Financial Crisis and Currency Essay

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Reform of the International Monetary System

The proposal for international reform that is most important is the International Lender of Last Resort. An international lender of last resort might have the ability to preclude contagion, in which an efficacious speculative attack on one emerging market currency gives rise to attacks on other emerging market currencies, propagating financial and economic disorder as it goes. Taking into consideration that a lender of last resort for emerging market nations is necessitated at times, and bearing in mind it cannot be provided locally, there is a significant justification for an international institution to occupy this role. This can be linked to Mexico's financial crisis of 1994, where the IMF took the role of lender of last resort and offered emergency lending to nations facing financial instability. On the other hand, an international lender of last resort generates risks of its own, particularly the risk that if it is supposed as preparing to bail out negligent financial institutions, it may set in motion unwarranted risk-taking of the kind that makes financial crises more probable (Mishkin 19).

This resolve can be compared to other reforms. One of the upsides to Tobin Tax is that during periods when several nations are experiencing budgetary pressures, owing to financial crisis, the new tax would add to fiscal amalgamation devoid of directly affecting the real economy. In addition, Tobin Tax might also dissuade unwarranted trading, and along the way, promote market constancy and long-standing investing.

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However, this reform has its downsides. One of its weaknesses is that the potential for decreased market liquidity and the greater price volatility might follow on. For that reason, the cost of capital might increase and investment decline. What is more, financial transactions are undertaken to wind break risks and Tobin Tax may dissuade these risks and unintentionally diminish stability (Mehta).

Another reform is having a new international reserve currency. One of the strengths of this reform is that taking into consideration the role of the United States dollar in the international system, it is necessary to obtain a substitute that would better safeguard the purchasing power of foreign currency reserves. This takes into account the downfall and demise of the Bretton Woods system and the Triffin Dilemma. However, the shortcomings of this reform is that the main issue with the system is not the specific asset that functions as the international currency but instead the operation of the modification mechanism for coping with international inequities and disparities. The efficacious quest of these policies will necessitate a misrepresentation of prices, of exchange rates, or of the international dissemination of demand. The subsequent excesses and shortfalls will also have values that are inaccurate and as a result cannot be assured (Kregel 5).

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