increasing sense that major financial centers will create significantly different rules impacting their nation’s financial firms.  United States Treasury Secretary Timothy Geithner prefers a more unified approach to financial reform.

“Urgent action is needed to arrest the disturbing trend toward unilateral moves,” wrote Institute of International Finance managing director Charles H. Dallara in a letter to IMF officials.  The IMF fears that the global overhaul does not fulfill its promise to insulate the world from a repeat of the financial crisis.  “The more we continue with the present system, the more likely we are to have a relapse,” said Jos Vials, the IMF’s financial counselor and head of its capital markets department.  “Unless we deal with these problems, we will not have a safer system.”

The major points of contention relate to identifying and regulating firms considered to be too big to fail and how to create a system for some companies to collapse without requiring government bailouts.  The IMF’s financial experts believe that companies must be allowed to fail so they do not pursue risky strategies in the confidence that the government will rescue them if they get into trouble.  The only way to create effective regulations is to retain the idea of a moral hazard.