This morning I testified before the House Committee on Foreign Affairs’ Subcommittee on Terrorism, Nonproliferation, and Trade, chaired by Brad Sherman.
My written testimony is available through the Peterson Institute for International Economics’ website. I was asked to provide a perspective on the global economic outlook, so my testimony previews our next Baseline – we’ll release that when we see the G20 outcomes (i.e., from ministers of finance and central bank governors) this weekend.
In my interactions with the committee members, I stressed three points that connect our view of the outlook with the upcoming G20 discussions this weekend.
1. The financial sector should be thought of at this stage as a type of undefused bomb. We might be able to live with it for years or it could be a more immediate issue. There is nothing I see in anyone’s G20 agenda that even begins to address this; the “regulation” pieces proposed by Europe will make essentially no productive progress in the right direction.
2. The financial problem is much worse in Europe than in the United States, because (a) banks are larger relative to GDP in Europe, and (b) they have major problems with bad loans (from US property, European property, East European property and more). We have banks that can claim to be Too Big To Fail. Europe has banks that may be Too Big To Rescue. Sadly, therefore, most European countries don’t have room for further fiscal stimulus – they need to prepare to help out their own bank depositors, as well as weaker EU and eurozone member countries; putting all available resources into a European Emergency Stabilization Fund should be the priority.
3. In this context, I support Secretary Geithner’s call yesterday for $500bn in additional resources for the IMF (i.e., they would go from being able to lend $250bn currently to potentially lending $750bn; I called for $1trn in the fall, so we are getting there). But this should be seen as the backstop in case the Europeans drop the ball, particularly for smaller eurozone countries. I don’t know how likely that is (ask me again after the weekend), but more money for the IMF is smart contingency planning – what else are you going to do?
In the broader discussion before the committee, what really struck me is how angry people are about our trading partners’ behavior (including China, but also Europe, Latin America, and other parts of Asia were mentioned). There may be some good specific reasons to be unhappy, but I worry about the fragility of global trading relationships under the pressure we face today.
Update: typo in name of committee corrected, and name of chairman added.