Wednesday, October 24, 2007
No Committee to Save the World now
There is a certain nostalgia in Washington these days for a creative US economic leadership, like back in the 1990s
By LEON HADAR
MANY American magazines tend to feature on their covers pictures of Britney Spears, Paris Hilton and other notorious public figures, so that it may be difficult to recall that there was a time when the US media treated economists like John Maynard Keynes, John Kenneth Galbraith and Milton Friedman like celebrities, if not as national superstars.
On Feb 15, 1999, following the 1997 East Asian Financial Crisis and the 1998 Long Term Capital Management collapse/Russia/Brazil financial crisis, Time magazine's cover carried a group photo of then US Federal Reserve chairman Alan Greenspan, US Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, and proclaimed the three to be the chairman and two co-chairmen of the 'Committee to Save the World'.
'Economists as heroes?' asked the magazine. 'It sounds silly unless you understand how close the world came to economic meltdown last year,' it responded. The magazine's cover article described how the three top economic officials in Washington were being bombarded with phone calls from the leaders of Russia and China, the central bankers of Japan and Germany, and the world's leading investment bankers and CEOs who were pleading with the Three Marketers to save emerging economies in South-east Asia, Latin America and Eastern Europe, including Thailand, Indonesia, Brazil, and Russia, and bail out a collapsing hedge fund on Wall Street, the Long Term Capital Management (LTCM) with its two Nobel prize winners on its board.
'The Committee to Save the World is now in session,' Time gushed, describing late-night phone calls, marathon meetings over bagels, orange juice and quiche, during which Mr Rubin, Mr Greenspan and Mr Summers are working to stop 'what has become a plague of economic panic', containing 'economic anxiety now gripping much of the world', with their 'biggest shield' being 'an astonishingly robust US economy'.
One could accuse the authors of the Time article of hype in their reporting the achievements of Mr Greenspan, Mr Rubin, and Mr Summers, although, interestingly enough, the article does quote an analyst warning that 'if Greenspan's legacy is a stock-market bubble, he will not be treated kindly by history'.
But there is little doubt that the three men working together with then President Bill Clinton had played a critical role in managing the growth of the American and the global economies in the 1990s, through a deficit-reduction plan that helped create the first surplus in 29 years and established the conditions for lowering interest rates, kicking off a surge in business spending.
At the same time, a masterful battle to stem global financial turmoil, starting with the efforts to stabilise the Mexican peso made it possible to bring stability to the emerging markets and permitted investors to get back into them.
The economic conditions in the US and around the world today are different from the era in which the trio of Greenspan-Rubin-Summers were in charge of economic policy in Washington.
But against the backdrop of the continuing housing crisis and credit crunch, the turmoil in the financial markets and the sense of wider economic panic worldwide, not to mention a weakening US dollar and rising oil prices, it is not surprising that there is a certain nostalgia in Washington for the days when the Committee to Save the World (CSW) seemed to making a difference.
That nostalgia for a creative and energetic US economic leadership was clearly evident over the weekend when economic officials and central bankers from the Group of Seven (G-7) leading industrial nations gathered in Washington, where members of the International Monetary Fund (IMF) and the World Bank were convening for their semi-annual meeting.
As expected, empty rhetoric only helped to highlight the irrelevancy of the proceedings - the diplomatic and bureaucratic rituals that produce a lot of press releases.
US Treasury Secretary Hank Paulson reiterated his view that a strong dollar was in 'our nation's interest', while stressing that 'currency values should be determined in competitive markets, based on underlying economic fundamentals', making it clear to the members of the European Union (EU) that the Americans whose exporters benefit from their currency's current woes by making them cheaper (and harms European exports by making them more expensive) would reject any coordinated effort to stem the depreciation in the greenback.
The result of this US-EU stalemate was a communique issued by the G-7 finance ministers and central bank governors which opted not to single out the dollar, euro or yen - the currencies of the nations that took part in the meeting - but which urged China - which was not invited in the meeting - to let its yuan currency appreciate more quickly.
Notwithstanding the ongoing process of globalisation and the continuing strength of the US economy, the economic conditions today are in some respects different than they were during the 1990s.
The financial contagion had spread then from the emerging markets to the United States. Today the source of the financial turmoil is in the US and is spreading abroad. In the 1990s, the locomotive of a strong US economy could help pull along the rest of the global economy, including the emerging markets. Today it is the growth of the economies of China and India that could help by injecting new strength into the American economy and the rest of the industrialised nations aka the G-7.
Is it possible that a resourceful and forward looking US economic leadership a la the Committee to Save the World would have responded to this challenge by inviting China, India, Russia and perhaps even Saudi Arabia and other oil producers to join the G-7 process?
After all, you do not have to be a George Soros to figure out that unlike during the post-globalisation years when global financial imbalances and the plights of the US dollar could be dealt with and even resolved through negotiations among the rich industrialized nations, that kind of inside-the-club resolution is not possible today when a large share of the US current account deficit is financed by both China, which pegs its currency to the US dollar, and Saudi Arabia, which also pegs its currency to the greenback, are buying US assets.
What would happen if, say, China agreed to change its monetary policy and start selling its US Treasury bills, or if the Saudis, threatened by a weakening greenback, decided to float their currency instead of pegging it to the US dollar? To put it differently, any strategy aimed at dealing with the challenges that the G-7 economic officials were supposed to focus on this week in Washington - and you can add to that all the intertwining problems of energy prices, global warming, international terrorism, the Middle East as well as reforming the IMF and World Bank, that affect the health of the global economy - would require turning the G-7 into a G-10 (China, India, Russia) and beyond that, perhaps even Saudi Arabia and the other new kids on the block.
In fact, the freedom of the Fed to continue cutting interest rates and contain the credit crunch could be constrained if the value of the US dollar continues to fall and if China and other emerging markets face inflationary pressures.
One assumes that Secretary Paulson and Fed Chairman Ben Bernanke are aware of the growing need to bring China into the centre of global economic decision-making. It is quite possible that under a curious and thoughtful US President, these two respected economic officials, joined by World Bank President Robert Zoellick, could become part of the new and successful CSW.
But it says quite a lot about the current White House occupant that at a time when Washington needs to work together with Beijing on global economic and security issues, President Bush decided to poke the Chinese in their eyes and do a 'photo-op' with the Dalai Lama in Washington.
And in any case, it is becoming clear that the politically weak Mr Bush, who has invested all his time and energy in a failed war in Iraq, does not have the power and the will to stand up to the powerful China-bashing forces on Capitol Hill.
The strategic dialogue between the Americans and the Chinese that Secretary Paulson has initiated cannot be a substitute for an effective political leadership.
Moreover, much of the ideas that have been floating in Washington and Wall Street in recent days including the plan encouraged by Secretary Paulson to create a US$75 billion investment fund backed by Citigroup, JPMorgan Chase and Bank of America to buy the assets of troubled investment vehicles have failed to produce excitement among officials and bankers, including those with ties to the Fed.
Former Fed chairman Greenspan - the unofficial chairman of the CSW - warned in an interview with Emerging Markets magazine that the superfund could prevent the market for establishing true clearing prices for asset-backed securities. And the members of the Institute of International Finance (IIF), in a statement issued over the weekend, warned that the superfund needs to be transparent in its pricing as part of an effort to restore market confidence.
And it is becoming clear that Mr Bernanke has been unable to come up with a clear explanation of the problems facing the housing market or with a coherent strategy to end the credit squeeze.
In a way, the anxiety among investors, reflected in the recent Dow slide, is the result of a recognition that this time around there is no Committee to Save the World in place.
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.