A new IMF early warning system to warn of potential crises
will force politicians to make a social choice
between intervening too early and jeopardising growth,
and risking allowing a bubble to grow too big, according to a
senior central banker.
The IMF has run exercises with the Financial Stability Board
to assess the risks of unlikely but plausible
events that could cause huge damage to the financial system
so-called tail-end risks.
The results of this Early Warning Exercise were presented to
senior officials behind closed doors at the Annual Meetings in
At a seminar on the fringes of the meetings, Jean-Pierre
Landau, deputy governor of the French central bank, said:
You have to get leaders to make the explicit social
choice. It is not a technical choice.
If you prick [a bubble] too soon, you might disturb
the economy, he said. If you prick it too late, you
might get what we have now.
Stephen Cecchetti, chief economic adviser to the Bank for
International Settlements, said that if regulators did issue
warnings, these would require immediate policy actions but that
in fact they were unlikely to be heeded.
You are going to stop people from getting rich, you
are going to stop people from buying homes and from engaging in
activities that are rewarded by the market, he said.
The systemic risk manager in my view faces the same
challenges that are faced by a risk manager in a financial
institution, which is to say stop people from making
money. This is a very serious challenge to any early warning
Landau said that regulators and politicians faced a risk
that if they communicated the findings publicly they might
trigger a crystallisation of the scenario they were worried
about. You would then deprive yourself of the
markets self-correcting function.
Jonathan Ostry, deputy director of the IMFs Research
Department who is leading the EWE programme, agreed this was a
real concern. Obviously this is something we are very
conscious of, he said.
He said there was already a discussion of risks in the
public documents the Fund produced, such as the World Economic
Outlook, the financial stability report and individual country
reports produced through the Article IV process.
It is early days, [...] but going forward I would see
the fruits of this exercise to be apparent in the multilateral
products, he said.
John Lipsky, the Funds first deputy managing
director, insisted that the aim of the early warning exercise
was not to predict crises. He told a press conference on
Sunday: The idea is, in effect, to take a look in a
multilateral framework at the stress, call it a stress test of
the global system, and to ask, are there potential
Youssef Boutros-Ghali, the IMFCs chairman, agreed that
it did not attempt to predict crises but rather to
evaluate any risks that may come from outside the
borders of any one country.
It helps establish the probabilities of what we call
tail risks, events that come out in the periphery that look
innocuous to most countries but in fact have massive impact on
the world economy.