"A bank crash in the past had terrifically concentrated effects," Mallaby said. When the oil industry in Texas collapsed some years ago, so did some Texas banks. But it didn't spread further.
"The bad thing about what's going on now is that problems in the U.S. real estate sector can affect pensions in Norway or banks in Asia," he said. "But the good news is that because the pain is spread around, it's less acute in any one place."
Another reason that combating panic is difficult in a global economy is that there isn't necessarily a relationship between the size of a bank and the size of a country, he said.
"There are some small countries with enormous banks, like Iceland. The banks are bigger than the country. We used to say 'too big to fail.' This is more 'too big to bail,' " Mallaby said.
And if forging unified strategies for the economic crisis is hard among developed countries like those in the G-7, the challenge is all the greater when developing nations such as China, India, Brazil, Argentina and Mexico are added in.
The 2008 world economic outlook released by the IMF this week projected zero or even negative growth for advanced nations but 7% growth for developing ones. Such variations cause nations to react differently.
But the crisis still affects them. In Mexico, for example, the peso plunged against the U.S. dollar Thursday, leading President Felipe Calderon to push for a stimulus package to keep Mexico's economy afloat.
World leaders need to overcome those parochial interests and realize that the crisis needs a coordinated assault, the IMF's Strauss-Kahn said.
Already, he and others are talking about finding new ways for countries to cooperate economically. After the 1997 Asian financial crisis, finance and banking officials in the U.S., Asia and Europe created a group called the Financial Stability Forum to look for vulnerabilities in the international financial system and improve coordination in fixing them.
Its success is a matter of debate. But there are calls for finding similar new ways to coordinate efforts because of the current crisis.
"What would be the worst situation would be that after the crisis . . . we'll just say, 'OK, we'll go back to business as usual," Strauss-Kahn said.
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jim.puzzanghera@latimes.com
maura.reynolds@latimes.com
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Economic turmoil
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