Reform of Financial Architecture

Simon Johnson has a very good column on the problems of the international financial system. His point is that the currency wars that are attracting so much attention are just a prelude to a bigger problem:

The “currency wars” themselves are merely a skirmish. The big problem is that the core of the world’s financial system has become unstable, and reckless risk-taking will once again lead to great collateral damage.

The key problem is that the international financial system has not been reformed significantly since 1944, but the global pattern of current account surpluses and deficits have changed dramatically. In addition to the risk aversion on the part of emerging market economies that Johnson talks about we also have the surpluses of the petro states. Meanwhile, the industrialized countries are net borrowers owing to political equilibria that make it difficult to pay for their spending.

The system needs reform. Attention has to be paid to the structural changes that have occurred. This is actually one of the key research areas of our CRIFES center at PSU.