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Received my uncorrected proof, limited edition, advance copy of Great Powers: America and the World After Bush today. Nice ! As a serious book collector, I love having these editions. Dr. Barnett was kind enough to let me see some of the early draft chapters but this is my first look at the almost finished product.

Much thanks Tom!

The scale of the economic crisis has begin to sink in to the point where leaders of the G-8/G-20 have begin to realize that everyone dwelling on the welfare of parochial, politically favored, financial interests ( Goldman Sachs in the case of the U.S.) is not going to get the world out of this crisis. Coordination of macroeconomic levers will be the key. Some good posts that I strongly encourage you to read,  before I comment:

Status report on the financial crisis: we’re at a critical point in time by Fabius Maximus

Encouraging signs – coordination appearing by Robert Paterson

Notes to Self: What Are We Doing? by Brad DeLong

The world is at severe risk of a global systemic financial meltdown and a severe global depression  by Nouriel Roubini

Equities, Pay Caps, Liquidity: Structuring a Bailout–Posner & Government Equity in Private Companies: A Bad Idea-Becker by Becker and Posner Blog

Geopolitical Consequences of the Credit Crunch by Niall Ferguson

How to view this system perturbation by Thomas P.M. Barnett

Wolfgang Munchau: Policy Errors Risk Turning Credit Crunch Into Depression  and Are Hedge Fund Margin Calls Leading to Stock Rout? by Naked Capitalism ( HT to John Robb)

National Orientation by Chet Richards

JOURNAL: Cascading Bubbles by John Robb

What is to be done ?

Aside from shortsightedness that comes from playing primarily to domestic political inside interests, there is another reason that G-7 leaders in particular are moving slowly in coming to terms with reality of this crisis: the interconnectedness wrought by globalization implies that the long term solution involves a considerable erosion of sovereignty to a global entity that can coordinate and shape macroeconomic policies of the central banks of the world’s largest economies. And to an extent, fiscal and regulatory policy as well. If the G-7 leaders are bold, they will approximate such meta-policy activity this weekend to get us over this crisis but we will be back to square one for the next crisis in two or five or ten years down the road.

I am uncomfortable, make that opposed, to any Brussels style global authority. Given the predisposition of much of the world politically, representatives of such an authority will prefer to misuse their authority to micromanage to achieve social and political engineering rather than stick to a narrow mission of tending to macroeconomic trends. Yet the fact that the sum of the global capitalist system now exceeds the ability of any part, even the U.S., to control it, requires a mechanism be put into place to transnationally leverage macroeconomic policies for maximum systemic benefit during hard times.

Better to set up a simple WTO like structure today for a “coordination council” that rules natonal monetary policies in or out of international consensus against a clear rule-set yardstick, than to wait until some emergency creates a crisis large enough where we wake up some day with vast portions of our sovereignty ceded to unaccountable international bureaucrats. Sort of a “Concert of Economies” that preserves the flexibility and freedom of of capitalism and national sovereignty instead of instituting a global GOSPLAN.

The crisis points to creating a level playing field in terms of financial rule-sets with agreed upon “circuit-breakers” are put into place now. This requires various states yield on all sorts of national comparative advantages for the benefit of the system as a whole. Something that goes against every career instinct of a politician.

Thought German might fit the Wagnerian mood of the markets today in a brief post discussing the economy. A few links on related tangents that I found intriguing, and then a brief comment:

John Robb –  A Real Nuclear Option in Finance

John relishes being not only out front but the edge thinker. He’s right that derivatives have to be addressed though I’m not qualified to comment as to “how”. I haven’t the faintest idea and the sums that derivative markets leverage vastly exceed our planetary GDP ( that’s right, not the economy of United States, the GDP  of planet Earth)  In particular, I wonder how you monkey with one class of derivatives without spooking the traders in other derivative instruments into stampeding us over a cliff in ten minutes. OTOH, Robert Paterson, who unlike me really does understand derivatives and the nuances of trading, agreed with Robb, who offered:

One solution: Nuke entire parts of the system. In short, destroy the system’s network connectivity. For example, credit default swaps ensure that failure will spread through internetworked contracts. Nuke CDS derivatives ($60 trillion or so) by making them illegal. Destroy parts of the network in order to save the remainder — firewalls and firebreaks.

Fabius Maximus –  No coins, no COIN

FM sees the economic crisis forcing huge changes in American foreign policy, defense structure, military doctrine and acquisitions:

In most of these money is no object in the pursuit of security (or other goals, often quite chimerical).  That is an exceptional way of thinking.  More so when one considers how our current account deficit has steadily increased since 1971 (when we went off the gold standard) – and the even more rapid increase in the foreign debts that finances the annual deficit.

That era will close soon, and the United States will return to earth.  Like everyone else, we will have to consider what foreign adventures we can afford before starting them – weighing their costs and benefits – and stop wars whose costs spiral out of control.  This will force a military revolution more profound than any since WWII, when we entered the “money is no object” era for weapons and foreign wars.  

….Not that the annual budget wars were not fought fiercely, but they will be conducted differently once budgets start their rapid and long-term decline.  Like any organization thrust into radically changed environment, restructuring – drastic changes in structure and doctrine – will be needed.

Maritime, air, and land – our approach to all will change.  Maintaining full-scale forces against purely theoretical future threats will become impossible.  Seeking dominance in every theater will become unrealistic.  Prioritization will become imperative.

FM also offers up  A solution to our financial crisis . Right now, China, the leader in global dollar reserves is in a position where our crash is their crash and their crash may be the end of the PRC as we know it. Good time to strike a deal.

Tom at HG’s World cites Niall Ferguson in Ferguson’s greatest area of expertise, as an economic historian:

The End of Prosperity, or A Better Future?

Historian and author, Niall Ferguson penned this article in Time magazine, about the question that is on everyone’s mind if not their lips. “Are we headed into a second Great Depression?”He begins: “Congress’s initial rejection of the Bush Administration’s $700 billion bailout plan calls to mind an unhappy precedent. Back in 1930, the Senate passed the Smoot-Hawley Tariff Act, which raised duties on some 20,000 imported goods. Historians define this as one of the critical steps that led to the Great Depression – a tipping point when the world realized that partisan self-interest had trumped global leadership on Capitol Hill.”He explains what happened to tip the scales.“The U.S. – not to mention Western Europe – is in the grip of a downward spiral that financial experts call deleveraging. Having accumulated debts beyond what’s sustainable, households and financial institutions are being forced to reduce them. The pressure to do so results from a decline in the price of the assets they bought with the money they borrowed. It’s a vicious feedback loop. When families and banks tip into bankruptcy, more assets get dumped on the market, driving prices down further and necessitating more deleveraging. This process now has so much momentum that even $700 billion in taxpayers’ money may not suffice to stop it.”

Like Tom of HG’s World, I’ve been a big fan of Ferguson and have numerous books of his on my shelf . That said, it’s very odd to me that he not mention another parallel with the Great Depression of a Federal Reserve in the hands of a relatively new Chairman after the long tenure of an outsized and much respected predecessor. Or the inability of the Fed to effectively coordinate with European counterparts ( several days after loudly bloviating about American weakness/incompetence by the German Finance Minister it appears that he might have better spent his time addressing German and EU economic fundamentals. Good Lord, even by politician standards, what an asshole!) which back then scrambled to ditch the gold standard like a poor relation carrying hepatitis.

The solution, if you can call it that, from my crude perspective would be to gather the Fed with other central banks, treasury and it’s G-8 finance ministry counterparts plus China and the biggest sovereign funds and agree on a few, very simple, lowest common denominator “brakes” or safety nets to backstop the system, plus a 2 year “hot money” flight tax to give a window of time to let the markets settle and work out clear minded reforms rather tha jerry-rigged insider looting binges posing as band-aids. That and driving what money/credit remains toward entrepreneurship and innovation rather than another burst of McMansion consumption by a demographic of dudes without any verifiable means of support.

This scheme won’t create any rainbows. It would be a tourniquet but better a tourniquet than an amputation.  If we come out with a recession on the scale of 1981-1982 we should consider ourselves to be fortunate. The Great Depression has begun to pass out of living memory but reviewing the mistakes of those years might be instructive.

I have not had time to come up for air in the previous week, much less post intelligently on a subject rife with complexity like the turmoil on Wall Street. This is unfortunate because it’s a very important story and it seems to be taken by the MSM with about the same gravity as SNL skits. Here are two recommended posts on the subject:

Nissam Nicholas Taleb – THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS

The author of The Black Swan extends his theory into strategy while critiquing the causes of the current mess. A must-read piece ( hat tip Lexington Green)

Fabius Maximus – Another voice warning about the nationalization of AIG

FM should get some credit where credit is due. The 4GW school ( and to an extent Fabius) were subjected to complaints that 4GW thinkers were long on criticism and short on solutions and blind or disdainful of economic variables. Fabius has made a special effort since he’s started blogging to concentrate on these areas and integrate economics into the 4GW critique. His post is rich in links and normative argument.

My own opinion? There are no levers scaled to the size of an even quasi-integrated global economy and the best that can really be managed in terms of intervention would be to get all of the major central banks on the same page on one or two relatively simple interventions, along with Treasury and the major holders of dollar reserves. They might be harnessed for a limited, stabilizing, effect but I think we have to accept that the global economy has shed it’s old skin from the nation-state Keynesian era once and for all.

Sean finds Dr. Barnett briefing on youtube:

One of these days, I have to catch Tom doing his brief live. Perhaps there will be a “ Great Powers: 2009” tour hitting Chicago. 🙂