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
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.