The immediate need is to shrink leverage, maintain a flow of new lending and keep the core financial sector afloat, while addressing sagging confidence with fiscal stimulus. This requires big cash infusions, lower interest rates and budget deficits – all purely domestic issues.

When this triage stage is over, there are two obvious candidates for international cooperation: the global prudential regulatory framework and external imbalances. But to see what might usefully be done in these two areas, we need to define the agenda more precisely.

Almost ten years was spent developing and implementing the detailed Basel II Rules – 300 pages of requirements for banks. Before this is properly in place, one of its three ‘pillars’ looks distinctly shaky, relying as it does on the conflicted assessments of the rating agencies, which played a central role in the current crisis. A second “pillar” – market discipline – has shown itself to be ineffectually lenient in good times and punishingly harsh when things turn bad.

Basel III may be another decade away, but there is no need to wait. Most of the problems can be corrected by determined domestic action. The biggest task by far is in the USA, where the dispersed, uncoordinated and under-resourced regulatory bureaucracy was over-ridden, by-passed or ignored by the entrenched forces of Wall Street and the powerful anti-regulation free-market ethos. The UK has already begun substantive reform, demonstrating that the opportunity and responsibilities lie squarely with the national authorities, who need no international oversight.

What about international policy coordination? Until 1971, the Bretton Woods system provided some discipline and international coordination, fixing exchange rates and tolerating restrictions in capital flows. When this system broke down, such was the belief in the magic of the market that it was widely believed that flexible exchange rates would allow stable capital flows to fund whatever external imbalances the “consenting adults” in each country desired.

Despite ample evidence since then that the market doesn’t work at all smoothly in price discovery or equilibration, the US has shown no enthusiasm at all for attempting international policy coordination – the Plaza Accord and Louvre Agreement were aberrations, more than twenty years ago. Where external imbalances have been identified as excessive, the response has usually been bilateral and, judged by the recent finger-pointing at China by the new US Treasury Secretary, poorly-founded and counter-productive. Multilateral agencies such as the IMF have been side-lined.

If we believe that the world ‘savings glut’ (Fed Chairman Bernanke’s phrase) forced world interest rates down and funded the sub-prime excesses, the case for international coordination is compelling. More compelling still, the world system is clearly out of equilibrium, and relying on the spooked financial markets to sort the mess out requires more faith in self-equilibrating forces than the historical evidence would justify. Policy responses taken by one country impinge on others, sometimes adversely.

Much needs to be resolved if China, Germany, Japan and the US are to shrink their imbalances smoothly. Trade-offs and quid-pro-quo deals may well be a useful part of the process. If the pace of adjustment in the different countries is out of sync, GDP and exchange rates may be sharply disrupted.

The time-scale of this adjustment seems particularly intricate. China can’t suddenly turn off its export machine without serious internal damage (and damage back along the international supply-chain). Nor is there, now, any concern that China’s external surplus is pushing down world interest rates: central banks everywhere are pushing them down as fast as possible. The necessary prospect of huge US budget deficits suggests that turning America’s under-saving around can’t (and shouldn’t) be an urgent priority.

The top priority is to maintain the flows of international finance which countries in a globalised world have come to rely on. The more that countries like Australia assure their own nation’s access to international capital markets through AAA government guarantees, the harder it is for second-tier countries (particularly the emerging countries) to maintain their foreign funding.

So the case for international coordination is strong. But for success, it requires both heightened motivation and a new forum.

Perhaps the new G20 Leaders meeting is this forum. The December 2008 communiqué set out a realistic agenda, waiting to be built on in April. International peer pressure can urge countries to act more strongly where there is beneficial international spill-over, such as expansionary fiscal policy. G20 can discourage countries from actions which threaten an international spiral of tit-for-tat policy – principally trade protection.

It can spotlight US regulatory inadequacies by urging members to undertake the IMF/World Bank assessments of their regulatory frameworks: the US is the only G20 country not to have begun this process. It could oversight the strengthening of the Financial Stability Forum and pressure belated governance reform on the IMF. And it could provide the setting for a serious discussion of the international external imbalances, directly involving all the countries which matter.

Has the enormity of the Global Financial Crisis created the motivation for international cooperation? How serious do things have to get before all opportunities – international included – are brought to bear?

Stephen Grenville is an Adjunct Professor with the Crawford School, a visiting fellow at the Lowy Institute for International Policy and a former deputy governor at the Reserve Bank of Australia. This article originally appeared in the February 7-8 edition of the Australian Financial Review.