This was the first thing that Europe2020 called for in their open letter to the G20 participants. Paul Krugman's latest column shows one of the reasons why this is necessary.
Krugman doesn't actually think it is needed, he describes why China wants it, and then concludes that China shouldn't expect the world to bail it out of its investment mistakes. The investment mistake he refers to is China's massive buying of U.S. treasuries (T-Bills). Now China fears a sudden drop in the dollar (likely because of the greatly increasing U.S. debt), yet it can't sell it's dollar holdings because this would also cause that sudden drop before it could sell very much of this asset. What Krugman doesn't mention here (although he's talked about it before) is that the U.S. needs China to not only keep holding these treasuries but also to keep buying them. This is how we are expecting to finance things like the stimulus plan and various bailouts that keep coming up. (I'm not saying we should be doing this, I'm just pointing out what has been official policy in the Bush administration and now the Obama administration).
It may be true that China shouldn't expect to be bailed out of this predicament, except we're now trying to bail out others to prevent a system collapse. I think China's situation qualifies as having great systemic risk. Think about this: maybe they can't sell the treasuries without getting virtually nothing for them, but if the dollar drops significantly than they won't be worth much anyway. With this in mind, they have value as economic leverage at the bargaining table, since if China sold them or merely stopped buying them the dollar would plunge. Also, I think you know that the U.S. depends on China for a lot of goods and food. So I'm saying I don't think we can ignore their problem, because it's our problem too.
A side note: Jeff Vail talks about how China is currently dealing with this problem by using its US Treasuries to buy hard U.S. assets, and suggests this is a good work-around for as long as it lasts.
March 30,2009 post
The G20 Summit did not implement a basket of currencies as a global currency; Europe2020 then says that we should expect a decade or more of global economic depression and political turmoil. Krugman agrees about the economic part, he ends his column:
"The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.
And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run."