According to the WSJ this morning (top of p.A1), the US is pushing hard for the G20 to adopt and implement a “Framework for Sustainable and Balanced Growth,” which would amount to the US 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 2008-09? 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 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 misdemeanours 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 G20 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?
By Simon Johnson