Similarly, while buying up bad US real estate loans from banks all over the world is a good idea, it is unlikely to be done by any single government and needs coordination across nations.

The need for international coordination is not restricted to the banking sector. Today, with the contraction in output and demand, there is a need for government intervention. Yet, when it comes to providing fiscal and monetary stimuli, there is a temptation for a small open economy to free-ride on the heavy lifting being done by other countries. Each country could try a small fiscal stimulus, and hope to benefit from the efforts of its neighbours.

As mentioned above, when countries use taxpayer money there is a danger of protectionism creeping into their policies. As is well understood now, when every country turns protectionist it becomes even more difficult to pull the world out of a recession. One important element of international coordination is to avoid protectionism. Though there is consensus on this issue, a number of countries, including India and the US, have tried to put in place protectionist measures in their stimulus packages.

Apart from the immediate difficulties, there is the longer-term issue of how to prevent such a crisis from occurring again. One element which generated the global financial crisis was excessive reserve accumulation by developing countries, owing to the fears they had after the Asian crisis about the possibility of IMF support in the event of a crisis, or about the strings that came attached with IMF support. Preventing such crises requires modifying the ownership and governance of the IMF.

... contd.