Evidence Suggesting Source of Housing Crisis Not U.S.

A Freddie Mac study showing Western Europe had a more gaudy housing mania and collapse than the U.S. leads its authors to the conclusion that the bubble was not an American export. No mention is made of the role of the world's most powerful central bank holding rates at 1% for several years.

The Boom, the Bubble, and the Bust Abroad

By Chief Economist Frank Nothaft on February 14, 2011

The housing crisis this country has experienced over the past four years has been the worst since the Great Depression. That comes as no surprise to most Americans; as home prices fell, the country saw a vigorous debate about the crisis, and about the laws and regulations that have emerged to help prevent another one from happening.

What is surprising is how often the debate here characterizes boom-bust cycles in housing prices as though they are uniquely American. They aren't.

Real House Price Growth in Selected Countries 1996-2009
Country (Source)	1996 - Peak	Peak - 2009
Notes: Prices deflated using the standard consumer price index for each country
Germany (BulweinGesa)	n.a. (Prices fell over entire period)	-13%
United Kingdom (NBS)	152%	-17%
Ireland (ESRI)	182%	-25%
France (INSEE)	108%	-9%
Italy (Nomisma)	51%	-5%
Spain (MVIV)	115%	-10%
USA (FHFA)	47%	-15%

As the table above shows, most European countries saw a huge run up in real (inflation-adjusted) home prices followed by sharp declines.

In Europe, where the five-year, fixed-rate mortgage is king, middle-class families surged into the housing market as global interest rates reached historic lows and fast-rising home prices fueled a frenzy. A similar story unfolded in the U.S., especially in states like Nevada and Florida, where borrowers were more likely to eschew conforming conventional (i.e. 30-year fixed rate) mortgages in favor of 2/27's, 3/28's, and other short-term subprime and non-traditional mortgage products. On the other hand, the presence of the 15-30 year mortgage may be one reason the U.S. home price bubble did not reach the same stratospheric levels as in some other countries.

But the key question posed by the table above is this: why didn't German borrowers respond to low interest rates like the borrowers in the U.S., United Kingdom, or Spain? A few reasons suggest themselves.

First, the hurdles to homeownership are higher in Germany. While long-term prepayable mortgages with down payments of 20 percent or less are standard in the U.S., they are virtually unknown in Germany. Borrowers there can expect to make 30 to 35 percent down payments on mortgages with terms of 10 years or less, and also agree to stiff pre-payment penalties equal to the interest they would have paid had the loan amortized to full maturity.¹

Second, Germany's mortgage terms also reflect a housing policy that has primarily targeted public support towards middle-class rental housing as opposed to owner-occupied homes. The homeownership rate in Germany is 42 percent versus 67 percent in the U.S. and more than 80 percent in Spain.

Third, Germany did have a housing price bubble. But it took place a decade earlier, following re-unification. German home prices rose much faster than incomes as the country merged, and were coming off their peak at the start of the 21st Century. As a result, they are now back in line with neighboring countries.

Even so, Germany wasn't immune from the financial aftershocks that followed when the housing bubble popped in 2007, according to a recent report from the Congressional Budget Office.

"In some (European) countries, the government bailed out issuers of covered bonds, and in early 2009, the European Central Bank launched a €65 billion ($84.5 billion) program to purchase covered bonds in an effort to restore liquidity to that market," the CBO writes, and "Spain and Germany guaranteed another €300 billion ($390 billion) worth of covered bonds issued by mortgage lenders" to shore up their housing finance systems.²

The bottom line: just as a housing price bubble wasn't unique to the United States, neither was the coincident financial bust that followed.

¹ "The American Mortgage in Historical and International Context," Green and Wachter, Journal of Economic Perspective, Fall 2005.

² "Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market," Congressional Budget Office, December 2010, p. 50.

Italian Auction Bodes Well for Portugal

By Emese Bartha, WSJ

Italy Monday sold close to the maximum intended amount in five- and 30-year government bonds, known as BTPs, at somewhat higher yields than previously, confirming steady investor demand for the country's debt and sending a cautiously positive signal for Portugal and Spain, which will sell government debt later this week.

The Italian auction was "another confirmation" that the country doesn't face any immediate problems in funding itself, said Jan von Gerich, senior analyst at Nordea in Helsinki. "The successful Italian auctions pave the way for the Portuguese and Spanish auctions later this week, while these auctions shouldn't face any bigger hurdles either," he said.

Italy offered €3.75 billion ($5.08 billion) to €5.25 billion of the 3% Nov. 2015 and 5% Sept. 2040-dated BTPs, and sold €5.176 billion—the maximum planned €3.5 billion in the five-year BTP and €1.676 billion in the ultra-long one.

The yields increased from previous auctions, held Jan. 13, 2011 and Sept. 13, 2010, respectively, although the yield on the closely watched five-year BTP has only ticked up 0.1 percentage point to 3.77% from 3.67%. This increase reflects investors' new confusion over future bailout rules, rather than Italy-specific fears, analysts said.

The yield rise for the ultra-long bond was a bigger 0.71 percentage points, to 5.51% from 4.80%, but one has to bear in mind that the previous tender took place before the repricing of euro-zone debt in the autumn before Ireland's bailout.

The bid-to-cover ratios, which show how demand compares with the amount sold, came in at 1.4 versus 1.41 previously for the November 2015 BTP and 2.06 versus 1.73 for the September 2040 BTP.

The bonds on offer had been considered as cheap versus the two- and 10-year segments of the Italian curve, so offering incentives for potential buyers. Citigroup analysts had also noted that the Italian 5/10-year yield spread has flatted to historically attractive levels relative to Spain during last month.

"Some concession was given ahead of today's auction and it is likely to have supported total bids," said Annalisa Piazza, an economist at Newedge in London. She added that the "very good demand" for Italian paper is a sign that, despite renewed pressure on euro-zone peripheral issuers, "market dealers are still taking advantage of interesting spreads to buy relatively 'safe' peripheral debt."

Italian bond yields trade significantly below those of Portugal, still seen by many as a bailout candidate, despite its relatively smooth fund-raising this year to date and its advanced funding completion as well.

But Italian yields also trade below those of Spain. Deutsche Bank analysts say Italy's funding fears aren't currently a source of concern, although March and September will be the heaviest in terms of funding needs, totaling €67 billion and €69 billion, respectively, to fund government-bond and Treasury-bill redemptions, as well as the budget deficit.

"In terms of the sovereign funding needs, in our opinion, Italy should remain in a fairly manageable position throughout the year," said Deutsche Bank analysts, and doesn't need to "over-issue" in early 2011.

Portugal will sell €750 million to €1 billion of 12-month T-bills Wednesday, and the same day it will buy back bonds maturing in April 2011 and June 2011. These bonds have outstanding volumes of €4.532 billion and €4.958 billion, respectively.

Spain will auction the 4.85% Oct. 2020 and 4.20% Jan. 2037 bonds Thursday for an amount to be announced later Monday.

Portugal's Growth on Target

February 14, 2011

LISBON—Portugal's economy expanded in 2010 as exports to Europe increased. However Patricia Kowsmann of the WSJ reports that the country will fall into recesession, due to a fall in domestic spending that will likely start to outpace the rise.

Portugal's National Statistics Institute said Monday that gross domestic product likely grew 1.4% in 2010, as economic growth in its trading partners in Europe boosted exports. On a quarterly basis, however, GDP contracted 0.3% in the fourth quarter from the third, it said in its flash estimate.

The estimate doesn't include a statistical breakdown of growth, but the agency said export volume fell slightly from the third quarter, while domestic spending also slowed.

Filipe Garcia, an economist at Informacao de Mercados Financeiros, said the GDP figure for the fourth quarter was slightly lower than expected.

"Going forward, the budget consolidation will likely continue to depress public consumption," he said. He added that exports could also be hurt by rises in prices for electricity and raw materials.

Final GDP figures will be released March 11.

Portugal is raising taxes, cutting salaries and taking other measures to reduce its spiralling budget deficit, something the Bank of Portugal said will drive the country to a recession this year. Private consumption is expected to fall 2.7% this year, while unemployment should surpass the current 10.9% rate.

A recession will make public finances even more difficult to turn around, at a time when the country is desperately seeking to prove to investors it can tackle its persistent deficit on its own.

To date, the government has met its budget target, cutting the deficit to around 7% of GDP last year, from 9.3% in 2009. It needs to reduce the figure to 4.6% in 2011.

Billionaires Count in Russia

February 14 2011

Russia boasted 114 dollar billionaires at the end of last year, according to an annual ranking of the country’s richest 500 published on Monday by Finans magazine and reported in the Financial Times.

The new record, last achieved in 2007, when there were 101 billionaires, represents a comeback for this exclusive "club" that seemed endangered when Russia’s stock market hit rock bottom in February 2009. The recovery still has legs. The top 10 Russians in 2010 were together worth $182bn – up 30 per cent from $139bn in 2009, but still below 2007’s peak of $221bn.

Their resurgence is explained by a 20 per cent increase in the Russian stock market last year. It also reflects strong growth in Chinese demand for raw materials – still the root of the wealth of Russia’s richest.

The top of the list is dominated by Russia’s “steel kings” – owners, or sometimes ex-owners, of sprawling metals plants. Number one, as last year, is Vladimir Lisin, low-profile chairman of the board of NLMK Steel, based in Novolipetsk, with an estimated worth of $28.3bn.

Entering the top three is Alisher Usmanov, majority owner of Metalloinvest, another metals company, and a shareholder in London’s Arsenal Football Club.

Second is Mikhail Prokhorov, who sold his shares in Norilsk Nickel at the top of the market in spring 2008 – and thus was the only oligarch with any cash to spare when the markets collapsed.

Oleg Deripaska, head of aluminium company Rusal, which floated on the Hong Kong stock exchange last year, is fourth, with an estimated fortune of $19bn. That is a striking revival for an oligarch who entered the crisis particularly heavily leveraged.

Roman Abramovich, the Chelsea FC owner who sold his Sibneft oil company in 2005 but now has big steel holdings, was in fifth place – the first time Russia’s one-time richest man has been outside Finans’ top three since its rankings began in 2004.

The Finans list records one significant fall from grace: Elena Baturina, wife of former Moscow mayor Yuri Luzhkov, who was sacked from his post in September, fell farther than anyone – 47 places, to 94, with her fortune halved to $1.1bn.

Russia actually lost more billionaires than any other country during the financial crisis; the total, according to Finans, dropped to 49 at the end of 2008, before rising to 77 in 2009. This was mainly because of widespread use of shares as collateral for loans, which multiplied losses when the market soured.

Fannie Mae's Future Abruptly Terminated

WSJ REView and outlook:

the end of fannie mae

FEBRUARY 14, 2011

Treasury wants the company phased out but punts on how to do it.

It's enough to make you believe in miracles: The Obama Administration is now on record as saying that Fannie Mae and Freddie Mac should go out of business. It took a global financial panic and $140 billion in taxpayer losses, but on Friday there it was in black-and-white in the U.S. Treasury's report to Congress on reforming the mortgage market: The Administration will "ultimately . . . wind down both institutions."

This marks a break with decades of bipartisan support and protection for the two government-sponsored giants of mortgage finance. Fannie Mae has its roots in the Roosevelt Administration, and a phalanx of bankers, mortgage lenders, homebuilders and Realtors worked together to keep the companies growing and federal mortgage subsidies flowing. Now even some Democrats—though not yet those on Capitol Hill—admit their business model was a catastrophe waiting to happen.

***

Under the Administration's proposals, Fan and Fred wind down over five to seven years. The two mortgage giants would, in effect, gradually price themselves out of the mortgage finance market by raising guarantee prices and down payment requirements, while lowering the size of the mortgages they could securitize and guarantee. This sounds like a plausible set of first steps to lure private capital back into the mortgage market, where some 92% of all new mortgages are currently underwritten or guaranteed by the government.

The $5 trillion question, however, is what would replace Fan and Fred. And here the Obama Administration has punted, offering the "pros and cons" of three broad proposals without endorsing any one of them.

Door No. 1 is the best of the lot by our lights. Under this option, federal guarantees would be limited to Federal Housing Administration (FHA) loans for lower-income buyers and VA assistance for veterans and farm programs—each a narrowly targeted market segment. A Treasury official says this would reduce the taxpayer backstop over time to about 10% to 15% of the mortgage market.

The Administration puts the case for federal withdrawal from the broader housing market in compelling terms: "The strength of this option is that it would minimize distortions in capital allocation across sectors, reduce moral hazard in mortgage lending and drastically reduce direct taxpayer exposure to private lenders' losses." Bravo.

Treasury points to other benefits: "With less incentive to invest in housing, more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets. Risk throughout the system may also be reduced, as private actors will not be as inclined to take on excessive risk without the assurance of a government guarantee behind them. And finally, direct taxpayer risk exposure to private losses in the mortgage market would be limited to the loans guaranteed by FHA and other narrowly targeted government loan programs: no longer would taxpayers be at direct risk for guarantees covering most of the nation's mortgages."

Those two paragraphs more or less sum up 20 years of Journal editorials on housing.

So what's not to like? The Administration says this option could reduce access to credit for some home buyers, and that it would leave the government without the tools to intervene in a future crisis. As for the credit point, other countries have high rates of home ownership with far less government support. If the government stands aside, it would open the way for alternative forms of finance, such as covered bonds, that now can't compete in the U.S. because of government favoritism for the 30-year mortgage model. This would open options for borrowers by increasing the diversity of financing.

As for a future crisis, government intervention is less likely to be needed if the market isn't distorted by government subsidies in the first place.

Behind Door No. 2 is a rump Fan or Fred, one that would stay small in "normal" times but stand ready to step in with Uncle Sam's firepower in a future housing-finance crisis. But as the Administration acknowledges, it would be difficult both to stay small and retain the capacity to go large when needed. We'd add that the political pressure to expand any federal mortgage-lending program would be too great for lawmakers to resist. Within a generation, the winding down of Fan and Fred would be unwound.

But the greatest danger lies behind Door No. 3, which looks like Fannie in a new suit. Under this last option, the Administration envisages a group of tightly regulated, well-capitalized private mortgage insurers whose policies would be backstopped by government reinsurance. The government would charge premiums for this insurance, "which would be used to cover future claims and recoup losses to protect taxpayers." This reintroduces the lethal mix of private profit and public risk by other means.

The problem with Fan and Fred from the beginning was not—despite the Administration's claims—that the profit motive corrupted their benign goals. Rather, the political influence and financial power of the housing lobby ensured that the companies operated outside the normal rules of politics and financial discipline. Thanks to an implicit government guarantee, the market never put any limit on their growth, even as their liabilities climbed into the trillions. Few politicians had the nerve to challenge a housing lobby that would attack them for opposing home ownership. The same political flaws would afflict a future reinsurer and its coterie of putatively private insurers.

The power of the housing lobby is implicit even in the Treasury's refusal to pick a preferred reform. As with entitlement reform, the Administration is leaving the hard work to House Republicans, who will bear the brunt of the political blowback. A reasonable GOP fear is that the Administration, whatever its rhetoric now, will pounce with a veto when it's politically advantageous—in, say, 2012.

***

Our view is that there should be no federal housing guarantee. If Congress wants to subsidize housing for the poor, it ought to do so explicitly through annual appropriations. One lesson—perhaps the most important—of the financial crisis is that broad policy favors for housing hurt every American by misallocating capital and credit. The feds created incentives to pour money into McMansions we didn't need while robbing scarce capital from manufacturing, biotech and other uses that might have created better jobs and led to a more balanced and faster growing economy.

We realize this is political heresy, but it is the beginning of wisdom in getting government out of the mortgage market. We're glad to see the Administration concede this rhetorically, even if it lacks the courage to embrace its logical policy conclusions.

G-20 Beset with Massive Challenges

By NATHALIE BOSCHAT in Paris and IAN TALLEY in Washington for WSJ

FEBRUARY 14, 2011

The global economy's recovery, though still fragile, is easing pressure on world leaders to address lingering financial and economic risks at the upcoming meeting of finance ministers from the Group of 20 leading economies in Paris later this week.

Fears that helped drive cooperation during the peak of the financial crisis are dissipating and the agenda promoted by the G-20's current chairman, French President Nicolas Sarkozy, is proving divisive.

Mr. Sarkozy has outlined an ambitious program to begin restructuring the international monetary system, rebalance the global economy, tame volatile cross-border capital flows, lower inflation where it is a problem and tighten financial regulation.

"We want to implement decisions taken by past G-20 summits, prevent new crises and enlarge the scope of regulation," French finance minister Christine Lagarde said Thursday.

But at this point, the finance ministers going to the meeting are expected to agree only on the shape of negotiations for coming months.

"Don't expect any revolutionary announcements," said Domenico Lombardi, a senior fellow at the Brookings Institution, a Washington think tank, and former International Monetary Fund executive director for Italy. With Europe's debt crises appearing to recede, "leaders have a false sense of comfort…there will be no sense of urgency," Mr. Lombardi said.

Dominique Strauss-Kahn, head of the IMF, last week repeated his warnings that if the G-20 turns into a talk shop—with members figuratively doing more sightseeing in Paris than deal making—the group could undo the progress made in the past two years in reducing risks to economic stability.

"Global imbalances are back, with issues that worried us before the crisis—large and volatile capital flows, exchange rate pressures, rapidly growing reserves—on the front burner again, " Mr. Strauss-Kahn told an audience of economists. "Left unresolved, these problems could even sow the seeds of the next crisis," he said.

U.S. officials remain concerned about the potential for Europe's debt crisis to spread. One of Washington's highest priorities will be encouraging eurozone leaders to resolve politicial disagreements over how to boost the firepower of the bailout fund they have organized and to assure markets they'll be able to meet their governments' future financing needs.

However, U.S. officials are planning to take a less active role in Paris than at the past G-20 meetings, saying they prefer to let the process play out and allow others feel they can contribute.

Few G-20 countries have yet rallied behind Mr. Sarkozy, who has made reforming the international monetary system the crux of his G-20 program, saying currency volatility weighs on global growth.

Officials in the U.S., France, and in many developing countries complain their exports are hurt by China's policy of holding a lid on the value of its currency, the yuan, and have called for Beijing to let it rise more quickly in value.

France is trying to address the issue indirectly by advocating a bigger role for the yuan in global currency transactions, seeking to include it as part of the currency in which the IMF lends, known as Special Drawing Rights (SDRs).

Paris believes this will encourage China to loosen its tight grip on the yuan's value.

The Obama administration wants Beijing to pick up the pace of yuan appreciation, but believes it achieved a measure of success on the issue after Chinese President Hu Jintao's visit to Washington last month.

Mr. Sarkozy also believes that expanding the use of the IMF's currency will build a more stable monetary system because emerging nations won't have to build up large cash reserves—primarily dollars—as insurance against currency crises. Reducing these economies' dependence on the dollar could make them less vulnerable to the effects of changes in U.S. Federal Reserve policy.

One area where the G-20 may make limited progress is on developing common rules on when and how to raise barriers to foreign capital flowing into emerging market economies.

Finance ministers from developing countries have complained that loose monetary policy in the U.S., Europe and Japan has caused foreign capital to rush into their economies, threatening to overheat them.

Several governments also blame the Fed's policy, specifically, for fueling higher inflation around the world, a charge Fed officials reject.

In the past year, several emerging-market governments have adopted capital controls, such as taxing short-term investments or reducing the interest that banks can pay to foreigners.

But here, again, there are divisions: emerging markets do not want to limit their ability to stem inflows, while rich nations want capital controls to be used as a last resort.

France, Germany and Italy—the three eurozone countries that are part of the G20—are focused on the fall-out from Axel Weber's decision last week to resign as president of Germany's Bundesbank, after announcing he would not pursue the presidency of the European Central Bank. His decision on the ECB job appears to have owed much to French resistance to his candidacy. The chain of events has caused the German government acute embarrassment, severely testing the resolve of France and Germany to work together on Paris's G-20 agenda and Berlin's plans for overhauling the eurozone.

The G-20 has made little progress on one of its principal strategies for narrowing global trade imbalances. Under the counsel of the IMF, the G-20 was supposed to coordinate a strategy of shared policy adjustments, to be called the Mutual Assessment Process, designed to boost global growth by several percentage points. Member countries failed to agree last year on what all those policies should be, so the U.S. tried a separate approach, attempting to the G-20 nations to agree to keep their trade deficits and surpluses within a targeted range. That idea failed to win agreement. Now, the G-20 countries are trying to draft a set of economic measurements that would guide policies along the lines of the shared growth strategy. But, say officials close to the matter, members are still bickering over what those indicators should be.

—Geoffrey Smith in Frankfurt and Damian Paletta in Washington contributed to this article

A Stronger Financial Architecture for Tomorrow's World

Posted: February 10, 2011 04:13 P Huffington Post

By Dominique Strauss-Kahn

Managing Director, International Monetary Fund

The international monetary system (IMS) is a topic that encompasses a wide range of issues -- reserve currencies, exchange rates, capital flows, and the global financial safety net, to name a few. It is one of the key issues on the G-20's work agenda for 2011, and a topic that is eliciting lively discussion -- for instance the recent, insightful report of the group chaired by Michel Camdessus, called the "Palais-Royal Initiative".

Some are of the view that the current system works well enough. While not perfect, they point to its resilience during the crisis, citing the role of the U.S. dollar served as a safe haven asset. And now that the global recovery is underway, they see little reason to worry about the IMS. In other words, "if it ain't broke, don't fix it".

I take a less sanguine view. Certainly the world did not end in 2008, but mostly because extraordinary international policy cooperation helped avert a far worse outcome. Moreover, the recovery underway today is not the recovery we wanted. It's certainly a recovery, but it is uneven. It's a recovery where unemployment is not really going down and there are widening inequalities within countries.

And global imbalances are back, with issues that worried us before the crisis -- large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves -- on the front burner once again. Left unresolved, these problems could even sow the seeds of the next crisis.

So, there is good reason to think that reforms to the IMS that help us get to the root of these imbalances could both bolster the recovery and strengthen the system's ability to prevent future crises.

Let me set out three key questions that are guiding the IMF's work in this area.

First, how can we strengthen policy cooperation and reduce volatility?

The crisis marked a watershed moment for international policy cooperation -- leaders took the actions necessary to overcome domestic and global economic challenges. Now that the worst of the crisis has passed, how can we sustain this cooperation -- so that countries adopt policies consistent with less volatile global growth?

The G-20's Mutual Assessment Process has been an important first step towards creating a more permanent framework for global policy cooperation. IMF surveillance is a critical complement to the MAP -- and also lies at the core of our mandate. Through this activity, the IMF seeks to identify the country-level policies that can deliver more stable global growth.

We have also strengthened Fund surveillance -- for example, the early warning and vulnerability exercises. We are now increasing our focus on the impact of countries' policies across their borders, particularly for the five most systemic economies--for which we have new dedicated "spillover reports" in preparation.

At the same time, we are delving deeper into macro-financial linkages. For the world's 25 most systemic financial systems, Financial Sector Assessment Programs (FSAPs) are becoming mandatory. This tool will facilitate our efforts to catch dangerous build-ups of systemic risk in the financial sector -- which is precisely what preceded the recent crisis. Beyond this, we should explore whether even more ambitious changes to our surveillance are needed -- and we are conducting a major review to that effect.

My second question is: how best to cope with capital flow and exchange rate volatility?

Over the past decade, we have witnessed a dramatic increase in the size and volatility of capital flows. Broadly speaking, such flows are beneficial to the receiving economies. But they can also complicate macroeconomic management and threaten financial stability.

So, what are the tools? They are many, including macroeconomic adjustment, reserve accumulation, prudential measures and -- when all this is put in place and still a country experiences some disruptive inflows -- capital controls. Naturally, countries' responses are driven primarily by domestic considerations. But their actions can have consequences for the rest of the world.

Given these spillovers, should we have globally agreed "rules of the road" for managing capital flows? Our members have asked us to look into this question, and we expect to present some concrete ideas in the near future.

A related issue is the volatility of exchange rates. The major currencies have fluctuated widely vis-à-vis each other and have not moved consistently in a direction promoting an orderly adjustment of imbalances. Large and persistent deviations of exchange rates from fundamentals can result in significant systemic distortions, which can be particularly problematic for small open economies. Addressing this issue requires setting economic and financial policies that promote global balance and reduce the volatility of capital flows, as I have just discussed.

My third and final question: how can we enhance liquidity provision in times of extreme volatility?

Since the crisis, we have come a long way in strengthening the global financial safety net. The Fund's resource base has been increased significantly, and our financing toolkit has been made more flexible, in particular by adding the Flexible Credit Line and the Precautionary Credit Line.

But many countries remain to be convinced that the global financial safety net is strong enough to deal with the next crisis -- and so the costly accumulation of reserves continues well in excess of precautionary needs. What else can be done?

One important avenue is to strengthen partnerships with regional financing arrangements. Another is how to improve the predictability of systemic liquidity provision more generally -- as opposed to leaving this task to national central banks. A complementary question is how best to gauge the adequacy of precautionary reserves, and which benchmarks to use.

Over time, there may also be a role for the SDR to contribute to a more stable IMS. A paper the IMF is releasing today presents a range of ideas on this topic. But, increasing the role of the SDR would clearly require a major leap in international policy coordination. For this reason, the global reserve asset system will evolve only gradually, along with changes in the global economy, and at a pace that is not disruptive.

Let me wrap up. Reform of the IMS is wide-ranging and complex. Global debate is only just starting. But we must all recognize that this is not something academic or abstract. We need concrete ideas. This is linked to achieving the kind of well-balanced and sustainable recovery that the world needs--and it is linked to preventing the next crisis.