Let the Great Rebalancing Begin

  • Share
  • Read Later

Ever since every two-bit financial commentator on the planet started complaining that, a year after the start of last year’s financial crisis, almost nothing had been done to prevent the next one, reform trial balloons have been floating skyward. There was the Fed’s pay-regulation scheme, the SEC’s new credit-rating-agency rules, Chris Dodd’s super-regulator plan, Tim Geithner’s proposal to raise bank capital requirements worldwide (I’m sure I’m missing some others). And now, news in the WSJ of a G-20 effort to rebalance the global economy:

The focus is on a U.S. proposal, called the “Framework for Sustainable and Balanced Growth,” whose details haven’t been previously disclosed. If implemented, the framework would involve measures such as the U.S. saving more and cutting its budget deficit, China relying less on exports, and Europe making structural changes to boost business investment.

The argument here is that the huge imbalances between the importing U.S. on one side and exporting China, Japan, Germany and the Persian Gulf countries on the other played a big role in bringing on the financial crisis. The exporters had amassed gigantic excess of dollars that had to flow somewhere, and much of it ended up flowing into really dumb real estate loans in the California, Nevada and Florida.

Doing something about this makes a lot of sense. But at this point the rebalancing plan shares with most of the other reform proposals a great deal of vagueness and tentativeness. It’s also reminiscent of efforts in the late 1980s and early 1990s to move to a more balanced trading relationship between the U.S. and Japan, which never actually led to a more balanced trading relationship between the U.S. and Japan. Back to the WSJ:

“The really hard part is getting an agreement of what the rules should be and what the penalty is” for breaking them, said Anne Krueger, a former IMF deputy managing director. G-20 officials argue that if they don’t succeed this time, the world will remain stuck in economic patterns that could reduce potential growth and perhaps produce another crisis down the line.

Any new framework hinges on proper enforcement. To that end, European sherpas, including the British, are pushing for a “trigger” mechanism. If country’s current account surplus or deficit goes over a certain limit, for instance, that would require negotiations to get the country back in line.

The “sherpas” are the econowonks who advise their governments in G-20/G-8/IMF matters. What’s interesting about this last idea is that it echoes a plan first proposed about 70 years ago by the greatest sherpa of them all, John Maynard Keynes. To quote George Monbiot, writing in the Guardian late last year:

Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But – and this was the key to his system – he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits.

The “bancor” was the new currency Keynes proposed for use in international settlements. We have something sort of like it now in the International Monetary Fund’s Special Drawing Rights, which have recently been revived by the G-20 after years of dormancy. Keynes’s plan shattered on the political reality that the U.S., as the world’s biggest exporter at the time, was not willing to put up with penalties on countries that ran trade surpluses.

This time around the great challenge appears to be persuading China of the merits of such a plan. Oh, and I imagine Michele Bachmann might have some issues, too.