So the G20 leaders are descending on Washington. They will eat, meet (average allotted speaking time per nation, 15 minutes) and head home. The world leaders who are gathering here include not only your prime minister and his chief of staff, but the treasurer, assorted Treasury officials, and staff from your embassy, including Ambassador Richardson, a man who knows a thing or two about how Washington works.
Which is why we have to give weight to his view that the G20 meeting is worthwhile even though our outgoing President has no power to commit President-elect Barack Obama, and Obama himself remained sequestered in Chicago following his “There is only one president at a time” policy. Richardson says that since the financial crisis is global, there is logic in a group of leaders coming together so long as expectations of results are reasonable. He also thinks that Australia’s regulatory system has held up very well and has credibility around the world, in part because it is some way between the U.S. and the European models.
Still, not everyone is convinced that it was a good idea for French President Nicolas Sarkozy and British Prime Minister Gordon Brown to insist on this meeting, and to threaten Bush that they would convene one in New York if he refused to play host in Washington. Bush is in no position to do much about the international “financial architecture” even if he were so inclined, which he isn’t. And the last thing Obama wanted was for the Europeans to give him a deadline – 100 days from now, or about one month after he is sworn in – to lay out his plans for international coordination and regulation.
But Sarkozy will have to give up the presidency of the EU at year’s end, and for domestic political purposes Brown wants to position himself as the leader of the world’s economic rescue effort. So Brown is pressing for what he calls “a new global order,” and Sarkozy for the establishment of an alternative to what he sees as law-of-the-jungle style American capitalism.
France and Germany want the International Monetary Fund to become a global supervisor of regulators, and Brown wants the G20 to agree to a coordinated stimulus package. In essence, the world’s borrowers gathered together to tell the world’s lenders – India and China, most especially – to cough up several billion dollars even though they do not have seats at the top table.
The Europeans also want the IMF to operate “an early warning system and a crisis prevention mechanism for the whole world.” Two problems. The first is that the IMF wants no part of such a job. Dominique Strauss Kahn, managing director of the IMF, told the Financial Times, “I don’t think you can have a mechanical system with red lights and green lights and sometimes, country by country, the light goes from green to red.”
The second is that economists are not very good at forecasting economic conditions. As columnist Robert Samuelson points out in his new book, “The Great Inflation and its Aftermath,” economists at the Federal Reserve Board and in government have consistently made large and consequential forecasting errors. And throughout post-war history, “The consequences of these mistakes were devastating.”
When so accomplished a forecaster as former Fed chairman Alan Greenspan admits that he got it wrong, the anointing of an all-seeing international forecaster as a policymaker does not automatically recommend itself.
None of this deters the EU team, which is determined to substitute the European model of capitalism for the less heavily regulated American version – a long-time goal of the French, who also favour protectionism and rules to make sure that foreign investors do not get control of European companies. Just the policy that in the past has turned recessions into major depressions, as I would hope Prime Minister Rudd pointed out.
The new global order, those who have not studied history contend, is to be modelled on the Bretton Woods agreement of 1944. Never mind that the agreement depended heavily on some control of the international flow of capital and on fixed exchange rates, neither feasible in today’s globalised economy. Or that, as John Maynard Keynes, the architect of the Bretton Woods agreement, told the House of Lords: “We intend to retain control of our domestic rate of interest” – something that members of the eurozone forfeited when they dropped their own currencies and adopted the euro. Keynes cared more about national sovereignty than this weekend’s guests.
Still, as Ambassador Richardson pointed out, there is an intangible benefit in the creation of personal relationships that might contribute to future cooperation. Keynes’ closing speech at Bretton Woods referred glowingly to “new friendships sealed and new intimacies formed.”
Bush is a gracious host, as the Obamas learned when they visited the White House earlier in the week. Hence the pleasant but vacuous communiqué that will result (at this writing it is not available). But neither he nor in all likelihood his successor will want to replace the current quite flexible, but more effective system of informal international coordination with a more rigid architecture. The financial system needs reform; it doesn’t need straitjacketing international regulation.
My guess is that Keynes would endorse the scepticism of the American side. He least of all would want to see the world’s leaders bound by what he called “some academic scribbler of a few years back” – even if he himself is that scribbler. Especially when the new president will have a full-fledged recession to attend to on his first day in the Oval Office.
EXAMINER columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.
