A need for an effective world central bank

Comments on Suman Bery “The wisdom of Professor Calvo”, 30/07/2009, http://www.eastasiaforum.org/2009/07/30/the-wisdom-of-professor-calvo/

There seems a badly need for an effective world central bank.

Professor Calvo’s points, like the one on national international reserves, are profoundly thought provoking, particularly in the mist of what many countries are now worrying how to manage their international reserves to avoid potential losses if the US dollar devalues, due to its ever increasing budget deficits and government debts. One can have quite different perspectives for the same issues when looking in a different scope.

That is important in terms of thinking among competing “theories” for both economic or financial theorists and policy makers alike.

In addition to that, one might look at issues from an international perspective as opposed to a national perspective for managing the so called “sudden stop” of international capital inflow to a country. This would require a “world central bank”, an international last resort, to manage a sudden change in sentiments, similar like a run on a bank. It could provide emergence loans in whatever currencies to a country with reasonable prospects of success. Such loans can be quasi commercial, with reasonable interest rates.

The need for such a world central bank should be strong, because now international capital flow in and out of a country can be very large and the impact of a sudden change is very dramatic for most country to deal with along, simply because it is out of the capacity of any single country.

The Asia financial crisis in the late 1990s and the recent world financial crisis all prove the need for such a world central bank. The responses of some Asian countries following the Asia financial crisis was for individual countries to increase their international reserves and some attempts to establish an Asian regional financial institution with roles similar to those of the IMF with a focus on Asia. The latter is in the right direction, although the former has been said to have contributed to serious international imbalance.

Further, a private bank may be insolvent and bankrupt and be out of business forever, but a nation or country will stay in “business” forever, if you like. So it will have the ability to pay back any reasonable debts it incurs when in such emergence.