Watch Sternly

Writing in the FT yesterday, Nick Stern made the case for a new international organization to monitor global risks. Drawing on a decade of dealing with governments as board members of such organizations, he is blunt – keep them out of day-to-day oversight, by giving the institution an endowment and a leader appointed for 7 years without possible recall.

Lord Stern is right to be cynical about governments in this context, but his solution feels a bit too much mid-20th century. If the organization got off the ground, governments would compete madly to appoint the leader – trying for someone over whom they have a hold (it has happened). And if the organization really were independent, who would pony up the endowment or be comfortable with the (low) implied level of democratic accountability – it’s hard to see Senate Foreign Relations or Banking (both of which have jurisdiction over the IMF) getting excited about this arrangement.  Without the US there can be no meaningful deal.

And, thinking more about 21st century formats, don’t we already have – albeit in still emergent form – exactly what Professor Stern wants?

I’m not suggesting that today’s blogs do a great job addressing the need for early and clear warning about emerging global problems.  But the broader debate on and around the Internet is definitely moving us in the right direction.

If you want to know what is going on and why, you have a range of sources – some more news analysis, others more commentary – readily available.  The depth of coverage improves every day.  There are technical explanations (and these increasingly confront officials on the details), as well as broader expositions.  Readers’ comments are an essential advantage, both as an input into the debate and as feedback on what makes sense or has been explained well or is seriously off-track.

The exact structure that will emerge remains unclear, and I’m not suggesting that it will completely supplant more traditional national or international economic organizations and their reports.  But, in terms of early and frank warnings, I would look much more to the blogosphere than to anything officially backed by the G20 – you’ll never get the same level of directness in anything that involves governments.

I would also suggest that President Obama is likely the last US President who will say something along the lines of, “we don’t spend a lot of time looking at blogs.”

22 responses to “Watch Sternly

  1. markets.aurelius

    I agree, Simon. This feels a little like complex systems Stuart Kuffman wrote about in “At Home in the Universe.” We’re watching it evolve right before our very eyes. It makes sense: The system’s been shattered; reduced almost to its subatomic components. Now there’s an “official” attempt to put things back together, as seen in Lord Stern’s proposal to find a modern-day Rufus T. Firefly. Contra to this is the search for the threads that not only explain what happened and what’s going on, but a way to coherently organize it in a lattice of sorts that is stronger and more resilient than the ad-hoc rules and regs that everyone bent to their own advantage.

  2. the early warnings were well known – the problem with actually doing something to prevent the damage seems to have been that there was too much power to be gained, and too much money to be made on the downside…

  3. florian (germany)

    in my opinion, an institution of that kind would just be another of those “see, we’ve done something about it” kinda things, just to be able to lean back and blame the others, cuz ud have done what u could, rite?
    i dont think an institutional solution will make any sense, until we manage to implement further national/international restrictions/taxes and, which seems most important to me, make sure no one has the chance to sneak out of them to the cayman islands etc.
    as long as we didnt get to that point, i dont think we should do the second ste before the first one.

  4. Throughout the criticisms, one question that I do not hear uttered is, ” how did the United States become so successful to begin with?” When both pundits and politicians talk about American ingenuity and hard work and the superiority of the American capitalist system, what is it that they are referring to? At what point did the United States and the dollar begin to dominate international currency and the world market economy?

    One approach that needs further critical and historic examination is the Marshall Plan, often synonymous with the Truman Doctrine or the European Recovery Program (ERP).

    http://statehoodhawaii.org/wp/index.php/2009/03/26/marshall-plan-our-economic-downturn/

  5. To the last sentance, going on right now. Click on Finance

    http://www.whitehouse.gov/openforquestions/

  6. I’m sure this isn’t quite the place to post this, but I didn’t want anyone to miss out. If it’s true I really am dumb-founded. According to this post at Naked Capitalism, BOA and Citi are using their governement funds to get this… buy more mortgage backed securities. Granted someone has to buy this stuff, but when you’re already insolvent why take on more of the same risk?!

    http://www.nakedcapitalism.com/2009/03/has-gaming-of-public-private.html

  7. Twenty-twenty did a story on Friday on some students who did a video in school on how the economic crisis was affecting them personally. Obama saw it on YouTube and first sent them a letter and then flew down to see them personally. So maybe they don’t read the blogs, but they have time to follow Charlie the Unicorn? We’re paying attention. We feel your pain. But we don’t respect your intelligence.

  8. I would agree completely, but also add that such an arrangement would be uniquely 21st century. Remember, the IMF, World Bank, UN, and most of the technical IOs created after 1950 institutionalize U.S. leadership. We liked those organizations because we could pretty much get what we wanted from them.

    To truly suggest an impartial IO with an independent source of funding would be a revolutionary development in international politics. My guess is that it would be an equally spectacular failure.

  9. There is a total contradiction between Obama’s pro-Internet discourse in big rallies, and his cry from the heart “We don’t watch blogs”.

    As Obama went on to explain, like a little child, he was confused because, on the Internet, some people say “black”, and others say “white”, and he can’t get clear instructions…

    Mr. Obama claims that some people say “nationalize all the banks”, and others say “leave them alone”, so Mr. Obama does not know what to do. [I personally do not know of anybody who suggested to nationalize all the banks, that would be completely crazy. Which kind of Internet does Mr. Obama reads? One invented by Mr. Geithner?]

    Of course Mr. Obama will encounter the same problem with any media: listening, reading, etc. Normal people do not confuse conversation, information, opinion, and marching instructions. Apparently, Mr. Obama does.

    So it is to be feared that, as long as Mr. Summers’ discourse is endowed with an aura of authority, Mr. Obama will swallow it, hook, line, sink, and boat…

    I wrote an essay on this: http://patriceayme.wordpress.com/2009/03/09/the-audacity-of-dope/

    Patrice Ayme
    http://patriceayme.wordpress.com

  10. Blogs like Baselinescenario, Krugman’s etc. have been a godsend for the public, finally throwing transparency on the murky dealings of the financial industry and the hand-in-glove regulators who ought to be keeping them in check. Thank you!

    For the first time ever, interested non-economists (that’s me) can participate in this discussion. Wow! Which brings me to an observation of my own. I’m originally from New Zealand and came to the US via several years in England and then Brazil (during the late-80s period of hyperinflation, no less). In the nearly 20 years since I’ve lived in the US I’ve see the increasing Brazilianization of the the US:

    The US has fallen in the rankings of Transparency International’s corruption index,
    Wealth concentration and income inequality have grown enormously,
    An underclass of unprotected workers (illegal immigrants) has ballooned,
    Cronyism has become entrenched,
    The middle class has been squeezed,
    Favelas (tent cities) have sprung up on the periphery of major cities,
    And now, to cap it off we have the government printing money to ease a budget shortfall caused by rampant overspending.

    All we need now is hyperinflation to seal the deal. Any chance of that in the next 10 years?

    Fortunately, in the meantime Brazil has improved enormously (though still with a ways to go) and New Zealand cooks along on a par with Scandinavia. I’ve got my two other passports close at hand so if things get really dire, I’m off.

    Again thank you for your fantastic commentary and for opening up the discussion!

    Jane R

  11. What’s with this crypto-facist tendency to sidestep every problem by demanding and appointing a Yet Another Czar (call it YAC syndrome)?

    The fundamental mechanics of open societies such as the one attempted by the Constituional Convention is that the resonsiblity and privilege of governing ultimately rests with the governed. You can delegate the responsbility to a single person, but the privilege has to be delegated to a law defining the responsibilities.

    Every time a czar is proposed, somebody is attempting to replace the rule of law with the rule of man.

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  13. Maybe we need a version of “ARIA” from the movie “EAGLE EYE” to monitor and manage financial risk.

    Sounds like a crazy idea but listen… It is not what we believe the DoD or CIA does to monitor terrorism.

    Is not financial risk with this crisis looks similar to global terrorism? Yes or No

    People are dying due to this crisis and people will die..especially if countries continuing little by little increasing protectionism.. People in undevelop countries will suffer harder because of this mess..

  14. Interested and informed eyes also require greater transparency in order to be more effective. Here are two related items I ran across this morning.

    Hernando de Soto:
    “Toxic Assets Were Hidden Assets”
    http://online.wsj.com/article/SB123793811398132049.html
    (h/t FTAlphaville)

    Stella M.Hopkins:
    “As credit markets froze, banks loaned millions to insiders” http://www.mcclatchydc.com/251/story/64551.html
    (h/t Option ARMageddon)

  15. Via Clayton Christensen, a Harvard Business School professor who originated the canonical Model of Disruptive Innovation: “[Industry] regulations ultimately change *in reaction to* the innovators’ success in those markets” [1].

    Enter this Facebook group:

    NYC’s $3M Angel Fund: Invest in start-ups that, en route to becoming a bank, provide people with new and improved ways to customize education, and to showcase and earn money from expertise (i.e., ways to become (more) creditworthy).

    http://www.facebook.com/group.php?gid=56315044445

    Adapted from a biz plan praised by analysts at Microsoft, Amazon.com and top VC.

    [1] See page 386 of The Innovator’s Prescription, a 2009 book by Christensen et al.

  16. Looting.

  17. AIG’s Risk Manager still has a job. Something is wrong in our world….

    http://www.businessinsider.com/head-of-aig-risk-control-still-happily-employed-2009-3

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  19. Jane, I felt the same sense of liberation in learning more of what is really going on this crisis. My introduction to this outlet came via Bill Moyers Journal (PBS). I thoroughly enjoy every bit of information this site provides.

  20. adios amigos

    Attn America !!! I have SOLVED the problem !!! Yahoo !!!
    Here it is: Give us all back the money you stole from all of us outside the U.S. Your government, your rating agencies, you citizens, your bankers, your investment professionals, thousands and thousands of you all lied to our pension funds over here, and we bought your toxic, bullshit portfolios of debt. My pension fund, after 30-years of saving honestly for my family’s future is BANKRUPT. You did it to us. So, sell all your stuff, liquidate everything, and pay us all back. Now, we all know you can’t bring back to life all those civilians your military killed in the middle east. By the way, did you ever find those WMD’s you were looking for over there, cause boy!, your military sure murdered a bunch of civilians looking for them. Betcha those dead peoples families are pissed off, huh? Anyway, nothing we can do about all those dead civilians. But…..can you maybe return all the trillions of dollars your country STOLE from us? It’ll really solve everything, and boy, it’ll make me and my family feel better knowing that 30-years of pension savings that were stolen, have now been returned to us…..it’s rightful owner. And, after you give us back all the money you stole from us, could you do us one last favor? COMMITT SUICIDE….DO THE WORLD A FAVOR. We need to get people like you out of the system.

  21. Alright–I feel a little odd posting after amigo’s objectionable flame but let’s not give him too much attention. Anyway, a new international organization to monitor global risks…I agree–way too mid-20th century–and would it really be relevant? Kind of reminds me of another U.N.-like body.

  22. adios amigos

    HSG,
    Ah yes, you must feel odd, being at MIT and all….Sloan School perhaps? Great! Congratulations. Tell me HSG, when you write your federal tax check every year, do you often wonder if it is exactly your tax payment that will buy the bullet, that will be fired from that U.S. soldiers gun, that will shatter into the skull of some unsuspecting 9-year old child in the middle east? Do they have a class on that somewhere in Boston? I saw a picture of a child in Iraq in yesterdays Oslo newspaper. Laying dead in the street, brains seemed to be laying on the street next to her, perhaps 5 or 6 years old. KILLED. Dead. They don’t print THOSE kinds of pictures in The Boston Globe, do they? No….too much for the Americans to look at. It would be tragic if you were to learn what some of your tax payments are REALLY used for – killing children in far away places who did NOTHING to you. But that’s to much for the American people to see. Besides, seeing pictures of dead kids on the streets in the middle east doesn’t make you any money…so whats the point, right?