We Need a Bank Of the World

It could be the lead regulator of big global financial institutions, such as Citigroup or Deutsche Bank, whose activities spill across borders. It could monitor risks that are building in the global market and create an early-warning system that alerts banks and national regulators that trouble is coming, and pushes them to modify their policies.

It could act as a bankruptcy court when big global banks that operate in multiple countries need to be restructured. It could oversee not just the big commercial banks, such as Mitsubishi UFJ, but also the "alternative" financial system that has developed in recent years, consisting of hedge funds, private-equity groups and sovereign wealth funds—all of which are now substantially unregulated.

A new institution could have influence over key exchange rates, and might lead a new monetary conference to realign the dollar and the yuan, for example, for one of its first missions would be to deal with the great financial imbalances that hang like a sword over the world economy.

A global central bank would not eliminate the need for the Federal Reserve or other national central banks, which will still have frontline responsibility for sound regulatory policies and monetary stability in their respective countries. But it would have heavy influence over them when it comes to following policies that are compatible with global growth and financial stability. For example, it would work with key countries to better coordinate national stimulus programs when the world enters a recession, as is happening now, so that the cumulative impact of the various national efforts do not so dramatically overshoot that they plant the seeds for a crisis of global inflation. This is a big threat as government spending everywhere goes into overdrive.

The IMF could continue to exist, but its board would have to be restructured, its bailout role for smaller nations carefully defined, and its directions—including the severity of the conditions it imposes on borrowers—would have to come from the new central bank.

To give it legitimacy, a global central bank would have to be governed in light of political realities. That means that its board would include not only the top financial officials of the United States, the U.K., the euro zone and Japan, but also China, Saudi Arabia, Brazil, South Africa and perhaps a few others.