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Supersize the IMF

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
November 13, 2008
Washington Post

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Saturday's financial summit in Washington will be a good thing in itself: After years of "G-7" and "G-8" meetings, the new "G-20" format will give most of the key emerging economies seats at the world's top table. The summit could be even better if it spurs governments to pass stimulus packages: Already, China has announced a gargantuan infrastructure spending program that should soften a global recession. But the tricky challenge for the summit is to make global finance safer. To understand how headway could be made on that, it helps to think about finance as you might think about car insurance.

Car insurance makes driving possible by pooling the cost of crashes. If I had to pay out of pocket any time I had an accident, I might never get behind the wheel; I would want to have 80 grand in the bank in case I totaled someone's Mercedes. But since the number of expensive cars that get smashed is actually quite small, I can deal with this risk cheaply by sharing it with other drivers. We all pay $5 weekly into the Mercedes fund, and suddenly there's no need for vast sums in the bank. I'm so much better off that I'm visiting the Mercedes showroom.

The most famous financial summit, the Bretton Woods gathering of 1944, built upon this principle. Just as uninsured drivers need big savings to prepare for car crashes, uninsured nations need big savings to prepare for financial crashes. So the Bretton Woods architects created financial insurance in the form of the International Monetary Fund. Countries pooled savings that they would otherwise have kept in their central banks; when a financial crisis struck, the IMF's kitty was used to help afflicted members. The need for countries to hold savings in the form of central bank reserves was wonderfully reduced. Governments could allow their people to keep more of their money-and take it to car showrooms.

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