The Subprime Crisis: Towards a New Consensus

Abstract

Since the Asian financial crisis, major changes have taken place in the international financial system and in policy ideas about how to ensure international financial stability. Against the backdrop of a global economy characterized by growing financial linkages and innovation, a new consensus emerged around what can be defined as the policy idea of market-led liberalization. Evolving out from the contestation sparked in the aftermath of the Asian crisis, three procedural principles about how to contain systemic financial risks provided the foundations to the policy idea of market-led liberalization: market discipline, self- and light-touch regulation, and the dispersion of supervisory and regulatory authority among various international bodies. The wide international agreement around the new policy idea is well reflected in some of the most well-known policies adopted since the end of the 1990s. Indeed, the international financial standard initiative in the late 1990s and the Basel II accord in 2004 were both largely based on the principles of market discipline and private-sector self-regulation. In contrast, the role of governments along with that of traditional intergovernmental organizations was downsized, with the IMF increasingly marginalized as the anchor of global financial cooperation. Instead, new international bodies, such as the G20 and the Financial Stability Board (FSB), were created with the responsibility of supervising the international financial system.