A Global Firestorm

The global financial community had been lulled into complacency. The world economy was humming along at a fast clip, financial markets remained generally calm, and private financial institutions were making impressive profits. The International Monetary Fund was running out of clients and suffering from an identity crisis. Suggestions that the Fund was no longer needed, or was at best useful as a provider of analyses and statistics, were becoming commonplace. And the IMF itself failed in detecting signs that the global financial system was becoming dangerously vulnerable. It was certainly not alone in missing the onset of a new and truly frightening crisis that threatened to bring down some of the world’s largest banks and in its wake burn to ashes large swaths of other parts of the economy. But there were a few voices that had issued well-argued warnings of a possible financial cataclysm. William White, the perceptive Canadian-born Chief Economist of the Bank for International Settlements (BIS), was on record as highlighting the dangerous course the global system was taking. As an experienced central banker, he was sensitive to the fuel that excessive liquidity creation was providing to asset markets. Moreover, he issued repeated warnings about the increasingly obscure securitization practices and the dubious role of rating agencies.1 But White’s admonitions mostly fell on deaf ears. At the IMF, apparently following the line taken by the Federal Reserve, rapid growth of monetary aggregates and credit was largely ignored.