Sunday, November 23, 2008
Plus ça change - ECO
Nov 20th 2008 From Economist.com A conference on financial crises reveals striking similarities FORTY years of financial history were debated in a London livery hall on November 17th by a heavyweight group of speakers including Paul Volcker, the former Federal Reserve chairman, Jacques de Larosiere, a former managing director of the International Monetary Fund and Nigel (now Lord) Lawson, a one-time British finance minister. As the Lombard Street Research seminar discussed past crises, what was remarkable was how the old battles are still being fought. The Europeans always seem to be calling on the Americans to put their house in order by reducing their trade, or budget, deficits while Washington always wants the rest of the world to increase domestic demand (and thus buy more American exports). The Europeans tend to believe in international arrangements (such as fixed, or targeted, exchange rates); the Americans do not want any constraints placed on their domestic economic policies. So in the early 1970s, the Bretton Woods system broke down because the Americans (to European eyes) neglected their responsibility to maintain the value of the dollar relative to gold; in contrast, the Americans felt they bore an unfair burden because Europeans had the option to devalue their currencies which the US did not. In the 1980s, the Americans saw their deficits as the short-term consequences of pro-growth, tax-cutting policies; rather than being forced to cut back, they wanted other countries (and particularly the Japanese) to adopt the same approach. Jump forward twenty years and the cast has changed, but the script remains the same; Washington now wants the Chinese to play the role of consumer of last resort. Several panellists commented that countries with trade deficits come under pressure to change tack (with the currency markets leading the charge) but there is no mechanism (apart from the unpalatable option of tariffs) to force surplus countries to change policies. The same problem applies today. No wonder politicians struggle to cope. Mr Volcker recalled President Nixon’s plea to "give me some monetary system that doesn’t have crises". Many modern leaders will echo the sentiment.