Brad Setser quotes from Martin Wolf--and I find that Martin Wolf's reactions to the BIS are (a) very smart, and (b) close--embarrassingly close, in fact--to what I have written in a column that has not yet appeared...
Brad Setser's Web Log: More wisdom from Martin Wolf: More wisdom from Martin Wolf Having laid out the problem on Monday, Martin Wolf offers his solutions in tomorrow's Financial Times. He presents three answers to the question "what is to be done":
One answer... nothing. Let each country choose the policies that make sense to it.... The problem: Without big change in policies, the situation seems certain to deteriorate: US net liabilities will continue to rise in relation to GDP; and so, quite possibly, will the current account deficit. The longer this goes on, the larger the ultimate adjustment will be.
Option 2... the US would bully China into making a big adjustment of its exchange rate and macroeconomic policies. The problem: First, China is far from the only country that needs to change its policies... the Chinese... would almost certainly do the bare minimum, which would exacerbate ill will without rectifying the situation.
Which leaves only one viable policy course:
Serious multilateral discussion in which the US leads but does not attempt to dictate... discussing their responsibility for the health of an open world economy on which all depend. As a rising power, China should be invited to share in these discussions, by both exercising its voice and implementing its share of policy changes. Those changes must be large. They should include reform of the International Monetary Fund, to make it relevant to today's world, and a radical restructuring of the increasingly absurd Group of Eight. A forum must be found, together with a permanent secretariat, that makes possible serious discussion of how to proceed among the players that matter.
The US cannot dictate the policy changes or the pattern of global payments it desires to its partners. It must rely on institutions of co-operation, instead. The exchange rate and macroeconomic policies of east Asia are indeed destabilising. But a... successful response... [requires] a shared recognition of the dangers.... [and] determination to reach an agreed solution. US leadership is missing in action but remains indispensable....
That strikes me as right.
The odds of it happening strike me as low.
The difference between me and Wolf is that Wolf believes in institutions and secretariats whereas I believe in pressure to get the hegemon--the United States--to fulfill rather than ignore its leadership role. I am, after all, a student of Charlie Kindleberger.
The failure, in my mind at least, is not that we lack international institutions. It is that we here in the U.S. lack a Treasury and an OMB who are powerful and committed to fiscal sanity; it is that we lack economic advisers within the White House willing to say "worry a lot: be very unhappy" about the budget outlook and its consequences; it is that we lack finance and banking legislative committees that take their oversight-of-economic-policy role seriously; and it is that we have no political advisors who dare tell Bush that he should think about how the political careers of Carlos Salinas de Gortari and Suharto came to an end.