ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The World Crisis: Reforms to Prevent a Recurrence

The current financial crisis started in the financial sector of what was thought of as the country with the most sophisticated financial system, and that has spread almost universally and with startling rapidity by virtue of either financial or trade interdependence or both. Preventing a recurrence of such a crisis - which is a quite different exercise to overcoming the present crisis - demands reforms to the financial system. The question discussed in this essay is: What reforms? What needs to change? Preventing a recurrence requires a three-point programme: a reversal of the past policy of encouraging bank mergers and its replacement by a vigorous anti-trust policy directed at the banking sector; a determination to make monetary policy anti-cyclical (aided by the adoption of asset-price indicators); and reform of the regulatory system. There are a large number of reforms that are desirable, but the key ones are addition of macro-prudential regulations to the existing system of purely microeconomic regulation, and the penalisation of maturity mismatches in the financial system.

Arvind Subramanian, John Williamson

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