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Adding its voice to those blaming the free-market model of the United States and Britain for the crisis, the United Nations Conference on Trade and Development (UNCTAD) said considerable public intervention was now needed to avoid greater damage to the financial system or real economy.
'The market-fundamentalist argument against stronger regulation based on the idea that market discipline alone can most efficiently monitor banks' behavior has clearly been discredited by this crisis,' it said in a policy brief.
UN Secretary-General Ban Ki Moon said the financial crisis should not derail world commitments to reduce poverty and narrow the gap between rich and poor nations.
'Grave as it may be, today's financial crisis will be overcome,' Mr Ban told reporters at UN headquarters in New York.
'We must underline the need for 'crisis-proofing' of the important priorities of the United Nations from international financial turbulence.'
He said the heads of all UN agencies and the World Bank and the International Monetary Fund would hold a special session on the financial crisis on Oct 24.
Prposed fixes
UNCTAD proposed several quick regulatory fixes:
UNCTAD said the global policy response was confused, with US efforts to revive its economy contrasting with reactive, even contractionary, moves in other big countries.
The European Central Bank was providing liquidity but retained a hawkish monetary stance at a time when fiscal policy remained bound by the EU's stability and growth pact, it said.
Policymakers have failed to grasp the full implications of the acceleration of the US deleveraging process - depreciating toxic assets and reducing debt, the weak dollar and the uncertainty of Americans, it said.
'Such forces can have tremendous negative implications for the world economic outlook as a whole,' UNCTAD said.
The painful effects of unwinding unsustainable debt must be compensated for by a policy stimulus from surplus countries such as Japan and some large Eurozone members reducing their surplus to avoid recession or a depression, it said.
UNCTAD said inflation concerns were misguided.
'The risk of a prolonged downturn or depression is far more important, as the slowdown will further reduce commodity prices... Deflation, not inflation, may actually be the main economic policy challenge,' it said.
'Governments and central banks must also recognise that a modern financial market chasing higher and higher returns based on the expectation of ever-rising prices in certain sectors or certain assets is a beast that must be tamed before it causes acute damage and threatens the whole system,' it said. -- REUTERS
