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The G-20 now assumes the role of defender of the world's health as the financial crisis ravages the global economy. The group now backs the IMF so that this institution will become its tool to solve the crisis. Hitherto, the Bank for International Settlements, based in Basel, has been regarded as the central bank of the central banks. But with this crisis, the IMF has overshadowed the Bank for International Settlements.

All of this sounds very funny, for the IMF and many leaders of the G-20 countries have come out to assert that the worst of the crisis is over, with early signs of a global recovery. Yet at the same time, they want to stack up the IMF with even more capital to lend out to the client states.

If the crisis is not going to get worse, why does the IMF need massive capital? The IMF has also recently announced a plan to auction about 400 tonnes of its gold reserves.

Many emerging markets, particularly those from the old Eastern European bloc, will need an IMF bail-out. It is the same old story. They stayed in an underdeveloped state for so long, then they opened up their economies and went through democratisation. They got capital from the global banks. They sold off their assets. Their asset prices surged. They enjoyed economic success. Then reality struck. The foreign capital created the bubbles. When the bubbles popped, their economies went down the tube. Capital flew out en masse and they were forced to devalue their currencies. The IMF will be stepping in with bail-outs accompanied by tough policy conditionals so that they can repay their loans to the global banks.

But the East European economies are small fry when compared to the crisis in the United States. George Soros, the international financier, has repeatedly said that the US financial system is practically insolvent. The damage from this global meltdown could be between US$50 trillion and $80 trillion. Since the US represents about 25 per cent of the global economy, it stands to suffer a loss of five years of its gross domestic product in this best-case scenario.

The US government has already committed more than $14 trillion to bail out the financial system, including the corporate sector. But the situation remains very precarious because the root of the banking crisis has not been addressed. The banks are still holding on to assets, which have not yet been revalued to take into account their price slump. About 100 banks in the US have already failed this year. The bigger banks have received full protection from the government. But their day of reckoning will also come if the smaller banks fall in a domino effect.

It is now October, a month when the financial instruments of the US and other global banks reach maturity. These banks are facing a dilemma, for they have already invested their money into assets that can't be turned into cash to service the debt. The amount of the financial instruments reaching maturity is believed to be several trillions of dollars. If these banks do not have the liquidity on hand, they will have to turn to the Federal Reserve. The Federal Reserve can't print too much money because its quantitative easing so far has already shocked global investors. Gold prices have shot up to a historic high of $1,048 per ounce because investors are scared of the money printing machine of the Fed and inflation. At the same time, the global banks hold the US dollar at about 60 per cent of their assets. If the value of the dollar were to fall by, say, 20-30 per cent, they would become insolvent.

This is the grave picture facing the global financial system. The IMF might try to come to the rescue, but it will be too little too late because it will amount to trying to use a rat's skin to cover an elephant.

The world's financial system needs a reset. How? Nobody knows the answer at this point.