Comments on: Summitry, change and the global financial architecture

By: The Gold Standard » Ready to look back already?

The Gold Standard » Ready to look back already? — Fri, 10 Apr 2009 17:23:26 +0000

[...] This sentence in Brad Setser’s post of April 2, 2009 caught my eye: When economic and financial historians look back at the current crisis,… [More here] [...]

By: The Irish Economy » Blog Archive » Summits and the international system

Sat, 04 Apr 2009 16:14:52 +0000

[...] Brad Setser has a typically thoughtful piece on the relative roles of summits and unilateral action in shaping the international econnomic system here. [...]

By: gillies

gillies — Fri, 03 Apr 2009 18:37:40 +0000

the people are weak, led like sheep, bamboozled with skilled propaganda and scripted photo opportunities; distracted by irrelevancies, high fives, fashion statements, g20 banquet menus, sound bites; quietly mugged, and fleeced of their hard earned wages, so that massive holes in bank balance sheets can be filled in and tarmaced over with taxpayers’ money – and yet the mood has changed. the citizens of the united states are saving a greater percentage of their incomes than the citizens of japan, for which they are to be congratulated, and no amount of flim flam can reverse the great contraction that is now under way.

By: Twofish

Twofish — Fri, 03 Apr 2009 18:19:34 +0000

The effort at creating an international financial regulatory system is going to have a lot of long term consequences.

The other thing about the G20 conference is that it marks recognition of the rise of major developing powers in the world governance system. In 1985, you could have a summit of the G7 and be relevant, whereas absolutely nothing useful came out of the G-8 summit this year.

By: Emmanuel

Emmanuel — Fri, 03 Apr 2009 17:42:34 +0000

I still think the IMF deserves more credit. The September 2002 WEO has a chapter discussing imbalances. In particular, they ran general equilibrium models mapping out different adjustment scenarios. On this issue at least the IMF was not asleep at the wheel. From the conclusion:

Real sector globalization has clearly reshaped the magnitudes, composition, and direction of trade flows in the global economy. However, empirical evidence to date is ambiguous as to whether this has increased the sensitivity of the demand for traded goods and services to changes in relative prices or demand conditions…

That said, globalization has fundamentally changed neither the nature of adjustment nor the magnitudes involved: ultimately exchange rates and trade balances will need to adjust, and adjust substantially…

If financial market conditions prove to be less benign, with only limited or perhaps
temporary scope for further increases in U.S.
net external liabilities, global rebalancing is likely to involve greater risks. In particular, initial changes in real exchange and interest rates would be much larger, and the short-term output costs of a global rebalancing clearly higher, particularly in the United States. In an environment where gross assets and liabilities are substantially higher than they were in the
past—a feature not fully captured in the
simulations—the potential for large changes
in exchange rates, interest rates, and risk premia to lead to disruptive financial market
turbulence in the short term must be correspondingly elevated.

For something written seven years ago (under Rogoff’s watch), this sounds more than reasonably accurate IMHO.

By: bsetser

bsetser — Fri, 03 Apr 2009 16:49:17 +0000

back in 02/03 Rogoff was more focused on “debt intolerance” — i.e. the fact that a lot of emerging economies had too much debt and were locked in a cycle of serial defaults. He warned about imbalances more loudly once he left the imf. and i don’t think the G-7 ever once sat down and discussed the risk that large capital flows from emerging markets might overwhelm the capacity of their financial sectors.

By: Indian Investor

Indian Investor — Fri, 03 Apr 2009 16:02:25 +0000

I believe there are plenty of people who’re mainly investors, trying to understand the actual developments, rather than advocating policies or spreading propaganda at this forum. The takeaway for such people from the G20 announcement is as follows:
a) Eastern Europe countries will soon get external financing bailouts, due to the increase in IMF funding.
b) There’s no serious effort to reform the international monetary system.
c) There’s tentative agreement b/w the US and Russia on disarmament, with missile defence co-operation to be taken up in July.
d) A new boom is being funneled by way of transition to a green economy.
Of the above, d) is the most significant. It shows that the Great Game over control of oil resources with militarist and territorial implications, requiring medium intensity conflicts and massive defense budgets has been all but abandoned. The new Great Game is an attempt to create Greenhouse Dollars. The US now hopes to win a race in green technology, including alternative fuels, alternative ways of generating energy. This will be followed by a divide-and-rule mechanism. Since the G-20 have jointly agreed on a transition to a green economy, in future the US will put in place a mechanism by which countries that continue to rely on oil and carbon emissions will have their external financing position disadvantaged in favor of countries that win the race to green technology. The advantage in green technology will then be shared between the major powers, and the rest of the world that doesn’t have that technology will be forced to pay tributes to some combination of the ‘traditional industrial countries’ – viz. the World War Two players.
This new Greeenhouse Dollar recycling, the US apparently hopes, will replace the disavantages accruing to the Dollar Hegemony from the loss of military and diplomatic domination over all oil-exporting countries.
Meanwhile, how is the existing system likely to evolve? Let’s look at that in a transparent objective manner without nationalistic biases. Nationalism in the stock market can make you lose your shirt, and I doubt if the US flag will be given free to you in return when that happens.

By: Emmanuel

Emmanuel — Fri, 03 Apr 2009 15:58:29 +0000

Are you sure about this? Rogoff was sounding the tocsin on imbalances as IMF chief economist as far back as 2002:

And there certainly was no discussion of how advanced economies should manage the risks associated with increased demand for their debt from emerging economies looking to raise their stock of reserve assets—including the risk that the emerging economies’ desire for reserves might distort financial markets in the advanced economies and mask the impact of large fiscal and household deficits.

By: jonathan

jonathan — Fri, 03 Apr 2009 15:53:53 +0000

I enjoyed the Chapter 9 link, as well. Enjoyable reading and the box with the 4 main points was a treat.

By: David Heigham

David Heigham — Fri, 03 Apr 2009 15:04:15 +0000

I agree that most changes in the international finacial architecture since Bretton Woods have happened by accident as a result of national decisions.At the G20, though, two big changes happened.

First the IMF was expanded, rejigged and re-legitimised. That could only be done internationally, with the USA taking a slghtly humble lead.

Second, all the countries that matter gave notice that they were no longer blocking effective international co-operation on financial regulation.

As a third event – away from financial architecture – the G20 gave notice that they were all now too scared to go on being silly about the Doha round.

The fourth event was a useful stimulus to poor countries demand and growth. It is a poor substitute for agreement on stimulus to domestic demand in the trade surplus countries.