International Reserve System: Is it Feasible? Essay -- Economics Econo

International Reserve System: Is it Feasible? During the last decade, the world saw some of the most severe economic shocks and crises since The Great Depression of the late 1920’s. The crises of Mexico in 1994, Russia in 1995, Asian countries in 1997 and even recently in Latin America in 2000 have shown us that the economic shocks have a very drastic and crippling effect on the stricken countries. Rapid capital outflow; firms and banks overwhelm by bad debts; inability to provide loans; bank closures due to sudden capital losses and devaluation of the home currency, all have struck the affected countries simultaneously that their central banks did not have enough sufficient reserves to protect themselves. The realization of the poor central bank’s regulation, also aided by the fact that markets throughout the world are now interlinked, quickly caused panic and similar shocks to spread to neighboring countries and even regions. An international organization, which controls a form of reserve system, could have b een the lender of last resort for these sickened countries in their time of need. A working example of a reserve structure for banks would be the Federal Reserve System currently being used by the United States. This consists of 12 regional Federal Reserve Banks that is coordinated under one main Board of Governors. The main roles of the Fed is to issue new currency, administer discount loans to banks, examine the management of local banks and their financial status and provide a system of standardized banking regulations for banks to follow. Lastly, but most importantly, the Fed acts as a lender of last resort to banks facing financial collapse.[1] This not only provides stability for consumers but also prot... ...y (Cambridge: Harvard University Press, 1994). 5) Federal Reserves Bank, Boston web site, http://www.bos.frb.org 6) Frederic S.Mishkin, The economics of Money, Banking and Financial Markets (New York : World Student Series, 2003) 7) Jorge A. Chan Lau / Zhaohui Chen, â€Å"Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation.†, IMF Working Paper, August 1998 http://www.imf.org/external/pubs/ft/wp/wp98127.pdf or http://www.imf.org/external/pubs/CAT/longres.cfm?sk=2738.0 8) IMF web site, http://www.imf.org 9) The Asian Crises, http://faculty.washington.edu/karyiu/Asia/papers/index.htm 10) Works in International Monetary Fund-Financial Medic to the World?, ed. Lawrence J. McQuillan and Peter C. Montgomery (Stanford: Hoover University Press, 1999) 11) World Bank web site, http://www.worldbank.org