The Baseline Scenario

The G20 Finance Ministers and Central Bank governors are meeting today in St. Andrews, talking about the data they will need to look at in order to monitor each other’s economic performance and sustain growth (seriously).

The underlying idea is that if you talk long enough about the US current account deficit and the Chinese surplus, stuff happens and the imbalances will take care of themselves – or move on to take another form.

Warren Buffett seems to agree. Read the rest of this entry »

Strong advocates of our new G20 process are convinced that it will bring legitimacy to international economic policy discussions, rule-making, and crisis interventions.  Certainly, it’s better than the G7/G8 pretending to run things – after all, who elected them?

But who elected the G20?  The answer is: No one.  And, in case you were wondering, there is no application form to join the G20 (although you can crash the party if you have the right friends, e.g., Spain).  The G20 has appointed themselves as the world’s “economic governing council” (to quote Gordon Brown).

Is this a good idea? Read the rest of this entry »

It is easy to dismiss the G20 communique and all the associated spin as empty waffle.  Ask people in a month what was accomplished in Pittsburgh and you’ll get the same blank stare that follows when you now ask: What was achieved at the G8 summit in Italy this year?

Perhaps just having emerging markets at the table will bring the world closer to stability and more inclined towards inclusive growth, but that seems unlikely.  Should we just move on – back to our respective domestic policy struggles?

That’s tempting, but consider for a moment the key way in which the G20 summit has worsened our predicament. Read the rest of this entry »

On Thursday evening and all day Friday, heads of government from countries belonging to the G20 will meet in Pittsburgh.  On paper, this looks important – 90 percent of world economic output and 67 percent of world population will be at the table: the G7 (US, Canada, Japan, UK, Germany, France, and Italy), plus the European Union, the largest emerging market countries (including China, India, Brazil, Mexico, and South Africa) and a few others.  And unlike the G7, which is really a club for rich industrialized countries, every continent and almost all income levels are represented in the G20. Read the rest of this entry »

It looks like the G20 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 G20 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? Read the rest of this entry »

As we wade through a long line of international economic meetings – G20 ministers of finance last week, G20 heads of government in Pittsburgh coming up, IMF-World Bank governors meeting in Istanbul early October (and all the associated “deputies” meetings, where the real work goes on) – it seems fair to ask: where is regulatory reform of our financial system heading?

Long documents have been produced and official websites have become more organized.  Statements of principle have been made.  And the melodrama of rival reform proposals has reared its head: continental Europeans for controlling pay vs. the US for raising capital vs. the UK not really wanting to do anything.  But what does all of this add up to, and what should we expect from the forthcoming summit sequence?

Nothing meaningful. Read the rest of this entry »

The big news at the G20 was obviously about the IMF, with the Americans pulling out an impressive deal on funding (compare with our predictions…). But the money is not the biggest achivement. The big move was in terms of who will run the IMF in the near future – as I explain my NYT.com column this morning, there is an implicit and almost immediate shift towards emerging markets.

President Obama had just the right tone yesterday.  Admittedly, he was helped by the fact that we no longer have anything to be arrogant about, but still the way he reached out to other countries – while also pointing out that they made big mistakes and are currently in trouble – conveyed exactly the right message.  The US will do much better if it lets emerging markets and developing countries have a serious and permanent place at the big table. 

Among other things, this will fundamentally change the way the IMF operates.  As a symbol and for its potential impact on the international economy moving forward, yesterday’s final loss of European control over the IMF really matters.

By Simon Johnson

With our myriad banking problems, rapidly rising unemployment, looming political battles over the budget and much more on the pressing domestic agenda, is the G20 summit in London (dinner Wednesday and meeting Thursday) really worth all the time and effort that the President and his team have devoted to it?  And, granted that President Obama has to attend this heads of government meeting for protocol reasons, is there much that this summit can realistically achieve – i.e., are there actions that will be taken as a result of the summit that would not otherwise have happened and that can really make a difference to the parlous state of our economy?

These are all reasonable questions.  And the answer is simple: in terms of the obvious major issues of the day, this summit is unlikely to achieve much.

But every global economic recovery has to start somewhere and it probably has to begin small.  And there are some slight glimmers of hope because (a) President Obama is taking a global leadership role, (b) he is doing this in a creative way that might seem surprising, but which should reduce the chance of a further global meltdown. Read the rest of this entry »

We know already much of what the G20 will produce: a communique that looks very much like the last one (dubious reassurances about the great progress being made along vague dimensions), no progress on fiscal stimulus (as we have been projecting for some time), and promises to clamp down on regulation for hedge funds and the like (fine, but how relevant is this to either what caused the crisis or what can sustain a recovery?)

Almost all the important issues are kept off the table by anachronistic diplomatic niceties: monetary policy around the world, Europe’s impending crisis, and how to escape the overweening power of major banks in almost all industrial countries.  The G20 summit has substantially failed even before it begins. Read the rest of this entry »

Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs – no one likes oligarchs, but their factories employ a lot of people.  There is naturally resistance - pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment.  The question becomes: does the government have the ”political will” to get the job done?

In fall 1997, a key issue for Indonesia’s IMF program was whether the government could close the banking operations belonging to one of President Suharto’s sons.  There was an epic and fascinating struggle and, in the end, the government did not have sufficient political will or power.  The subsequent loss of US support, and further currency and economic collapse is (messy and painful for many) history.

It is striking that Ben Bernanke now asks whether the United States today has sufficient political will. Read the rest of this entry »

A fundamental principle that we all hold dear is: in industrialized countries, with relatively high income levels, the government can’t be completely out to lunch.  After all, we reason, there are democratic processes, watchdogs of various kinds, and we can safely delegate monitoring of government official actions to others (e.g., the media). 

This principle is, of course, now appropriately called into question both for government officials directly and increasingly for the media’s scrutiny of what the government (and business) is doing.  As a result, the level of public attention to various domestic policies - bailouts and the like - is surely at or close to all-time highs; the current reaction time and seriousness in public discussions of various initiatives for banks must set some sort of record.

Yet there remains at least one completely murky and unaccountable area of government action: international economic diplomacy. Read the rest of this entry »

I’m continually amazed by how easy it is for government officials to hoodwink most of the news media.  All it takes is for a couple of leading finance ministers to get on roughly the same page, and we’re reading/hearing about “substantial progress” or “major steps forward.”  If someone provides an articulate background briefing to a leading newspaper on the supposed debate within a group of countries, this becomes the dominant news story.

Saturday’s G20 meeting of finance ministers and central bank governors is a leading example.  It was a disaster - we face what officials readily concede is the biggest financial and economic crisis since the 1930s, yet this conclave agreed precisely nothing that will make any difference.  If the G20 heads of government summit on April 2nd is a similar failure, we will be staring at the real possibility of a global catastrophe.  Yet the spinning storytellers of the G7 have still managed to get much of the press peering in entirely the wrong direction.

For more on what would the right direction, take a look at my piece in Britain’s Sunday Telegraph.

The global crisis approaches another major twist in its downward spiral.  A key barometer of financial and fiscal pressure – the credit default swap (CDS) spread – has widened sharply for Irish government debt over the past few days; the markets think that the risk of a sovereign default is rising sharply.  Immediate action is needed to forestall a dramatic deterioration of growth prospects across Europe and around the world. Read the rest of this entry »

The big annual economic meeting at Davos opens next week (Jan 28-Feb 1 are the official dates), and the discussion there – in both formal and informal interactions – is worth scouring for indications of the current situation around the world and where we all may be heading.

Given the likely composition of the main players this year – world corporate leaders and the non-US policy elite (with the new US policymakers stuck at home, doing real work; update: this is now confirmed by Bloomberg for Summers and Bair) – I would suggest viewers at home and on the ground keep watch for answers to the following.

1. Are we on the same planet? It is not unheard of for Davos participants to appear as if they are living in their own bubble.  Watch for opulent parties and excessive consumption, particularly if the people involved have nominated themselves for any kind of government handout.  If you meet someone from Merrill, ask if their attendance fees came out of 4th quarter earnings – or if there is still more bad news to come. Read the rest of this entry »

The US has the opportunity – and perhaps the responsibility – to immediately retake a leadership role in global economic policy thinking, with the pressing priority of preventing the world’s recession from becoming something more serious.  But what should be Mr Obama’s priorities in this regard, for example in the run-up to the G20 summit in early April – which, given the timetable for these things, will have an unofficial dry run of sorts at the Davos meetings next week?

The obvious message could be: a large US fiscal stimulus is coming, but the rest of the world needs to do more.  In this option, Mr Obama could devote considerable effort to encouraging others to expand their government spending and/or cut taxes.

While worldwide cooperation of this form may have been a constructive thought last year at Davos, when the idea was first broached publicly by the IMF, a joint global fiscal stimulus is a glorious idea whose time has for now passed. Read the rest of this entry »