Calls grow for global strategy
The way the current financial crisis spread around the world like a brush fire, outracing all efforts to contain it, underscored a painful reality: We have a global economy but nothing close to a global system for managing it. The world may be flat when it comes to the increasingly interconnected economies of the 21st century, but it still has borders -- and conflicting national interests to go with them.
Now, as senior economic policymakers from the major developed nations meet here today, the question is whether the worst economic crisis since before World War II will open the door for a comprehensive, unified economic strategy.
U.S. officials have been careful not to raise expectations for the so-called Group of 7 meeting, which brings together the top financial officials of Britain, France, Germany, Italy, Canada, Japan and the U.S.
“We have very different countries, economies of different sizes, financial systems with different needs,” Treasury Secretary Henry M. Paulson said this week. “You’re going to have different policies.”
But pressure is building for that to change -- both in response to this crisis and to head off potential crises in the future. The head of the International Monetary Fund warned Thursday that governments must act “quickly, forcefully and cooperatively” to prevent a global recession.
“There’s no domestic solution to crises like this one,” IMF Managing Director Dominique Strauss-Kahn said. “All kinds of cooperation has to be commended. All lonely acts have to be avoided if not condemned.”
Finance ministers attending the G-7 meeting will confront the fact that the response to the global crisis thus far has reflected the differing approaches to the crisis taken by U.S. policymakers and many of their counterparts abroad.
As the problems that began with the subprime mortgage debacle have grown steadily worse, Paulson and Federal Reserve Chairman Ben S. Bernanke have thrown out the old playbook, devising one dramatic new program after another and committing billions of tax dollars aimed at reviving the economy.
In what would be the most dramatic move yet, the U.S. is considering backing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits, the Wall Street Journal reported late Thursday on its website.
Overseas, however, most central bankers have hesitated to take joint action beyond the sphere of setting interest rates. Where joint action beyond that has occurred, it usually has been ad hoc, not part of a comprehensive global strategy.
Several major central banks cut interest rates together Wednesday, for example, and three European countries joined to save a major cross-border bank Thursday. But getting agreement on a wider scale has proved elusive.
The European Union has created a common currency and gone a long way toward erasing national borders for people and businesses on the continent. But when it took up a proposal to create a pool of money to undergird all the banks in member countries, Germany vetoed the idea because it would not control how its money would be used.
Countries were left to deal with the crisis on their own. The problem with that approach soon became apparent: When Ireland promised to guarantee all deposits in its banks -- and extended the protection Thursday to some foreign-owned banks in the country -- the action angered Britain and other nations that feared cash would drain out of their financial institutions and into the banks in Ireland.
Given the differences that still exist even among developed countries, most experts say no one-size-fits-all approach to the crisis is possible or even desirable.
“I don’t think it’s necessary that they all have a similar response . . . but the question is: Does the response of Country A create a problem for Country B?” said Nicolas Veron, a research fellow at Bruegel, a Brussels-based think tank.
And Paulson said, “The key thing is that we continue to work closely together, we continue to communicate, we continue to coordinate.”
Those goals have been fairly easy to achieve in the realm of monetary policy, which largely involves interest rates and the supply of money in circulation -- the traditional duties of central banks.
Getting multinational agreement on the broader economic response demanded by the current crisis is harder because it’s more political, said Edwin M. Truman, a former official at the Federal Reserve and the Treasury Department.
Doing things like buying up mortgage-backed securities or guaranteeing loans to struggling financial institutions involves taxpayer money and also has political ramifications, said Truman, a senior fellow at the Peter G. Peterson Institute for International Economics.
Sebastian Mallaby, a senior fellow in international economics at the Council on Foreign Relations, said the globalization of finance meant that this credit crisis was different from those of the past.
“A bank crash in the past had terrifically concentrated effects,” Mallaby said. When the oil industry in Texas collapsed some years ago, so did some Texas banks. But it didn’t spread further.
“The bad thing about what’s going on now is that problems in the U.S. real estate sector can affect pensions in Norway or banks in Asia,” he said. “But the good news is that because the pain is spread around, it’s less acute in any one place.”
Another reason that combating panic is difficult in a global economy is that there isn’t necessarily a relationship between the size of a bank and the size of a country, he said.
“There are some small countries with enormous banks, like Iceland. The banks are bigger than the country. We used to say ‘too big to fail.’ This is more ‘too big to bail,’ ” Mallaby said.
And if forging unified strategies for the economic crisis is hard among developed countries like those in the G-7, the challenge is all the greater when developing nations such as China, India, Brazil, Argentina and Mexico are added in.
The 2008 world economic outlook released by the IMF this week projected zero or even negative growth for advanced nations but 7% growth for developing ones. Such variations cause nations to react differently.
But the crisis still affects them. In Mexico, for example, the peso plunged against the U.S. dollar Thursday, leading President Felipe Calderon to push for a stimulus package to keep Mexico’s economy afloat.
World leaders need to overcome those parochial interests and realize that the crisis needs a coordinated assault, the IMF’s Strauss-Kahn said.
Already, he and others are talking about finding new ways for countries to cooperate economically. After the 1997 Asian financial crisis, finance and banking officials in the U.S., Asia and Europe created a group called the Financial Stability Forum to look for vulnerabilities in the international financial system and improve coordination in fixing them.
Its success is a matter of debate. But there are calls for finding similar new ways to coordinate efforts because of the current crisis.
“What would be the worst situation would be that after the crisis . . . we’ll just say, ‘OK, we’ll go back to business as usual,” Strauss-Kahn said.
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maura.reynolds@latimes.com
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