Time to Address Real Economic Reform

NEW YORK — Financial markets have painfully short memories. With the Dow hovering above 10,000, last year's near-meltdown has been forgotten. As a result, the movement for international financial change, so strong just a few months ago, has dissipated. The key nations are stalemated over reform. This week in Germany, the Group of 8 will convene for its annual economic summit. Its immediate preoccupation likely will be Kosovo, but the seven industrialized nations plus Russia should also break the economic-reform logjam because it carries far greater risks than the Balkans.

Everyone has heard about the political difficulty of world financial reform. But that's like Los Angeles learning a major earthquake is imminent yet being told its City Council can't agree on a preparedness plan.

The system is rickety and must be strengthened before the next crisis. Necessary steps include dramatically enlarging the International Monetary Fund, straightening out its role relative to the World Bank, strengthening the medium-sized currencies and installing a real financial early-warning system. With leadership, these can all be taken.

There should be little doubt about the inevitability of renewed financial crisis. Remember Mexico in 1994, Asia in 1997 and Russia in 1998. The recent Brazilian crisis was especially sobering.

Six months ago, the Asian financial crisis abated, and world markets were temporarily calm. In this environment, the IMF painstakingly assembled a $42-billion precautionary credit line for Brazil's economy. This was a new approach, a standby financing so big as to deter a currency crisis in the first place, not just clean up after one had already struck. But without warning, almost before the ink was dry on the IMF loan documents, markets blew right through it.

Confidence in Brazil suddenly ebbed. Its currency plunged 40% in three weeks, capital poured out of the country, interest rates rocketed up and recession set in. All global markets were shaken amid fears of renewed contagion. It seemed the world economy was headed back to the precipice.

All except the unfortunate Brazilians ended up dodging this bullet. But, these recurrent near-misses signal danger. The Brazil case reveals that the world financial system's shock absorbers are still not strong. Frequent trips to the edge of the cliff eventually result in a plunge.