According to a warning by the deputy head of the International Monetary Fund, even while the world financial system being unprepared for another economic meltdown, there are dark clods gathering over the global economy that could lead to the setting in of the next global financial crisis.
Even after the passing of more than a decade since the last meltdown in the global banking system, “crisis prevention is incomplete” among banks, said David Lipton, the first deputy managing director of the IMF.
“As we have put it, ‘fix the roof while the sun shines’. But, like many of you, I see storm clouds building and fear the work on crisis prevention is incomplete.”
The next global economic recession would be too big to handle for individual nation states alone, Lipton said, he also called on governments to function together address the issues which could be behind the next global economic crisis.
“We ought to be concerned about the potency of monetary policy,” he said referring to the capability of the US Federal Reserve and other central banks to cut interest rates to provide a boost to the local economy if they are struck by another financial downturn. He also warned that the scope for the governments to cutting taxes and raising spending was constrained by high levels of borrowing by governments.
Before it was handed a war chest worth $1tn (£790bn) from governments around the world, the IMF went into the last crash under-resourced, Lipton said. It is imperative that an agreement is reached among the national leaders for the completion of a review of financial firepower of the IMF next year, he also added.
“One lesson from that crisis was the IMF went into it under-resourced; we should try to avoid that next time.”
A call on China to take immediate and significant steps to open up its economy was also made by Christine Lagarde’s deputy.
It is imperative on China to implement stricter rules to protect intellectual property which is a – a key complaint of the US president, and bring down trade barriers, he said, even as China and the US have agreed on a truce in the escalating trade war between the two largest economies of the world.
The trade policies that were practices by China at the time of its joining the World Trade Organization when it was a $1 trillion economy in 2001 is now not appropriate when the its economy has grown significantly to reach a value of $16 trillion and has become an economic super power, suggested Lipton.
But an overly heavy-handed approach to reform should not be adopted by the US, warned Lipton and added: “China has many reforms that it could carry out that would be in its own interest and in the interest of countries around the globe. But China feels they can’t take those steps, as they put it, with a gun to their head, in the midst of trade tensions.”
(Adapted from TheGuardian.com)