Representatives of some 20 nations arrive here tomorrow to erect a new architecture to house the world’s financial system — “a new global order”, is the description British Prime Minister Gordon Brown uses for this project.
To prepare for this meeting of the G20 industrialized and emerging nations, Europe’s leaders set down the principles they intend to have President Bush sign onto. And — get this — they gave America a 100-day deadline to agree to their plans.
France and Germany want the International Monetary Fund (IMF) to become a global supervisor of regulators, and Brown wants the G20 to agree to a coordinated stimulus package.
The Europeans 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, with “devastating” consequences.
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 favor 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.
The new global order, those who have not studied history contend, is to be modeled 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 globalized 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.
This is not to say that the meeting will be a complete waste of time. There is the intangible benefit of 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.”
Then, too, there is the fact that the G8 industrialized nations have finally recognized that it is important to include emerging economies in such jamborees, both to tap their huge currency reserves and to reduce grumbles about exclusion from the corridors of power.
Until now, the countries that need money have been attempting to dictate terms to those who have it to lend. That can’t work.
But in the end this talking shop will reach no meaningful and binding decisions. The Bush administration wants nothing to do with supranational regulatory authorities, and anyhow is busy packing.
And the incoming Obama team has no intention of signing on to such a program, either before it takes office or during the 100-day deadline — counting starts on Saturday — that the EU has set, as if it could determine the new president’s priorities.
Bush is a gracious host, as the Obamas learned when they visited the White House earlier in the week, and so will acquiesce in a pleasant but vacuous communiqué.
But neither he nor in all likelihood his successor will want to replace the current quite flexible but effective system of informal international coordination that has developed during this crisis with a more rigid architecture. The financial system needs reform; it doesn’t need straitjacketing international regulation.
My guess is that John Maynard Keynes would endorse the skepticism 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 is that scribbler.
Examiner columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.