G-20 Thinking: In the Medium Run We Are All Retired
It looks like the G-20 on Friday will emphasize its new "framework" for curing macroeconomic imbalances, rather than any substantive measures to regulate banks, derivatives, or any other primary cause of the 2008–2009 financial crisis.
This is appealing to the G-20 leaders because their call to "rebalance" global growth will involve no immediate action and no changes in policy—other than in the "medium run" (watch for this phrase in the communiqué).
When exactly is the medium run?
That's an easy one: it's always just around the corner. Not today, of course; that would be short run. And not in 20 years; that's the long run.
The medium run is perhaps in three or five years. It feels close enough not to be meaningless at the press conference, but it's not close enough to be meaningful.
And—here's the key—whatever you agree on for the medium-term, you know that the world will change, quite dramatically, two or three times before you get there. At that point you can say, quite reasonably: But the conditions today are quite different from what they were when we made this medium-term commitment, so we really need to rethink it.
Of course, having the IMF report back every year on progress towards these medium-term goals is equally pointless. This is what the IMF has been doing since 2006 and what it was preparing diligently to do just as the global crisis broke out.
Expectations for the G-20 summit are low. But unless and until the leaders take any steps to address our pressing financial sector vulnerabilities, the summit is not worth its carbon footprint.
Remember what the financial experts said at the previous summit (April) and the one before that (November): We can't fix the financial system in the height of the crisis. True enough, although the opportunity to break the power of the largest players was squandered in both the United States and Europe.
So, now the crisis is over—as the G-20 heads of government will affirm—where are their efforts to fix the financial system? Please don't tell me, "that's what we're doing, in the medium-term."
Also posted on Simon Johnson's blog, Baseline Scenario. The following were posted previously.
You Cannot Be Serious (September 21)
According to the WSJ this morning (top of p.A1), the United States is pushing hard for the G-20 to adopt and implement a "Framework for Sustainable and Balanced Growth," which would amount to the United States saving more, China saving less, and Europe "making structural changes to boost business investment" (and presumably some homework for Japan and the oil exporters, although that is not stressed in the article).
This is pointless rhetoric, for three reasons.
- Such an approach has been tried before, mostly recently in the Multilateral Consultation, run by the IMF. This achieved little, as the WSJ article points out.
- This approach will always be fruitless unless and until you can put pressure on surplus countries to appreciate their exchange rates. But the IMF, with US connivance, just punted on this exact point—letting China off the hook. Tell me exactly, in detail, how the administration's proposal would change this, particularly with Mr. Geithner and Ms. Clinton so keen to be deferential to Chinese official buyers of US government securities.
- Where is the evidence that this kind of "imbalance" had even a tangential effect on the build up of vulnerabilities that led to the global financial crisis of 2008-2009? I understand the theoretical argument that current account imbalances could play a role in a US-based/dollar crisis, but remember: interest rates were low in 2002-2006 because of Alan Greenspan (who controlled short-term dollar interest rates); the international capital flows that sought out crazy investments came from Western Europe, which was not a significant net exporter of capital (i.e., a balanced current account is consistent with destabilizing gross flows of capital); and the crisis, when it came, was associated with appreciation—not depreciation—of the dollar.
The main argument for the revolving Wall Street–Washington door is that this lets an administration bring in top minds from the financial sector, with the practical experience necessary to tackle our most pressing problems. It is hard to understand the prioritization here, unless the goal is to create a smokescreen that will both postpone real policy action ("because correcting imbalances takes time") while also covering up for the crimes and misdemeanors of the Greenspan era ("it was all about imbalances, which were out of our control").
Granted, big current account imbalances are not a good thing and should be on some list of problems to address. But are they really on the top ten list of pressing issues for this G-20 summit, which should include: much tougher financial regulation, substantially raising capital standards, workable cross-border rules for handling failed banks, a timetable for downsizing our biggest banks, how credit rating agencies are paid, and reforming—top to bottom—financial sector compensation?
Protect Consumers, Raise Capital, and Jam the Revolving Wall Street–Washington Door (September 20)
Ben Bernanke has a great opportunity to lead the reform of our financial system. His standing in Washington and on Wall Street is at an all-time high, as a result of his bailout/rescue efforts. He is about to be confirmed with acclaim for a second term as chairman of the Federal Reserve's Board of Governors. And he has a lot to answer for.
Look, for example, at his speech of May 17, 2007, which discusses some of the problems in the subprime market and contains the memorable line: "Importantly, we see no serious broader spillover to banks or thrift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits" (full speech [pdf]; marks in the margin are from an anonymous and careful correspondent.)
Three points jump off these pages.
- With the kind of analytical capacity and world view demonstrated in this speech, there is no way that Fed can be regarded as capable of protecting consumers vis-à-vis financial products going forward. The Fed's claims to that effect undermine their legitimacy and plausibility. They failed consumers completely, and they should reflect deeply on the organizational culture and internal incentives that brought them to this sad point. "Give us another chance" is not convincing; there is too much at stake.
- If the Fed is capable of such mistaken views as Bernanke expressed in May 2007, you must assume that regulation will break down again in the future. Tightening the rules on bank behavior is fine, but down the road the banks will again fool the Fed, other regulators, and perhaps even themselves on the true risks they face. It is therefore essential that our financial system carry much more capital than has been the case in the recent past. We should go back to pre-1935 or even pre-1913 levels (see slide 40 in this presentation [pdf]). In a New York Times op-ed today, Peter Boone and I call for at least tripling current capital requirements as the right goal (of course, this should be phased in over a few years).
- The intellectual capture of Washington by Wall Street was well underway in May 2007; it is now complete. This is why the banking barons felt no need to show up and show respect for the President on Monday. They have so many of their people (mindset-wise) placed throughout the administration, and the principle of revolving between Wall Street and Washington so well established, that they know: If they ever need another massive bailout, the people standing behind this or any future President will say there is no alternative. That's why Peter and I also call for a 5 year gap between holding a responsible position on Wall Street and a top job in Washington, and vice versa. Stop with the political appointment of regulatory "doves" and end the notion that you can go directly from a failing bank to directing efforts to rescue such banks.
Ben Bernanke can play the broad reformist role of Marriner Eccles, chair of the Fed during the Great Depression. Or he can go back to being a cheerleader for the financial sector, following in the discredited footsteps of Alan Greenspan.
This is his choice.