Making the Global Financial System Work for All

Thursday, November 29, 2018
Toru Hanai/Reuters
Jacob A. Frenkel

Chairman, JP Morgan Chase International; Former Governor, Bank of Israel

Raghuram Rajan

Katherine Dusak Miller Distinguished Service Professor of Finance, University of Chicago Booth School of Business; Former Governor, Reserve Bank of India

Tharman Shanmugaratnam

Deputy Prime Minister, Singapore; Chairman, Group of Thirty

Jean-Claude Trichet

Chairman, Bruegel Institute; Former President, European Central Bank

Gillian Tett

U.S. Managing Editor, Financial Times

The G20 Eminent Persons Group on Global Financial Governance (EPG) has called for reforms to the international monetary and financial system to meet the realities of a changing world. Four members of the EPG discuss the challenges facing the developing world and the global commons and their recommendations to prevent major financial crises.

TETT: Well, good afternoon, everybody, and welcome to what should be a fascinating hour.

My name is Gillian Tett, I’m the U.S. managing editor of the Financial Times.

And I have sitting with me right now four people, all of whom have served as central bank governors in their own countries, in different corners of the world, and all of whom are now holding high office—sorry, all of whom have been holding other high offices.

Jean-Claude Trichet, former head of the European Central Bank, Tharman Shanmugaratnam—sorry, apologies; I practiced that, but not enough—(laughter)—the deputy prime minister of Singapore—

SHANMUGARATNAM: The trick is not to practice it. (Laughter.)

TETT: Right. Well, I’ll remember that next time.

Raghuram Rajan, who was former head of the Indian Central Bank and is now in Chicago; previously, one of the few people who forecast the financial crisis, and Jacob Frenkel, who is chairman of the JPMorgan International Chase Bank.

So we have four people who have come together for a very specific reason, which is that they have been overseeing a report that was commissioned last year by the then head of the G-20, the German presidency of the G-20, to look into the future of the global financial system, and, in particular, look at what is not working and what can be done to put it right. They’ve spent many countless hours in committees trying to come to some kind of agreement and consensus with a large group of G-20 officials and also part of the G-30, which is a group of think tank people and former officials. And they’ve put forward these proposals which are fairly radical in places, often concealed under diplomatic niceties, but very thought-provoking.

So what we’re going to do is hear a bit about their proposals for what to do to make the global financial system work better, then ask some questions, and then we’ll open it up to all of you, many of which are expert in these very topics.

And I can’t think of a better moment to be doing this at a time when not only is the global trading system under pressure, not only are we seeing growing concerns about a potential downturn, but we’re also, of course, at the beginning of the G-20 meeting down in Argentina right now.

So I’d like to start, please, with you, Tharman, to tell us a bit about why you wrote this report and what the key message is, because you were essentially the key driving force overseeing this.

SHANMUGARATNAM: Well, I wasn’t—yeah, I wasn’t the driving force, I was chairing it. I think it starts by appreciating—with an appreciation of the sheer scale and urgency of what we are facing. Very few of the headlines that we read about every day deal with the problems in the developing world and especially Africa and the Middle East is going to have profound consequences for the world. And the situation is of a magnitude and complexity very different from the past, very different from recent decades.

Just look at the bulge of the youthful population in Africa—median age, nineteen years old, huge bulge. Likewise, the Middle East; likewise, if we look at parts of South Asia. It’s of a vastly greater scale than anything we’ve seen in previous decades. And we’re completely unprepared in terms of education, skills, markets. If we don’t tackle it well, the world has something coming. And the intersection of that something coming, whether it’s political forces, forced migration, or other things that we don’t like, the intersection of that, together with the climate change, the spread—the spread of antimicrobial resistance, and the fact that we’re just quite unprepared for the loss of agricultural land, that combination and the intersection is profoundly destabilizing. So we have to tackle it in new ways and not just rely on the old ways and try to do more of the same.

The second motivation for the report has to do with some of the traditional concerns when we think about the international monetary system. What’s the role of capital flows? What’s the role of interconnectivity? And the basic role is that it was supposed to help capital flow to where it could be used most productively and could support growth. Capital had to flow downhill, so to speak.

And what we’re seeing, and we didn’t anticipate this fully, is very large flows in two directions. So the gross flows are far more important than the net flows, and the net flows are fickle. And the fact is, the world that existed thirty years ago when the Koreas and Singapores of the world were growing, when we could run current account deficits significantly in excess of 5 percent of GDP for long periods, and it was financed in a stable fashion by long-term capital in the main, that world doesn’t quite exist anymore. If you read the brokerage reports, they’ll have a table and they’ll have figures on current account deficits. If it comes close to 2 percent, go for them.

Something’s wrong. Something’s wrong. We’re not using the system to finance growth the way we used to, and that’s something my colleagues will talk more about.

If I can come back then to the development challenge very quickly. There are ways in which we can run this better. First, we have to recognize that we can’t go back to old multilateralism, the old centralized multilateralism, which actually worked quite well, I would say, for forty or fifty years. That world is over. It’s now a more decentralized world. We’ve succeeded with the emergence of China and some of other new poles of power and influence. It’s a more decentralized world when it comes to decision-making, but it is not a more decentralized world when it comes to connectivity. It’s actually a far more connected world, so we now have a situation where you have decentralization of power, influence, and decision-making, but a far more interconnected world.

The real risk is of growing fragmentation in decision-making, some isolationist tendencies. But I don’t want to exaggerate that, but it’s basically fragmentation in the way in which we go about decision-making that impacts the rest of the world, and it’s not going to address the two problems I mentioned. We need a new multilateralism that achieves coherence and complementarity between the many more institutions that now exist. And some of these institutions are play very useful roles, but they’re not linked together and they’re not acting in a coherent and complementary fashion. And in development finance, where bilateral financing is now larger than multilateral financing, it’s an urgent task to bring people together country by country, region by region, to have some sense of a division of labor, even as we compete, so that we can scale-up development finance, achieve a lot more lasting impact, and critically—critically—catalyze private investment.

And you can only catalyze private investment if you’ve got more coherent country platforms that involve de-risking. And it means not just de-risking a power plant, it means de-risking an entire investment environment, which can be done. And secondly, it means pooling risks across the entire system, pooling and diversifying risks across different political geographies, which is—it’s not—it doesn’t require very sophisticated securitization and insurance, it’s fairly plain-vanilla stuff. But it hasn’t been done. We haven’t tapped the potential of the system as opposed to looking at risk mitigation of individual projects. And that’s a real interesting opportunity which allows us to mobilize institutional capital—the pension funds, insurance funds, and sovereign wealth funds—which are very large, but are barely invested today in developing country infrastructure.

TETT: Right. Well, thank you. A lot of ideas in that summary.

And the four men have basically agreed to do, if you like, a roadshow. They’re each going to talk for, I think, about five minutes in sequence, and then we will open up to questions.

But just to summarize what you said, the gist of your argument is the world’s on the verge of a crisis, there’s plenty of money, but it’s going in the wrong places, the Bretton Woods institutions don’t work anymore because you now have many powers, not just one, and you have to remake the system and remake the financial mechanisms for moving money around the world. Is that a fair summary?

SHANMUGARATNAM: And you don’t need new institutions for that, but you need a way of acting coherently together. And it can be done. This is not pie in the sky. We’ve had lots of conversations, by the way. As part of our one year of work, we had extensive discussions with not just the G-20 players, but many others. It is actually doable.

And this is not, by the way, a think tank report. I mean, I have great respect for think tank reports. It is a policy report. It’s a report that is meant to be implemented. And we think that most of its proposals can be implemented within the next few years.

TETT: I mean, the language is diplomatic, but the (call to arms ?) is pretty radical.

Raghuram, do you want to say—I think you’re next in the—

RAJAN: Actually, Jacob was going to—

TETT: OK. Sorry, Jacob.

Jacob, you are next in the order on the billing. Tell us, is any of this actually doable?

FRENKEL: First of all, it is doable. Thank you for doing it. And let me follow on Tharman by asking, why the report to begin with and why now?

In 1944, when the Bretton Woods organizations were designed and the idea of a global system was thought of, the concept of globalization meant trade, trade in goods, and the institutions that were developed to facilitate it were in the world of trade in goods.

The main difference that has happened since, in the past couple of decades, has been the growth of capital markets. And the growth of capital markets means that it is both source of opportunities as well as risks. One of the dangers is that when countries are not fully prepared to enjoy the benefits of capital flows because when the capital flows are coming in or out it creates noise in them, the tendency would be to limit them.

And what we are trying to do in this particular report is don’t get into the fashion of attack on globalization. Globalization provides great opportunities, but it means a lot of homework on the part of countries to enjoy, to enable them to enjoy the benefits of it. And we are talking about the capital flows because it has been very controversial.

I still remember, in the mid-nineties when the IMF was getting excited over creating a new amendment to the Articles of Agreement, in which the idea would be that countries will open their capital accounts as they have done in the trade account. Then came the Asian economic crisis and the program was shelved—shelved, not scrapped. But with the passage of time, so much dust was put on it, and together with the more recent crisis, that nobody talks about it anymore. And you take it for granted that capital flows are a source of noise and damage. And I think that it is important that that’s part of the message, is it’s not only the bad news, the results of the good news.

Why is it relevant now? During the past decade, the mindset was crisis. From the emergence of the great financial crisis, everyone was talking about a crisis. Crisis, by necessity, creates a mindset of short term, let’s extinguish the fire. It is clear that in order to transform us into the medium-term perspective of growth, we need really to change the mindset.

It reminds me of a very famous Chinese saying that Liu Min Kung (ph) used to say when he came to this place. He says that honey is sweet, but the bees sting. And the question is, how can we enjoy the honey without being helped by the bees? And that’s the whole essence on one foot. Don’t give up the benefits of capital flows just because of the bees, create a better resilient system that will enable you to do it.

And the sources of vulnerability throughout recent crises came from the financial markets. And therefore, much of the solutions to it are also in strengthening the financial markets, and that’s where Raghuram will continue.

TETT: OK. Well, that’s a very nice throw. But before I do that, I want to ask you, are you essentially saying that if you want to keep globalization at a time when money’s been going to the wrong places at the wrong types of speeds, you need capital controls?

FRENKEL: Absolutely not. (Laughter.) You need to make sure that money does not go to the wrong place at the wrong speed. And the right way to go about it is really prepare the umbrella before the rain.

Let me tell you, I used to be a governor of a central bank in which there was a trauma of don’t open the capital account because the last time they opened the capital account a hyperinflation emerged. And indeed, you cannot jump from the airplane without having the parachute, so you need first to get the parachute and then really it will bring benefits.

TETT: Well, Raghuram, you’ve had experience at trying to jump from an airplane without a parachute in India sometimes, in financial terms. How do—how do we create a better system?

RAJAN: Well, I think, taking off from where Jacob left, the idea is to use capital flows effectively to create systems that can use them for all the good reasons that Tharman talked about. There is an enormous need for development in the rest of the world. And one way to develop is to use flows from outside, which we’ve been doing less and less in effective ways.

Now, we have to recognize the world has changed from the post-war world that was largely made by America in which America played the role of global hegemon or guarantor of effectiveness. We now have a multipolar world where the United States is still the biggest economy, but not the only big one, and also more reluctant to contribute its valuable resources to maintaining that order on its own. It wants others to also chip in.

Well, in addition to that, as Tharman pointed out, along with this dispersion of power, we have tremendous interconnection made much more volatile by factors like capital flows across borders. It used to be the case that we believed as economists, so long as you keep your own house in order, things will be OK. You do the right policies, you allow your exchange rate to be flexible, and, you know, capital flows will come in and out, but you’ll do fine.

It turns out that’s not the case. It turns out you do, you know, reasonable policies, you still get buffeted by huge inflows, and it still leaves when it wants so that you can’t really use those capital flows for the development purposes that Tharman talked about.

Think about what happened post-financial crisis, enormous flows into the emerging markets. Think what’s happening now, because we’ve had a strengthening U.S. economy, obviously monetary policy is tightening, already we have two countries which have, essentially, have suffered some form of crisis, Argentina and Turkey, and more may be on the way. So we need to figure out how we can use capital flows better.

And as Jacob said, the point is not to put a full stop this. That serves no one and is probably detrimental for the world. But to manage it, we have to understand what kinds of policies make these flows volatile and what kinds of policies reduce volatility. And in other words, we want to limit the adverse spillover effects of capital flows, while encouraging their long-term benefits, both in strengthening domestic capital markets, but also financing the development that Tharman talked about.

Now, what do we know about all this? Unfortunately, we don’t know enough. We do know that easing monetary policy in those countries tends to push capital into developing markets, tends to push capital into risk-taking enterprises. Some of that risk-taking is good, some of it can be very bad. How do we determine what kinds of policies are optimal for the world? That is something that we need to debate. And I think the debate should start now, it should start with a lot of research. I think the central banks have expressed their willingness to start this kind of research so as to essentially benefit from capital without causing the adversity.

Let me—let me give that as a preamble, (in advance ?).

TETT: Well, that’s a very helpful way to turn to Jean-Claude because part of this whole complex of ideas, if you’re going to get money to move to places it’s needed at the right pace in a way that makes more sense, is to have better surveillance of the global financial system. And, of course, the G-20 really had its heyday after the financial crisis when it emerged as a key forum for crisis-fighting mechanisms. That was really what gave the group its impetus. Since then, it’s begun to slightly run out of steam.

What do you think needs to be done to have a more intelligent way of trying to both regulate and watch the global financial flows?

TRICHET: I think I will illustrate very much what Tharman said in terms of we don’t call for new institutions, but we called for a generalized linking of existing institutions in order for all them together to be more effective and more efficient. And I can illustrate that both, I would say, in the strengthening risk surveillance to avoid the next global crisis, we consider that if we do not prepare very, very actively to avoid this crisis, we will have a new, full-blown crisis. We are clear on that. And there are a number of elements that are calling for extreme, I would say, vigilance in particular. And we say that, even at the very beginning in the overview, the fact that we have a level of leverage, public and private, at a global level, debt outstanding, divided by the global GDP, which is higher today than it was at the eve of the last crisis, and seems to continue to grow. So there are good reasons to be very vigilant, if I may, very alarmed, in some respects.

So what we call for preventing the new global, full-blown crisis would be to ask the IMF, the Financial Stability Board, and the BIS, the Bank for International Settlements, to work together much more than they did in the past and to work out a global risk map for financial linkages and vulnerabilities.

We don’t ask them to lose their independence. We have the memory of the fact that they were not on the same page. When we were about to have the last crisis, the BIS was much more lucid, in some respects, and alarming, but the rest of the international financial institutions were not. And I have to say the, I would say, consensus—the common wisdom was—the conventional wisdom was really tranquil and quiet, very wrongly I have to say. So what we are asking them is to work out this global risk map to remain fully independent and to incorporate as much as possible contrarian views in order to have really a multi-ocular vision of what are the main risks.

And that is, again, taking your point, Tharman, a consensus of the group on linking together institutions that exist. And we would like also very much the IMF and the Financial Stability Board to enhance and extend their early-warning exercise, which already exists, to ensure that there is a policy follow up on the global risk map which I was just mentioning.

I don’t elaborate—I don’t want to elaborate, I have no time, of course, on the various triggers that could erupt and create what is necessary to have a global crisis, but there are many, and geopolitical risks. We have, of course, the abrupt and brusque fall of assets valuation. We have the next recession, which will come at a certain amount of time. We have Brexit, Gillian, that is also—

TETT: Don’t look at me. (Laughter.)

TRICHET: No, of course not, of course not.

Now, let me elaborate for one minute on stitching together the fragmented global financial safety net. We have a phenomenon that we have to fully understand. We are very clear on that. The IMF represented 90 percent—the IMF, I would say on a permanent basis and the IMF on a temporary basis—90 percent of the overall global financial safety net before the crisis. In the crisis and after the crisis, the IMF represents only—all, I would say, facilities together—32 percent, the regional financial arrangements represent 34 percent, and the swap agreement represents 34 percent equally. One one-third, one-third, one-third. We do not consider that it is appropriate.

Clearly, the IMF should have a much important capacity to cope with the next challenges when they come. And we know that we will have next challenges. So we consider that the global financial safety net is uneven in scale and in the covering across all regions. We consider that the system is badly in need of coordination.

We call for an ex-ante protocol between the IMF on the one hand and the various regional financial arrangements on the other hand. We consider that this is absolutely of the essence. The last experience where we invented on the spot—and I was myself very deeply involved in this invention—was not appropriate and created problems that we should avoid in the future. So this is, again, a way to stitch the various layers that exist today in terms of the global financial safety net with a view to have, again, something, an entity, that would be much more integrated and much more efficient and effective when the time comes—and time will come.

And we also call for augmenting considerably the capacity of the IMF. On that domain, we all have an agreement on asking for a standing IMF liquidity facility.

We are also listing the possibility for the IMF to have a much better capacity to intervene. We list the possibilities. We did not say “that one is the good one.” We will see, of course, what happens. But we call very, very, I would say, assertively on the international financial community to find solutions to give the IMF much more clout.

TETT: Well, thank you, Jean-Claude Trichet.

You’ve laid out collectively an extremely sensible diagnosis and a pretty sensible set of proposed policy responses. And it’s very hard to disagree with most of what’s in this report. As I say, when you read between the lines of the diplomatic, carefully described comments, you know, they’re pretty radical proposals. But as someone who’s sort of a paid cynic, as a journalist, who on earth is actually going to drive any of this forward without a full-blown crisis? Because right now, Europe is pretty distracted internally by this little thing called Brexit and rising populism. You know, China is seeking to spread its wings with its own policy institutions and the Belt and Road Initiative. And America, you know, where do I start? (Laughter.) Multilateralism is a pretty dirty word right now in the White House, and I don’t see President Trump standing up and championing the cause of a newly powerful IMF just down the road. I mean, maybe it’s time to put the IMF in Beijing instead.

But who is actually going to champion any of this? And if you were betting men, what probability would you actually attach to any of this materializing before the next crisis?

Who wants to answer?


SHANMUGARATNAM: Well, yeah, let me take that. Because this was commissioned by the G-20—we are an independent group, but it was commissioned by the G-20. In the first instance, the next G-20 presidency, which is Japan, is coordinating the follow up, and they’re actually going about it very systematically. We’ve got twenty-two proposals, some of them may take a little more time, some of them go beyond current thinking, some others are low-hanging fruit. And Japan, being the systematic people they are, are actually going to bucket the proposals differently and actually find a way of getting consensus to take some of them forward earlier than others.

I don’t think any of them are going to be dropped completely, but some of them do challenge conventional wisdom, including what Raghuram was talking about earlier regarding the sending countries. And it requires a lot more study, a long more consensus-building over time.

So I would say, given the very extensive consultations we’ve had, even in today’s world and even with everything we read about multilateralism, I’m still quite optimistic. There are enough people in the world who want to see this more coherent system develop and who are gravely worried—who are gravely worried—about what happens if we get fragmentation.

TETT: Right. I’ve often thought, if only the world could be run like Singapore, it would be much more efficient all around and rational, too.

But, Jacob, you’re sitting in New York, tell us, do you think that there’s going to be chance of multilateralism being taken up as a rally cry by the current government?

FRENKEL: My family will tell you that I’m sitting on a plan, 2A, which is part of the answer. It will be an uphill journey. I don’t call it a battle, it is an uphill journey. It was originated during the German presidency of the G-20, going through Argentina, it is already in Japan.

I think that the extraordinary skillful management or navigation that Tharman had during the proceedings have helped a lot. You had there about sixteen people or whatever is the number of signatories on it, all of them come from developing and industrial countries alike, all of them have had some official position in the past, so it’s not a—it’s not a sky or the moon, but it is an uphill damage.

The important thing is that I think that what we are doing here is creating a compass. We don’t need to agree to do everything today. This will be impossible. But we do need to agree, and at least the group that signed on it agreed unanimously, where we want to end up. We want to end up, and that’s the compass. We want to make sure that as we work towards our northern pole, we do it unidirectional without going back, we do it each one in his own pace. And markets will encourage. Maybe there will be virtual cycle somewhere along the way. But the important thing is that we are not committing in the short term.

You asked me earlier about capital controls and I gave you a very quick answer, which reflects both my bias and true belief. But it’s a controversial issue. There are people and countries that are not yet ready to declare that they have the parachute to jump, which is perfectly fine as long as you are preparing the parachute. So if we agree about the long-term, I think it’s a great achievement during a period in which there is such a conceptual attack on globalization.

One last point about it, which is one of the damages of the financial crisis that, I mean, that started a decade ago, more than a decade by now, is not only damage to markets, but also damage to confidence of people about the role of professionalism and about what it takes to do good economic policy. Suddenly, experts have been declared as having failed, so an outsider has an advantage, and the less you know, the more likely you are to be clean. And in the modern world, that’s a dangerous game.

And because it is a dangerous game, the tendency is to stay low, so let’s stay and protect our own little boat. But we are all in the same ocean. And the role of a skipper of a little boat is to make sure that his boat is the strongest possible, and that’s the economic policies, but we are still in the ocean. And, therefore, yes, there will be spillovers and spillbacks, and that’s why we need a system that manages the rules of operation when there is a spillover and a spillback. You are a small boat or a large boat, but you’re in a bigger ocean.

TETT: Raghuram?

RAJAN: I think you’re pointing to dissatisfaction and saying, given the dissatisfaction, why will people change? I think that’s the reason for people to start contemplating change. The system doesn’t work for the country that created it. The U.S. is not happy with what—with the system because it bears much of the burden. And, of course, China’s asking, who made the rules? We didn’t make the rules, we were not part of that process.

I think it may well need a crisis for us to get all to the table. But it is possible also, with the dissatisfaction that we have right now, for us to not have that crisis, but still see that all these solutions that have been proposed in the short term don’t work and we’re ready for contemplating a bigger change in the system.

It’s not just the industrial world which is dissatisfied, it’s not just the industrial world where you have populist movements. Even the emerging world is seeing some of that. And so my sense is, if we are to live together in this world, we will have to contemplate serious change, and that means adjustments on all sides.

This is a sort of plan or a set of ideas. It’s not—it’s not too firmly set down. It allows for development and saying, well, when you want to talk, here is a possible set of policies that you could think about adopting. Some are very easy, as Tharman said, and will be taken up sooner. Some are bigger picture and will take longer to rectify.

TETT: I mean, I remember, Jean-Claude Trichet, I saw you laughing when we talk about the crisis spurring action because, of course, the last crisis was one that you did live through and that did spur some action. How long do we need to wait until the next crisis actually encourages governments to take these ideas off the shelf?

TRICHET: No, it is the element which is terrible, of course. The G-20 was strongly active in the time of the crisis, in the time where the demand for appropriate decisions and action was very, very high. And as soon as we went through, more or less, the domination of the major difficulties, then we could see that the activity of the G-20 was much less important. And again, we let the vulnerability of the system augment, as we already say, year after year after year.

I think that we are, more or less, at a turning point. It seems to me that we see now a lot of elements in the analysis of the international financial institutions, including the IMF, on the fact that we are in a very dangerous world. This is a little bit new. Before, we were only concentrating on repairing the damage of the last crisis. Amongst the damage, there is the amplification of the populist wave, that’s absolutely clear. We observed that, as you said, Raghuram, in all countries—advanced, of course, very visible. Even if I have to, I would say, comment in Europe, I see the populist wave directly mainly towards the national institutions, national governments, national parliament, and less, fortunately, against Europe. That is very visible.

Yeah, yeah, very visible, not in the U.K., Gillian, but in the other countries, members of the European Union.

But we are at a point where there is a more lucid understanding of the danger of the present situation. We have—we think the time to prevent new drama, and we are reasoning medium, long term. That’s absolutely clear.

And we were asked by the G-20, it’s not a self-appointed report, it’s the G-20 itself. And I have reasonable confidence in the fact that we will advance. Whether it will be sufficient, I don’t know. History is not written yet. But we should be, it seems to me, all of us, as, I would say, eloquent as possible in our warning, in our early warning. And it is what we tried to do.

TETT: Right. Well, that seems like a good moment to go to questions. I can see hands already going up.

I should remind you or remind the members that please keep your questions short, please indicate if there’s someone particular you’d like to direct it to, to whom you want to direct it. It would be courteous, but not compulsory, to identify yourself. And let’s get as many questions as we can. I think we’ve got microphones—yeah.

Got a group of questions here already. So got one back there first, then—yeah. Thank you.

Q: Hello. I’m Lyric Hughes Hale from EconVue in Chicago.

It seems to me what you gentlemen are advocating is a more centralized financial system based on either consensus or created through crisis. At the same time, there’s a shadow financial system that’s developing beneath our feet that is totally decentralized and is based on technology. In your report, what is the role that technology plays?

And, Tharman, I think I’d like to address my question to you because Singapore is a leader in financial technology. How do you see that playing a role in averting crises in the future? Thank you.

SHANMUGARATNAM: Shall we take a few questions, do you think?

TETT: Let’s deal with that one first, I think, probably and then we’ll get—yeah.

SHANMUGARATNAM: OK. So my colleagues will jump in as well. So I’ll just be very brief.

We do think technology is going to pose new risks in global finance. It has speeded up—it has speeded up global finance. That’s the first thing about it. And not all of it is human decisions anymore. Some of it is algorithmic. That’s one thing.

Second, I wouldn’t understate the seriousness of the cyber challenge in global finance. And that’s not just a risk to individual countries, it could be potentially a risk to the system, especially the payment system. That’s a second very important point.

We do think for that reason that what Jean-Claude was talking about, this relationship, not centralization, but a relationship between the IMF, the BIS, and the FSB is going to be critical. We’ve got to bring minds together, connect the dots around the system and have a far more sophisticated system of risk surveillance. And on technology, it requires a lot more specialized expertise as well, not just the regular central banking expertise, but it can be built up. So that’s what—that’s what I would say.

RAJAN: I think what Tharman was talking about is the policy structure, which almost, by necessity, has to be a more centralized structure obviously benefiting from technology as a way of getting information quickly and so on, all of which central banks are engaged in.

But I think you were also talking about the possibilities of using technology to expand on the financial side. And I think Tharman’s point was, yes, there is that, which sounds very exciting, there are lots of new possibilities from using fintech—for example, microlending and so on—but there are also risks. And often, we don’t fully understand the risks for a while, and so we have to make sure this doesn’t get so big that by the time we understand the risks it’s beyond what we can—what we can.

So Singapore, for example, has this idea of sandboxes. You do experiments at a local level with the help of the regulator sort of making sure that things don’t go out of—out of order, and then that gets sort of spread out once there’s satisfaction on both sides that it works. So I think we need to learn from all this and do it more widely.

TRICHET: If I may, just one word. There are two dimensions, I think, in your question. One is, what are the new emerging properties that IT and all the technology surge creates in global finance? And, of course, we are not testing all these emerging properties.

One emerging property which we discovered in the last crisis was the rapidity of contagion. Contagion took place as a matter of half days after Lehman Brothers, and that was not at all what we had observed before. So there are probably that emerging property is still there and it’s a big, big challenge which calls for extremely rapid and swift response. And, of course, we might have other properties that are emerging.

And then you have also, and we mentioned that, the problem of the cryptocurrencies, the crypto platforms, and so forth. And I have to say that we should look at it from the financial stability standpoint, perhaps with much more, I would say, vigilance than was done in the past. That’s my own understanding.

TETT: I think that Tharman is actually correct. I think I can see so many hands waving, I’m going to take three questions now, back to the three. We’ve got twenty minutes.

So a question there—one, two, and then three. And then we’ll go further back.

Q: I’m Lucy Komisar, a journalist.

The question is first to Mr. Trichet because the EU has dealt with this issue, but then to others that want to drop in.

I’m interested in the capital flows that go to, fit in, and move through offshore secrecy jurisdictions. It’s now widely accepted that trillions of dollars evading tax is being laundered for drugs and arms traffickers, by kleptocrats, and other criminals, looting developing countries, find safety in tax havens. And I think that an interesting idea has been put forward by former New York District Attorney Robert Morgenthau. He says a way to combat that for international regulators of the financial systems, to ban transfers from jurisdictions that practice such secrecy, as the U.S. does for transfers from places like North Korea, Syria, and Iran on grounds of national security. Has this been discussed in your deliberations over the year? And what is your opinion? Could this be done and should it be done?

TETT: OK. All right. Thank you.

So what about offshore funds? Do we need controls over that?

Q: Ricardo Tavares from TechPolis.

If I understand the proposals and architecture, that has a lot of links between the institutions that matter, but also an increase in funding for the IMF. So I think the two parts may not match well together because, on the one hand, the links admit that, you know, we need several institutions that are coming from a place that really matter now in the reality of the financial markets. On the other hand, empowering and getting more funding to the IMF might bring the discussion about the issue of IMF governance. So how will you—I think there’s a certain tension between the two parts of the proposal.

TETT: OK. So how do you manage to square having a more powerful IMF with essentially giving more voice to groups like China and elsewhere?

Let’s take one more. Do you want to—a question back there. OK, then come forward.

Q: Andres Small from Partners Group.

I wanted for you to comment on the status of reserve currency in the international system, and what do you think is best suited for what you’re proposing?

TETT: Right, OK. So whether the dollar, in a sense. (Laughter.)

Who would like to—who would like to deal with the dollar, who would like to deal with the IMF, and who wants to talk about dirty offshore money?

SHANMUGARATNAM: So I’ll start with the dirty, so I’ll leave the dollar to my colleagues.

So first, actually, I think one of the achievements of the G-20 post crisis was to do with money laundering and tax evasion. And we now have a system quite different from even five years ago where most jurisdictions, not all, but most are now part of a system of automatic exchange of information. This year and next year, all G-20 countries, plus all other significant jurisdictions, are going to be part of that system: automatic exchange of information on any customer deposits.

It’s frankly a major achievement. Not all offshore jurisdictions are part of it, and we should shine a very bright light on them. That’s the first point.

On the question of the IMF and this tension, IMF, for that matter the World Bank and the multilateral development banks, we actually need both. We need both to strengthen the capital base and effectiveness of the multilateral players as well as to link them up better and to capitalize private finance, because the magnitude of the problem is actually much larger than people realize. We need about a trillion dollars every year in infrastructure financing alone. It’s well beyond the scope of the public sector or the multilateral public sector alone. They have to play a stronger role, the IMF has to play a stronger role at the center of the system, but it has to be part of that stitched-together system as well on safety nets.

And on development finance, you do need a strong World Bank, ADB, IDB, Inter-American Development, and the rest in order that they play that catalytic role with private finance because they need a balance sheet to be able to mitigate risk in order to attract in private capital. So it’s really a win-win, much more than a tension.

TETT: Jacob, do you want to comment?

FRENKEL: Yes. I think that the comment feature to all of the questions that we’re asked has to do with the need of a machinery, which is cross-border machinery that will deal with those cross-border issues.

A decade ago, the world’s AML, anti-money laundering, or KYC, know your client, were not known. And today, it’s part of the—part of our culture and the regulatory system, and that regulatory system is not local, it’s global. But that is clearly the direction.

I’m coming back to the cyber issue. Cyber does not recognize borders. And cyber is the area where public sectors and private sectors join hands in different places. Some countries, the private sector is much more advanced than the governments and vice-versa. But there is no—there is no—formal machinery for international coordination. There is no international treaty that governs these relationships. And I think that’s something which is missing. And in a way, getting into the habit of having an international system will be contagious across other areas that we need to have them.

And finally, about the IMF governance, I think that the general principle—I’m not talking now about whether China is violating things or not violating things, that’s a separate issue—but the issue of no taxation without representation is a valid issue. And therefore, if you really want large countries like China to be a stakeholder and an active participant in a positive way, the quota of China should reflect it. And this was really the issues that have come in the G-20 discussion also.

TETT: How much more money does the IMF need? How much more money do we need from China or the U.S.?

RAJAN: It depends, to some extent, on what you’re trying to substitute for. Because if you’re substituting for the entire central bank swaps that came in the last time, it’s a lot of money.

TETT: We’re talking—

RAJAN: We’re talking five hundred (billion dollars) to a trillion (dollars).

TETT: Five hundred billion (dollars) to a trillion (dollars), right?

RAJAN: Yeah, of additional money.

TETT: That’s a lot of money.

RAJAN: That’s a lot of money.

FRENKEL: That’s why you don’t want a substitute for it.

RAJAN: But really, part of what we’re trying to do is also reduce the need for that. So to the point of why we’re talking about all these other rules of the game to discipline country behavior so that the spillovers are more limited, well, if we have that system, perhaps we need less a centralized authority like the IMF coming in to bail out countries because we’ve got more orderly flows. Now, how do we do that? That’s something we need to think about, and that’s where we need a lot of research and development. But certainly, it’s a possibility that we want to put out.

As to the issue that we talked about about reserve currencies, I think it’s very hard to say this is a reserve currency and that is not. The market evolves and finds currencies that it likes because it can go in and out, it prices in those currencies. Increasingly, the economics field is basically saying, you know, it’s an equilibrium which emerges. The U.S. is today the reserve currency. You know, 60 percent of transactions, for example, are determined in the U.S. because it just—everybody uses. And because everybody uses it, everybody uses it, right? It’s self-fulfilling.

The euro was growing before the financial crisis, but after the financial crisis the use of the euro has come down somewhat. The renminbi is starting to creep up. But, you know, we don’t have the power to say this will be a reserve currency and that will not. It’s something the market figures out.

TETT: Tharman and Jean-Claude, yeah?

SHANMUGARATNAM: Just very quickly, to distinguish, when you talk about the IMF and the amount of money it needs, between two things. The first thing we’re talking about is building up the permanent resources of the IMF through quota increases. And there’s now what’s called the Fifteenth Review. It’s still under discussion amongst all the players. I think it’ll eventually happen. And the amounts of money there are not very large, to be quite candid.

Then you have what Raghuram was talking about and what Jean-Claude referred to earlier. In a real tail-risk situation, a major systemic crisis, the permanent resources of the IMF are not enough. And the last time around, what happened was the U.S. Fed, together with some other central banks, injected a very large sum of money, five hundred billion dollars, very quickly. We can’t count on that happening again. We can’t count on the U.S. Fed doing it again.

And you need a system in a tail-risk situation where the IMF can amass very quickly, either from the markets or through bilateral borings or some other mechanism—and we’ve listed a few possibilities—a large amount of resources. And there will not be permanent resources.

TRICHET: Yeah, if I may. On this particular point, we are not calling for something entirely new. The global safety net before the crisis had the IMF at its core. It represented, as I said, 90 percent. So we are calling for the IMF regaining a reasonable, I would say, position in this global safety net.

A word on the FATF, Financial Action Task Force. Tharman said very well that we have improved considerably the fight against financing of terrorism, money laundering and so forth. It has to go on and on and on. And then we have the problem of the obscurity of the crypto tokens, cryptocurrency, crypto platform, which has to be examined under that particular angle. I’m not sure that it is done now.

Reserve currency, say—I mean, the ups and downs that you mentioned for the euro are minuscule in comparison with the fact that we represent now in the euro one-third of the dollar, both, I would say, for the reserve currency, and we are five times, ten times over and above the third currency, which is generally the yen. So from scratch, we became the second-largest reserve currency. But you don’t change that overnight and I was not calling for that changing overnight. If it had changed overnight, it would have meant the euro picking up dramatically on the exchange market and the dollar going down. So this has to take place progressively and calmly and in an orderly fashion. And, of course, the renminbi is now coming in.

TETT: Right. I think we’ve got time for three quick questions—one, two, three.

Q: Thank you. Gail Fosler from the Gail Fosler Group.

If I understand your proposals, I really—I really think you would move very quickly to some kind of at least discussion of your—of adopting your proposals in a systemic crisis. I think more difficult are the points that you made about the need of the developing world to have a more steady, sustainable financing structure. And in that regard, it seems like you’re ignoring a whole lattice of what I would call pooled risk opportunities that exist in many of the jurisdictions.

You know, I think of Europe as my favorite example because it is shocking to me that Europe does not have a European, sort of, effective treasury security. And when we—when we had the Greek situation, the solution for the Greeks was you got yourself into it, you have to get yourself out of it. And so this more sustainable system, I think, needs to have intermediate risk assessment and intermediate capital sources.

TETT: Right. Very interesting point.

Q: Rick Niu from C.V. Starr.

You each touch on China, so could you please each predict what’s going to happen this weekend—(laughter)—between the two presidents. I know you’re not the trade and tariff specialists for today, but I just—I just can’t help myself. Thank you. (Laughter.)

TETT: This is the very last question, and then we’ll have to—then you’ve got about a minute or two each.

Q: Hi. Daniel Moss, Bloomberg Opinion.

Back on the IMF, can you reconcile its financial constraints with the record amount it’s just committed to Argentina? And is there anything about that Argentine agreement that serves as a useful template going forward?

TETT: Wow. OK. You’ve got a minute each to—(laughter)—answer those three great questions. I think the first one was as much a statement as a question.

But anyone like to deal with this weekend’s G-20?

RAJAN: I’m happy to say I think whatever happens it can’t be the end point. You know, it may satisfy markets, it may not satisfy markets, but what’s really at the core of the dispute between the U.S. and China cannot be solved over a weekend. It’s a much bigger issue that needs much more discussion, many more weekends, and agreements before it is resolved. So I doubt we’re going to see any resolution this weekend of the deep differences.

FRENKEL: I’d also start with this question by, first of all, agreeing with my good friend Raghuram.

But second, I don’t feel that there is sufficient recognition that the greatest—the greatest—economic danger to the world today comes from an uncontrolled trade war. It’s a really slippery slope.

We need only to remember the Smoot-Hawley tariff. And the idea is, the feeling, that if you go into a room we have to negotiate in the way of a zero-sum game rather than a win-win or a lose-lose, I think that there is here a lot of analytical issues to clarify by professional economists. It’s not a—it’s not surprising that professional economists all are very, very concerned about it.

The second remark has to do with—I’ll just pitch in again—with the reserve currency. The reserve currency status will not be determined by politicians, regulators or legal scholars. It will be determined by an ongoing referendum of the marketplace. And that’s basically what the outcome is. And those referenda take many years, but it’s not without precedent. There was a time that sterling was the king.

TETT: Jean-Claude.

TRICHET: Well, first of all, I would say that, on China, I fully agree with what has been said. In any case, it’s a process, highly uncertain, highly unpredictable, and I deplore that, of course. I think that this uncertainty is really very damaging for the global economy. But we will see what happens.

Let me also say that I was shocked myself when I could see that the dialogue with the Europeans was very, very abrupt and sharp, which seems to me something a little bit abnormal. I agree with Jacob that we have there, potentially, one of the major risks to the global economy. And again, uncertainty is terrible.

Argentina, I have no opinion.

And regards to Gail’s remark, I would say—I mean, history is in the making in Europe. There was no blueprint. We invented a lot of things in the crisis, namely two new treaties; the creation of the ESM, the European Stability Mechanism. The callable capital of the European Stability Mechanism is—let’s be all seated—it’s more around seven hundred billion euros—seven hundred billion euros callable capital—which makes a dimension largely superior to all other entities. I mention that en passant. It is, to that extent, that the stitching between the IMF and this particular regional arrangement is very important.

So we were very bold, not to the extent that we could merge all treasuries—and I see that you’re regretting that—but that would call for a full-fledged political federation, which even does not exist in the U.S. because you didn’t merge in the U.S. all the budget of the various states.

So we are in a history-in-the-making process full stop.

TETT: Tharman.

SHANMUGARATNAM: So just two points. First on IMF resources and how do you—how is that consistent with having to spend so much money on certain individual countries, if we don’t strengthen a system of global insurance, which is the IMF plus the stitched-together global safety net, if we don’t do that, the only alternative is self-insurance. And indeed, since the crisis, in fact since the Asian crisis and especially since the global financial crisis, more countries are now having to do self-insurance, which means you have to build up your own reserves, which means you’ve got to reduce your current account deficits around a surplus. And what that means is a reduction in global growth. That’s what it means. It’s not a good solution. So the far more efficient solution and actually quite doable is to strengthen the global financial safety net and allow countries to run current account deficits, but find ways of financing them in a more resilient fashion.

When it comes to Argentina, when it comes to some other countries, once you get a crisis, frankly, you’ve got no choice—you’ve got no choice—but to tackle it with force. And the real challenge is to avoid getting to that point. You’re getting the same play repeated over and over again, it’s just different acts and different actors, the same play of countries finding that all of a sudden the capital leaves you. And then you realize you’ve had some domestic policy weaknesses or inconsistencies, but you also realize you are heavily dependent on short-term capital. So we’ve got to reform the system to make that play happen less frequently.

TETT: Well, thank you.

I must say that I find it a fascinating discussion. The report is absolutely fascinating. And, you know, the core of the message is pretty potent, that the money in the world is going to the wrong place at the wrong speed at the wrong time. The financial institutions that were set up after World War II, the Bretton Woods institutions, are no longer fit for purpose. They simply do not match where the world is today. And there needs to be an urgent wave of change, because either there’s going to be another big financial crisis or, looking further ahead, there’s all manner of other crises which are waiting and which could be even more brutal, potentially. I mean, that’s a pretty alarming diagnosis.

It’s a very sensible set of solutions, in many ways, to try and deal with that. I just hope that my journalistic cynicism is wrong and that some steps can be made to put some of those solutions into place before the next financial crisis or next big crisis. But in any case, I applaud you for writing this report. And I just wish you the very best of luck for all of our sakes in getting this very necessary debate moving. Thank you. (Applause.)


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