Mike Dooley and Peter Garber argue (at VoxEU) that the recent crisis has nothing to do with “Bretton Woods 2” — an international monetary system where reserve growth in the “periphery” financed deficits in the center. They write:
“the crisis was caused by ineffective supervision and regulation of financial markets in the US and other industrial countries …. [NOT BY] ….”current account imbalances, particularly by net flows of savings from emerging markets to the US,” “easy monetary policy in the US” or “financial innovation. … the idea that fraud and reckless lending flourished because US financial markets were unable to honestly and efficiently intermediate a net flow of foreign savings equal to about 5% of GDP, while having no problem with intermediating much larger flows of domestic savings, is astonishing to us.” *
The authors of Box 1.4 of the IMF’s Spring 2009 World Economic Outlook also attribute the current crisis to risk management failures in large financial institutions and weaknesses in the regulation and supervision of such institutions.** The role of imbalances are downplayed, as a “disorderly exit from the dollar has not yet been part of the crisis narrative.”
The last point is hard to refute: the dollar rallied during the most intense phase of the crisis.*** Reserve growth stopped, but that was because private money moved out of the emerging world and into the dollar, yen and swiss franc after the crisis – not because the world’s central banks lost confidence in the dollar. The proximate cause of the most recent phase of the crisis was a collapse in private financial intermediation, not a collapse in key central banks’ willingness to finance US.
But the absence of the kind of dollar collapse that many postulated might bring Bretton Woods 2 to an end doesn’t imply – in my view – that there was no connection between a global system marked by large inflows from the emerging world and the current crisis. The key issue is whether or not the large net flow from the emerging world to the US and Europe created conditions that facilitated, directly or indirectly, the failure of private risk management.
Three potential connections come to mind:
A rise in offshore dollar deposits by central banks provided some of the financing for the growth in banks’ dollar balance sheets. Central bank inflows into offshore money market funds had a similar impact.