Rubin Proposes Reforms for World Financial System

Conceding that the international response to the global economic crisis has been inadequate, Treasury Secretary Robert E. Rubin on Thursday called for a new “global financial architecture” to head off the next one.

“The global economy cannot live with the kind of vast and systemic disruptions that have occurred over the last year,” Rubin said, offering the most detailed U.S. description yet of possible reforms that may emerge.

They included increased financial contributions by emerging countries to such rescue agencies as the International Monetary Fund; better financial reporting methods for transparency in cross-border transactions; and a major role for the private sector in financing rescue packages.

But such measures would take years to implement. Critics noted they are too late to be of help in the current crisis as it sweeps around the world and increasingly laps at U.S. shores.

“As Samuel Johnson said, ‘Nothing concentrates the mind like a hanging in the morning,’ ” said Gary Hufbauer, senior fellow at the Institute for International Economics here.

Rubin’s speech was meant to set the stage, one government source said, for meetings here this weekend with finance ministers from the Group of 7 industrial nations who are to weigh action to contain the crisis.

Although stating that the IMF “has made sensible policy judgments in the face of complex and in many ways unprecedented challenges,” Rubin nevertheless called for IMF reforms.

He urged the IMF and World Bank, whose assistance to Asian economies has been blamed for exacerbating their crises, to “examine their policies and programs and change them where needed.”

At a news conference Thursday on the eve of the IMF’s annual meeting, managing director Michel Camdessus made several of the same reform suggestions Rubin made, saying the IMF had learned from its role in the Asian crisis.

But he also deflected criticism of the IMF’s handling of the crisis, saying the United States and other industrialized countries had to “discharge their responsibilities” by lowering interest rates and possibly restructuring debt to ease struggling countries’ burdens

In a striking example of how little is known about private loans being made internationally, World Bank President James Wolfensohn told reporters here that he was as surprised as anyone during the current Asia crisis to “wake up one day and find out that over $60 billion had been loaned by Western banks to private companies in Indonesia.”

Greater disclosure of such loans is among the reforms expected to be spelled out Monday. They represent proposals by 22 industrial and emerging economies after several months of study, Rubin said.

He said they will include:

* A call for the IMF to examine and publicize countries’ adherence to international standards of transparency. The IMF itself also needs to be more transparent, Rubin said.

* Strengthened national financial systems, with new standards and principles for corporate governance, bank restructuring, deposit insurance, and foreign exchange and interest rate risk management.

* A greater responsibility for the private sector in combating “contagion,” because the current crisis has been characterized by the massive movement of private capital rather than public funds as in previous global crises.

* “Appropriate regulation” of capital flows in both good and bad times, including better risk management in financial institutions.

But Rubin warned against implementing broad capital controls, a pointed reference to recent actions by Malaysia limiting the movement of money.

“Appropriate regulation of capital markets is one thing, wholesale distortions of them is quite another,” he said. “My own view is that . . . short-term speculative capital flows have played a relatively small part of what happened in the current crisis.”