First, countries could come to a common understanding about the core elements and principles governing their financial markets development and regulations. Full harmonisation is neither desirable nor feasible. But policy‐induced divergences may prove very destabilising and lead to a reduction in welfare. It should be possible to agree on the core principles governing, for instance, capital account regimes, the treatment and resolution of internationally‐active financial institutions, deposit insurance, and the organization and functioning of securities markets. Divergences in financial development are a fact of life. Some of them reflect true social choices and preferences that must be respected and accommodated. Others result from deliberate or inadvertent policy‐induced distortions, which should have been reduced or eliminated. Disentangling these two sources of divergences in financial development should be a priority in the international agenda. Second, the search for an efficient and powerful “financial safety net” should be pursued. Stabilising the demand for international reserves would bring huge benefits in terms of world welfare. At present, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention. In addition, if sterilisation proves difficult or impossible, it also leads to unwanted changes in monetary policy. Precautionary reserve accumulation, however legitimate, unavoidably creates side effects for domestic macro policies as well as spillover effects on other countries. All countries, therefore have a common interest in finding ways to disconnect reserve accumulation from exchange rate management and, more generally, from balance of payment situations and monetary policies. The difficulties, however, are huge.

In the days and weeks that followed, banks tightened credit standards on new loans to households and enterprises. Global economic growth was already slowing, but the situation deteriorated in the last few months of 2008. The turnaround hit hard, with synchronised effects on virtually all financial and goods and services markets, not only in the US but also in Europe, Asia, Latin America and Oceania. For a long period there were hopes that growth in China and other emerging market economies would hold up. But they are also now severely affected by the crisis. The world economy is now in the deepest downturn in the postwar period, and will contract in 2009, for the first time in over 60 years. What is happening now is more than a normal fluctuation in the business cycle. The world is facing a crisis of confidence, with faltering faith in the future and a loss of confidence in banks, counterparties and contractual partners. The authorities have taken extraordinary action, as in a state of emergency, deploying a wide range of established and new policy instruments. Banks have been nationalised and state ownership has increased. Central banks have cut policy rates substantially. Government authorities have employed credit easing and quantitative easing to increase the money supply by purchasing private bonds and government debt. Government authorities worldwide have increased budget deficits. In many industrialised countries, deficits will rise to about 5 per cent and for some as much as 10 per cent.