Who’s in Charge Here? How Governments are Failing the World Economy Alan Beattie RIVERHEAD BOOKS a member of Penguin Group (USA) Inc New York 2012 To John and his family My Lord, wise men ne’er sit and wail their woes, But presently prevent the ways to wail William Shakespeare, Richard II, Act 3, Scene Contents Introduction How many divisions has the Pope got? Partisan paralysis and polder politics Brics without straw What is to be done? A free excerpt from Alan Beattie’s False Economy Introduction How we got here And everything had been going so well In the spring of 2007 the big new things in the world economy were the rise of a social media site called Facebook, then celebrating its twenty-millionth member, and a new rival named Twitter, favored by narcissists pressed for time Clearly, globalization was about to enter a new and excitingly solipsistic phase In April 2007 the International Monetary Fund, the sentinel of global financial stability, smiled benignly as it surveyed the economic landscape “Notwithstanding the recent bout of financial volatility, the world economy still looks well set for continued robust growth in 2007 and 2008,” the IMF said “Spillovers have been limited, growth around the world looks well sustained, and inflation risks have moderated.” In retrospect, that forecast rivaled for hubris the infamous prediction of Irving Fisher, the legendary Yale economics professor, who opined two weeks before the 1929 stock market crash that share prices had reached “what looks like a permanently high plateau.” By 2007 the world had seen nearly two decades of almost uninterrupted growth, first reaping the peace dividend from the end of the Cold War and then seeing digitization and the Internet dissolve hundreds of separate markets in goods, services and money into one But subterranean subsidence had been silently and invisibly eroding the foundations of global capitalism, and in the summer of 2007 the ground started to give way Over the next five years, the crisis would metastasize and spread Weakness in the USA’s overstretched market for mortgage finance became a general international credit squeeze as financial markets started to dry up, then a rolling banking crisis that swept around the industrialized world, then the squeeze turning into a crunch as the entire global financial system threatened to grind to a halt, then a worldwide recession as years of excess were undone, and most recently a wave of governments across Europe heading toward bankruptcy At every stage since the crisis hit, two things have been clear One is that the governments, central banks and international institutions charged with safeguarding the world economy have had almost no idea about the severity of what was coming The second is that official reactions have for the most part been slow and inadequate within countries and disjointed and uncoordinated between them At each turn, the international response to the successive attacks of financial contagion has been hobbled by complacency, misplaced ideology, a failure to coordinate and a lack of political will Along the way, to be fair, individual policymakers and institutions have improvised some remarkable responses to the unprecedented challenges But as things stand, dysfunctional politics and wrongheaded economics are posing the biggest threat of another worldwide depression since the one that followed the crash of 1929 So what went wrong? In the coming chapters we will see how the system we are supposed to have for coping with the global economy has largely failed, how the dysfunctional political cultures in Europe and the USA took hold, how the emerging economic powers have been big enough to be part of the problem without being part of the solution, and finally where we should be going from here As the Queen of England famously asked on a visit to the London School of Economics in 2008: “If these things were so large, how come everyone missed them?” The reply she got, from the head of the management school, was a pretty good one: “At every stage, someone was relying on somebody else, and everyone thought they were doing the right thing.” In the end, the strength of globalization— its speed, its breadth and its complexity—also proved to be its weakness The buzzword of the 2000s was “globalization”—the worldwide integration of markets in goods, services and capital But it turned out that governments did not understand the dangers that it had created And when disaster struck, it turned out that the crisis could travel faster than the boom—and faster than governments could react * * * As is now generally known, the crisis started with, or at least was triggered by, problems in the U.S housing market For years mortgage lenders, encouraged by low interest rates and weak financial regulation, had been overextending loans to risky “subprime” borrowers When the borrowers started to miss payments and default, the problem cascaded not just through the mortgage lenders but also across the financial system The streams of forthcoming payments on those mortgages had been parceled up as separate financial assets, combined, remixed, ludicrously labeled as “safe” by credit ratings agencies and sold on to a huge variety of financial institutions The poison of bankruptcy spread through the world financial system as those assets, in the favored idiom, began to “turn toxic.” In the summer of 2007, governments got an early sense of just how far the problem had spread, as financial markets across the world started to shake Banks became reluctant to lend to each other and the reverberations started knocking down wobbly institutions In September it caused the first run on a British bank in more than a century with Northern Rock, a UK mortgage lender that had ridden Britain’s housing bubble by borrowing huge amounts of short-term cash to lend to long-term mortgages Right from the beginning the problems in U.S subprime mortgages and British banks showed one of the key features of the crisis—that responsibility for preventing and stopping problems was scattered across an array of different agencies The mortgage lenders whose recklessness led to the U.S subprime crisis could shop around different regulators—the Federal Reserve (the central bank), the Office of Thrift Supervision, the Office of the Comptroller of the Currency and more—to find the one with the lightest touch All of them were in charge, and so none of them was In the UK, while the Treasury had overall responsibility for financial stability, the Financial Services Authority supervised individual financial institutions and the Bank of England, the central bank, was “lender of last resort,” able to bail out troubled banks if their bankruptcy threatened the wider financial system For weeks in September 2007, as lines of anxious savers formed at Northern Rock’s doors, the bank, misjudging the extent of the problem, rebuffed pleas from the FSA and the Treasury to intervene in the financial markets to help banks lend to each other, while the crisis worsened All of them were in charge, and so none of them was It was a pattern that was repeated, on an international scale, when the problem entered its critical phase a year later In this case the trigger was not a humble British mortgage lender but Lehman Brothers, a venerable U.S investment bank dating back to the nineteenth century that found itself unable to meet its obligations On September 15, 2008, Lehman Brothers collapsed, and the crisis spread outward through the tens of thousands of deals it had entered into with other banks and finance houses Because there was no record of who owned what, no one had any idea of how bad it was Ignorance bred panic, and as banks around the world feared for each other’s solvency, so they stopped lending to each other, even for a day or two at a time, and the “interbank” market seized up In came the governments, like a cavalry charge of pantomime horses The U.S Treasury decided it wanted $700 billion to buy up toxic assets from the banks, a figure that Hank Paulson, U.S Treasury secretary, later admitted was pulled from thin air The request to the U.S Congress for the money—a vague proposal put down on three pages of paper, strikingly close to an actual blank check —was turned down Stock markets went into free fall, and though Congress voted a few days later to grant the money, confidence in the authorities’ ability to fight crises was badly hit (We will return to U.S congressional dysfunction later.) In Europe, where banks operated in something close to a single market, thanks to the rules of the European Union, the logical thing to would have been to organize a similar rescue fund on international lines, or at least to coordinate actions by regulators But such a mechanism did not exist Not for the first time, a market in Europe had grown much faster than the policy infrastructure around it (We will return to European ineptitude later.) Instead, countries jumped for the lifeboats—even if it meant pushing others into the water Two days after Lehman Brothers collapsed, Ireland, whose banks were in severe trouble after fueling an unsustainable housing bubble, massively expanded a government guarantee of bank deposits and debts Since the Depression of the 1930s, it has been routine for governments to guarantee savers’ deposits up to a certain level to stop destabilizing runs on banks But the sudden expansion of the guarantee was enough to start UK savers fleeing British banks to shelter under Irish government protection (We will return to disjointed financial regulation later.) In one extraordinary week in October, governments first deepened the crisis and were then forced to scramble to undo the damage On Monday, October 6, Angela Merkel, the German chancellor, blocked a French idea to create a cross-border rescue fund Instead, just hours after an emergency European summit had called for greater coordination among the continent’s big economies, she unilaterally issued her own deposit guarantee, infuriating France and the UK That Wednesday, in one of the more decisive actions of the crisis, half a dozen of the world’s central banks simultaneously cut interest rates to try to thaw frozen financial markets In another, Gordon Brown, the UK prime minister, later that day announced a rapidly assembled plan to inject public money into British banks, which had faced a real risk of collapse within hours Initially, France and Germany rejected similar plans Guaranteeing savers’ deposits to prevent a bank run was one thing; plowing taxpayers’ money into banks offended German financial orthodoxy Within two days the threat of financial collapse forced them to perform a U-turn At the annual meetings of the International Monetary Fund the following weekend in Washington, visibly scared finance ministers put together a vague plan to do, in essence, whatever it took to bail out the financial system No bank the size of Lehman Brothers would henceforth be allowed to fail The USA, which had previously rejected the idea of putting public money into banks, abruptly shifted course after realizing that their own institutions would hemorrhage business if they did not On Sunday, a European summit at the Elysée Palace showed an almost complete reversal of ideology within a week EU governments pledged to guarantee savers’ deposits, guarantee banks’ borrowing, pump public money into the banks themselves—anything to prevent a meltdown In seven days, governments of the world’s leading economies went from “no need to panic” to “whatever it takes.” That extraordinary week in October was not a victory In soccer terms, Europe and the USA had barely tied the game before the final whistle Unprepared, uncoordinated, gripped by a noninterventionist ideology, the governments of the rich countries had taken global finance to the brink of total collapse before being forced to retreat The world could surely not go on being governed like this Something had to be done Enter, like a pantomime horse manned by a troupe of slapstick clowns, the G20 grouping of large economies A full account of the diet and habits of this peculiar beast is left until Chapter 2, but it made its first appearance in the saga in November 2008 when the USA convened a meeting of G20 heads of government in Washington The tone of the meeting was self-consciously historic and transformative, with the dining metaphor being much used to boast that the big emerging economies had for the first time been invited to the “top table” of global governance Gordon Brown, the UK prime minister, never one to undersell an international meeting in which he had the slightest role, predicted that the meeting would resemble a second Bretton Woods—the gathering in the eponymous New Hampshire ski resort in 1944 that created a new global monetary system out of the ruins of the Great Depression and the Second World War That invitations to the G20 were prized is not in doubt Spain, whose population and economy were too small to warrant inclusion, managed to wangle a spare invitation after a frantic round of calls of European and Latin American countries to ask them to lobby for its admittance The Spaniards need not have bothered They wouldn’t have missed much Attendees at the summit issued a series of grandiloquent pronouncements about the new geopolitical realities of the interconnected world, changing paradigms of inclusive international governance, rising aspirations to a truly innovative global consciousness, and other strings of abstract nouns But the fate of the specific promises that the G20 made gave astute observers an early clue that this was a grouping whose ratio of rhetoric to action was set to be stratospheric * * * The G20’s challenge was clear: avoid a second Great Depression Although the immediate threat of financial collapse had receded, there was a growing awareness that the global economy itself was hitting a wall The world’s big central banks, having largely learned the lessons of the 1930s, were doing what they could The U.S Federal Reserve was fortunate to have as its chairman Ben Bernanke, a renowned scholar of the Depression It cut interest rates in effect to zero and found more and more ways to pump money into the financial markets, a measure known prosaically as “quantitative easing.” The European Central Bank, which set monetary policy for the economies that had adopted the euro, acted similarly But households and businesses, their borrowing constrained by the credit crunch and their optimism battered by the near-meltdown of the financial system, were sharply curtailing their spending Big emerging-market countries such as China for a while looked as though they had, in the modish jargon at the time, “decoupled” from the rich world But that hope lasted only a couple of months until their stock markets, too, nose-dived, and their growth, too, faltered International trade, which had grown quickly during the globalizing 2000s, went into free fall (By February 2009 it would be seen to have shrunk by a fifth from its pre-crisis peak.) Concern rose about a repeat of the Great Depression of the 1930s, where a collapse in trade had been accompanied by a destructive resort to trade protectionism, as crisis-hit countries walled off their economies behind import tariffs Boldly, the G20 governments promised that they, like their central banks, were determined that the history of the 1930s would not be rerun They pledged to keep fiscal policy loose—boosting or maintaining government spending and keeping down taxes—to make up for the shortfall in demand from households, businesses and export markets They promised to eschew protectionist actions and to maintain a free and open global economy And, specifically, they set a goal for trade ministers to meet before the end of 2008 to agree to a framework deal in the so-called “Doha round” of global trade talks that had been running since 2001 Such a breakthrough would indeed have been impressive, and an excellent early achievement for the G20 The talks, under the aegis of the World Trade Organization, the global guardian of open commerce, were the ninth such series of global negotiations since the WTO’s forerunner was created in 1947 Launched in the eponymous capital of the Gulf state of Qatar two months after the September 11 attacks on the USA, they had been intended as a symbol of global solidarity at a time when the world seemed divided But negotiations over reducing import taxes on agricultural and industrial goods had stalled the process Governments’ ritual vow to complete the Doha round had become a meaningless pleasantry on a level with “Have a nice day!” The G20’s specific immediate pledge not to take protectionist actions was a down payment, or at least a sign of good faith and of their willingness to complete the trade talks The G20 meeting finished on a Saturday in Washington It was on the Monday morning in Moscow that Russia, a member of the G20, announced that it would go ahead with a rise in car tariffs to block cheap imports The solemn and binding promise to eschew protectionism had lasted about thirty-six hours Soon afterward India piled in with a rise in steel tariffs, followed a short while later by the EU reintroducing controversial export subsidies to dump their dairy products on the world market, and the pledge was in tatters The promise to complete the Doha round proved no more effective A few weeks after the summit, talks broke down again and the cryogenically preserved round was quietly returned to its freezer cabinet True, the world did not return to economic isolationism: countries continued to stick, by and large, to the commitments they had made in previous agreements, and protectionist actions were fewer than in other recessions But of collective determination to extend the reach of global trade rules there was little sign The other specific pledge made at the G20, for governments to keep the fiscal taps open, was hardly any more productive China, showing that it had learned a thing or two about pre-summit spin from the rich countries, announced a spending program of nearly $600 billion—equivalent to 15 percent of its national income—the week before the G20 Finally, perhaps, China was taking up some of the burden of global consumption that the USA and other rich countries had been pressing on it for years As it happened, the plans had been in the works for months, and were merely timed around the G20 for dramatic effect And the actual public spending programs turned out to be much smaller, the rest being made up of the government leaning on state-controlled banks to increase their lending In February 2009, once Barack Obama had taken office, the U.S did put through a stimulus program of tax cuts and spending increases that he had promised while on the campaign trail But even there, the package was rather smaller than some in his administration wanted, thanks to resistance from Congress And in the year after the November summit, no major G20 economy announced any significant increase in discretionary spending—that is, spending excluding automatic payments such as unemployment benefits—that it had not already planned The G20 fiscal pledge, too, turned out to be a fiction But it was not for want of trying, at least on the part of the White House (a strong believer in the virtues of fiscal stimulus) Just ahead of the next summit in London in April 2009 Larry Summers, the pugnacious chief economic adviser to President Obama, uncompromisingly declared of fiscal policy: “There’s no place that should be reducing its contribution to global demand right now.” But with the crotchety air of a dowager duchess sending a substandard amuse-bouche back to the kitchens, JeanClaude Juncker, Luxembourg prime minister and chair of the “eurogroup” of finance ministers from the single currency zone, said sniffily: “Finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.” Still, if ever there was a politician ready to good PR for the G20 irrespective of the underlying reality, it was the host of the London summit, Gordon Brown The British prime minister was by now infamous in the UK for conjuring big public spending announcements out of nothing with statistical smoke and mirrors—double- and triple-counting money, re-announcing or relabeling existing plans, rolling up multi-year programs into a single commitment—and now he had a global stage on which to as India and Afghanistan Countries’ own definitions of themselves can vary greatly, even within the same country, for tactical reasons South Korea, for example, is one of a wave of emerging-market economies—others being Singapore and Taiwan—that has graduated into the rich nations’ club Having been a semisubsistence economy as recently as the 1950s, South Korea’s GDP per capita is now higher than that of Spain, Italy or New Zealand But South Korea has retained an opportunistic attitude to its new status It moved heaven and earth during the 1990s to be accepted into the Organisation for Economic Co-operation and Development, a club of rich countries, because international regulations allowed OECD members’ banks to hold less capital against their lending Yet South Korea has continued to self-identify as a developing country in the WTO to try to get more leeway to preserve its agricultural tariffs At the failed WTO ministerial meeting in Cancun, in 2003, some of the most vocal demonstrators were Korean farmers, one of whom killed himself in protest at the proposed cuts in Korean import tariffs on rice Those European development campaigners who seized on the tragedy as evidence of the damage that WTO rules did to agriculture in the developing world were apparently untroubled that they were defending cosseted farmers in a wealthy country * * * The rivalries, divisions and contradictions within the developing world were clearly displayed by events in the summer of 2011 The International Monetary Fund suddenly needed a new managing director after the forced resignation of Dominique Strauss-Kahn, the French incumbent, following his arrest for alleged sexual assault in New York City The IMF, as we saw in Chapter 2, has been dominated by Europe both on its executive board and in the managing director’s office since it opened for business in 1947 Surely, one might have thought, an ideal time to reform both would have been a global financial crisis where Europe was vulnerable, having made many more mistakes than most middle-income countries, and suffered accordingly, and been humiliatingly forced to go to the IMF and accept lending with tough conditions attached? And what better opportunity to install a non-European managing director than when the previous one had been forced to resign after what at the very least was a huge personal indiscretion that called into question the judgment of the European governments that had installed him? Europe soon produced its candidate, the French finance minister Christine Lagarde, and everyone waited for a candidate from outside Europe to step forward Certainly the emerging markets seemed keen on having one They made endless earnest appeals—including a joint statement from the Brics countries’ representatives on the IMF’s board—for an open and merit-based procedure for selecting the managing director But high statements of principle were no substitute for coalescing around a credible candidate When one did appear in the form of Agustín Carstens, governor of the Mexican central bank, he did not get widespread support Governments could have few objections to him on the merits, since his credentials were near impeccable: excellent academic qualifications, with an economics doctorate from the University of Chicago, good institutional awareness from an admired earlier stint in senior IMF management, and exemplary policymaking experience, having been both central bank governor and finance minister of a leading emerging economy Indeed, in his former role as finance minister, Carstens made Mexico the first country in the world to gain a special IMF seal of approval by qualifying for a new form of credit line available only to exceptionally well-run countries Carstens made all the right noises about his own expertise and the need to show that the IMF was independent of its main debtor and could learn the lessons from the economic crisis He went around the world campaigning vigorously for the job And yet in the six weeks between Mr Strauss-Kahn’s sensational resignation and the IMF executive board making the new appointment, he was never more than an outside bet Carstens struggled from the beginning to pick up votes, including some in his own backyard South American countries traditionally harbor an undercurrent of resentment against Mexico, considered politically and economically as well as geographically too close to the USA for comfort Some officials also muttered privately that Carstens’s Chicago education—the university is considered to be the Medina, if not the Mecca, of the free-market sect of economics—would mean in effect appointing a U.S head of the IMF Meanwhile Russia, along with other former Soviet states, chose to make a gesture of regional rather than global solidarity by nominating a quixotic rival candidate in Grigori Marchenko, the little-known governor of the Kazakh central bank—by some accounts without bothering to ask Marchenko first Carstens’s valiant campaign was little match for the practiced European power-brokering and vote-getting machine, the EU demonstrating it was rather better at installing IMF managing directors than running their economies on IMF-approved lines The EU also knew how to flatter emergingmarket countries into support Few believed it was a coincidence when Zhu Min, a highly regarded Chinese economist who had already been serving as an adviser to Strauss-Kahn, was suddenly elevated to a senior management position shortly after Lagarde became managing director In the end, bizarrely, the self-styled candidate from the emerging markets got public support from Canada and Australia but none of the Bric countries and few other big emerging markets except his own country and Chile Governments were channeling St Augustine: “Lord, give us an emergingmarket managing director of the International Monetary Fund—but not yet.” True, the Brazilian and Indian representatives on the IMF’s board had a valiant attempt at firing shots across Ms Lagarde’s bow once she had got her feet under the table at the IMF Paulo Nogueira Batista, Brazil’s executive director at the Fund, told me in July that “the community of Fund-watchers around the world will be looking to see if she can transcend her European origins” (a suggestion Ms Lagarde subsequently dismissed as “rubbish”) But whatever the complaints about the IMF bailouts for Western Europe, the reality is that the emerging-market shareholder governments on the board continued to vote for them when they came up Their governments were motivated, perhaps, by a combination of not wanting to take the blame if the eurozone economy went up in flames and a sense that there but for the grace of God went they—and that there they might go again in future * * * In policy as well as personnel, the emerging markets not have a clear and unified sense of what they want from the IMF or any other international financial institution China has made some attempts to develop an intellectual framework for its more interventionist approach to economic growth, sometimes referred to as the “Beijing consensus.” But its own domestic economic policy is a largely extemporized mixture of the state and the free market, whose composition shifts as time goes on and often differs considerably across Chinese provinces The Beijing consensus idea has served mainly as a rhetorical tactic during China’s incursions into Africa, reassuring African leaders that, unlike the World Bank and IMF, Beijing will not be demanding painful economic liberalization as the price of aid As well as Zhu Min at the IMF, the flow of Chinese and other Bric officials into high policymaking positions has also installed Justin Lin, a Chinese development expert, as chief economist at the World Bank Lin’s intellectual approach is notably more interventionist than the more traditional free-market thinking at the bank, but the effect seems to be to have pushed the bank more toward eclecticism and an experimental approach in development rather than imposing a new orthodoxy Symbolic personnel appointments may keep the public at home happy in the thought that they are influencing global governance, but they not necessarily make much difference in practice Often it is not arithmetical representation that brings countries’ influence but competence, organization and determination That goes for the rising powers as well as the fading ones If the Brazils, Indias and Chinas of the world really want to control the international financial institutions, they need to start hammering out common positions on the issues that matter Counting percentages and poring over organograms is not enough Could this change soon? Will the Brics accept responsibility as leaders? Don’t bet on it Emerging markets (and particularly China) will be able to regard themselves as developing countries for a while to come These “premature superpowers” represent something new in the post– Second World War global economic order—economies that are huge players in aggregate economic (and military and strategic) terms but are still relatively poor per capita China may be the world’s biggest goods exporter, but the average Chinese person has an income one-sixth that of the average American, and only half of the income of those in better-off emerging markets such as Turkey or Chile Indeed, the Chinese may never reach the average incomes of the Turks or Chileans, let alone Americans Thanks to the misguided “one child” policy that restricted the Chinese birth rate, its demographics are not favorable China, as the saying goes, will get old before it gets rich Back when the G8 rather than the G20 meant something, a standard platitude of discussions about global governance was to suggest China be invited to join the G8 In fact, China had occasionally been informally sounded out about joining the G8, and had always said no Beijing had absolutely no desire to break ranks with other developing countries and be the only one to join an elite global group, especially as it would essentially mean giving the USA yet another chance to beat it up over its currency policy Similarly, when the International Monetary Fund went through the tortuous process of changing the voting weights on its executive board in 2010, the emerging markets insisted the voting powers reflect their growing weight in the world economy But several participants in the talks said that China’s strategy seemed keen to keep its vote share below that of Japan in size rather than become the second largest shareholder after the USA Since the rise of the G20, China now has the cover of being in a group with other emerging markets But Beijing has shown barely any more willingness to expend money or political capital on global governance than before China has proved quite as capable of maintaining a defensive position inside the G20 as outside the G8 Beijing’s default position in many international institutions is to as little as is possible to defend its own interests, and to go no further than that In the Doha round, for example, China was happy to leave the bulk of negotiating on behalf of developing countries to India and Brazil, keeping its own counsel and only expressing an opinion once it was clear which way a decision was already going to go In 2011, when the Europeans were trying to increase the size of the eurozone bailout fund, emerging-market countries floated the idea that they might help But in practice, this turned out to mean that they would contribute to the IMF, where their money would be safe, rather than directly bailing out Europe Although Beijing liked the propaganda value of being seen to ride to the rescue of the decadent Europeans, there was never a serious proposition that it was going to put hundreds of billions of dollars of its reserves at risk by lending direct to Greece or Italy The Chinese authorities —and the state-controlled “sovereign wealth funds” that manage a lot of China’s reserves—had already been severely burned buying stakes in U.S banks during the global financial crisis when the value of their holdings collapsed They had no wish to make the same mistake again The Brics would play a relatively safe bit part in the eurozone drama—they had no wish to make themselves one of the main actors For years, perhaps decades, to come, the world is likely to have several economies big enough to be an essential component of all serious attempts at global governance, yet which see themselves as developing countries that should not be burdened with the costs of making and implementing those policies The Pax Americana is fading, and nothing is coming up to take its place The Dark Ages of global economic governance could last a disturbingly long time What is to be done? Why globalization begins at home By reporters everywhere An ineffectual international organization yesterday issued a stark warning about a situation it has absolutely no power to change, the latest in a series of self-serving interventions by toothless intergovernmental bodies “We are seriously concerned about this most serious outbreak of seriousness,” said the head of the institution, either a former minister from a developing country or a mid-level European or American bureaucrat “This is a wake-up call to the world They must take on board the vital message that my organization exists.” The director of the body, based in New York, Washington or an agreeable Western European city, was speaking at its annual conference, at which ministers from around the world gather to wring their hands impotently about the most fashionable issue of the day The organization has sought to justify its almost completely fruitless existence by joining its many fellow talking shops in highlighting whatever crisis has recently gained most coverage in the global media “Governments around the world must come together to combat whatever this year’s worrying situation has turned out to be,” the director said “It is not yet time to panic, but if it goes on much further without my institution gaining some credit for sounding off on the issue, we will be justified in labeling it a crisis.” The organization, whose existence the White House barely acknowledges and to which hardly any member government intends to give more money or extra powers, has long been fighting a war of attrition against its own irrelevance By making a big deal out of the fact that the world’s most salient topical issue will be placed on its agenda and then issuing a largely derivative annual report on the subject, it hopes to convey the entirely erroneous impression that it has any influence whatsoever on the situation The intervention follows a resounding call to action in the communiqué of the Group of [number goes here] countries at their recent summit in a remote place no one had previously heard of The G[number goes here] meeting was preceded by the familiar interminable and inconclusive discussions about whether the G[number goes here] was sufficiently representative of the international community, or whether it should be expanded into a G[number plus 1, or higher goes here] including China, India or any other scary emerging-market country that attendees cared to name The story was given further padding by a study from an ambulance-chasing Washington think tank, which warned that it would continue to convene media conference calls until its quixotic and politically suicidal plan to ameliorate whatever crisis was gathering had been given respectful though substantially undeserved attention I wrote the above in about half an hour once in a fit of pique about something or other, and it was posted on the blog of a Financial Times colleague It clearly struck a chord with some employees of international organizations, as it first appeared in 2008 and I still occasionally get “Ah—the one who wrote that story” upon introduction In most tracts about global governance, this final chapter would be the point at which the author made the case for some overarching new worldwide institution to manage exchange rates, set financial regulation, harmonize fiscal policy, launch a space mission to colonize Saturn or otherwise take into a worldwide sphere some powers that are currently reserved for national governments But no The last thing that the world needs is yet another powerless institution that does nothing but suck up time and money, waste the careers of its staff and produce endless pious paeans to a global consciousness that does not exist Governments not sign up to multilateral institutions because of a principled belief in multilateralism: they so because they think their countries will get something out of it Notably, at the Bretton Woods meeting in 1944 now regarded as the high-water mark of global cooperation, only two countries really mattered—the USA and the UK Russia had no interest in Western capitalism; Japan and Germany were soon-to-be-defeated enemy nations; France was an occupied theater of war, with Paris yet to be liberated And because the USA was the rising financial power and creditor and the UK was the declining financial power and debtor, the USA more or less dictated the final terms The primary lesson of the global financial crisis since 2008 is not that the political structures are wrong or the global monetary or trading systems need fundamental change It is that through political weakness and misguided economic analysis, countries both individually and collectively are making the wrong decisions and are lacking in political will In this important way, the current crisis is different from the Great Depression In the 1930s, the intellectual edifice that framed the world economy was shown to be flawed National currencies had been linked to the price of gold and capital flowed freely across borders, which essentially forced central banks to keep a tight control on the supply of money and governments to run balanced budgets In the face of a colossal collapse in demand following the 1929 stock market crash in the USA, that proved to be exactly the wrong response—and those countries that broke the link between their currencies and gold, and were prepared to run government deficits to boost demand, were those that recovered fastest When the Bretton Woods system was created in 1944, it aimed to correct that mistake True, it sought to return to the stability of fixed exchange rates, but the system allowed currencies periodically to adjust against each other and controlled capital flows to give governments time if they needed to bring their balance of payments back into line And the world learned from the destructive slide into trade protectionism in the 1930s by putting in place rules to stop it happening again This time around, it is not the case that the whole underlying structure of the global economy is wrong and needs to be changed The fixed exchange rates of Bretton Woods gave way to floating currencies in the 1970s, but they were not the cause of the crisis If anything, they have worked as a safety valve since 2008, allowing the currencies of stricken countries such as the UK to depreciate, helping British exporters and softening the impact of the financial crisis on the British economy Some think the global economic order needs fundamental reform, but they generally fail to make their case convincingly When France chaired the G20 in 2011, President Nicolas Sarkozy spoke grandly of reinventing the international monetary system, in particular reducing the dominant role of the dollar in foreign exchange reserves in favor of other currencies such as—to take an entirely hypothetical case—Sarkozy’s beloved euro His rapid retreat from this campaign once he realized its impracticality was possibly the fastest reversal of a French cavalry charge since the disastrous Franco-Prussian war of 1870–71 Governments not buy dollars for their reserves because an international agreement tells them to—they so largely because they regard it as a stable and liquid currency There needs to be no grand design for the euro as an alternative reserve currency—just for the single currency to be run more competently In some quarters there is a hankering for a return to a system like the gold standard, to tie the hands of governments and central banks It is profoundly misplaced The price of gold has risen very sharply over the past few years Since it often does so at times of high inflation, enthusiasts for a gold standard say it is signaling that central banks are about to create hyperinflation to get out of the debt crisis, and currencies need to be relinked to the gold price to stop them This is nonsense Actual inflation—and, more importantly, expectations of future inflation—are rather low in most of the advanced economies, and particularly the USA Pegging currencies to gold would have meant tightening monetary policy very sharply since 2008—raising interest rates and choking off the money supply at a time when the global financial system was already freezing up This would have been madness The problem is not the international monetary or economic system as such It is that economic policy was run badly within that system in the years leading up to the crisis Financial regulators and central banks were far too nonchalant about the huge amount of borrowing that was going on, and the ever more exotic financial assets that were being created to facilitate it Governments in economies such as the UK and USA watched huge housing booms take off, financed by those incomprehensible financial instruments, and cheered them on their way rather than trying to restrain them (Try running for office in either country on a platform of discouraging young couples from buying houses.) But there was nothing inevitable about making these mistakes Nothing in the global economic system forced the USA to run a hopelessly dispersed regulatory system that allowed financial institutions to escape proper scrutiny No one made the UK allow its mortgage lenders to lend ever more absurd amounts to fuel an already overheated housing market No one compelled a gang of countries in Continental Europe to yoke their disparate economies together in a badly designed currency union that encouraged asset bubbles in the periphery fueled by reckless lending by banks in the center Some argue that the crisis was inevitable because the big emerging markets, particularly China, by persisting in intervening in the foreign exchange markets to hold down their own currencies, were in effect shoveling huge amounts of money at the rich world That money was recycled into cheap lending that fueled the housing and credit boom There is no doubt that those flows of capital created a serious policy challenge But the mistakes of countries on the receiving end were avoidable without changing the system—indeed, some countries have largely avoided them Countries where governments exercised proper control over their banks, such as Canada and Australia, have been much more stable Not a single major Canadian financial institution failed during the crisis And for emerging-market nations themselves, aside from China, though they have suffered the byproduct of the crisis in the USA and Europe, many were relatively better prepared, having built up government budget surpluses and implemented tight financial regulation * * * The current predicament of the world economy, hostage to an involuntary sovereign debt crisis in the eurozone and a voluntary one in the USA, is all the more poignant because it is unnecessary This is a political and ideological crisis, not a technocratic one Authorities could have done, and could still do, a lot to prevent their economies sliding back into recession and financial chaos That they are not doing so is not just because of a lack of political will It is also because significant numbers of voters and politicians have learned precisely the wrong lessons from previous episodes and are determined to make similar mistakes all over again U.S congressmen are not trying to tighten fiscal policy in the face of a shortfall in global demand because the financial markets—or an international system like the gold standard—have forced them to so The UK government is making a similar mistake, cutting government spending too fast in an already weak economy On the contrary, lenders are continuing to buy U.S and UK sovereign debt, thereby shoveling cheap money at the British and American governments and more or less imploring them to borrow American and British policymakers have cut back on spending because of a misguided view that it is needed to restore confidence in their economies Similarly, the authorities in the eurozone are not forcing austerity on the indebted peripheral countries because they are constrained by a global straitjacket or because it is intrinsic to the functioning of a single currency area They are doing so because, wrongly, they think that the eurozone’s problems are mainly crises of profligate governments rather than problems with reckless private lenders and borrowers Critics outside the eurozone often question how committed Germany is, where this wrongheadedness is endemic, to keeping the euro in existence They are wrongly inferring motive from action In reality, Germany is heavily committed to preserving the euro—it just has entirely mistaken ideas about how to so In the face of mistaken and conflicting ideologies on the part of governments, there is a limited amount that any outside agent, including international institutions, can The global institutions created at the end of the Second World War—the International Monetary Fund, the World Trade Organization and the World Bank—have done reasonably well within the confines of their abilities But the IMF, as we have seen, has in effect almost no power over any country unless it is actually borrowing from them The IMF has much more sensible ideas about fiscal policy, which it thinks should remain expansionary, than does much of the U.S Congress, but Congress can safely ignore it The IMF rightly points out the effects of China’s continued manipulation of its exchange rate on global economic imbalances, but Beijing brushes it aside Even in the eurozone bailouts, where it does have direct influence over what borrower countries do, the IMF has found that it cannot exert enough control over its fellow lenders Being a minority partner in the Greek, Irish and Portuguese bailouts means it has too often had to follow what the eurozone governments in charge of those rescues—particularly Germany—have decided to The same is true in areas such as world trade, where most governments have a fairly good idea of where they should be heading but lack the political will to get there The WTO is little more than a negotiating forum, only as good as the member governments of which it is made up Throughout the long, slow death of the Doha round of trade talks, those governments have time and again shown themselves to be horribly lacking in political will and to be in denial about what a perilous state the negotiations are in The USA has lacked the courage to take on the domestic farm lobbies that exert an influence way out of proportion to their economic size The EU repeats multilateralist pieties rather than face up to the failure of the round and plan constructively for the future The rising powers such as India and China have thrown their weight about in a negative way in Doha to block the initiatives of the USA and Europe, but have largely failed to come up with anything constructive to replace them Officials have a habit of looking toward international institutions as though they will solve their problems for them, and blaming them when they not, but member governments need to cede real sovereignty to make those institutions work Global governance begins at home Pronouncements from groupings such as the G20 are aspirations, principles and gestures—they are not decisions Just as with the fiscal rules inside the eurozone, or the aid pledges made at the Gleneagles G8 in 2005, there is no real sanction if G20 promises are broken The G20’s decisions have no real way of affecting the domestic debate within their member countries, and in any case its member countries have fundamental disagreements about the way the world works The G20 shares a weakness with the Doha round—governments launched both of them with a general sense of what they wanted them to be but a woollier view of what they wanted them to and a conspicuous lack of consensus about how they were going to get there At times, and to some extent during the crisis, central banks have provided, as far as they can, a model of what to Ad hoc groups of central banks came together in informal agreements—such as the interest rate cut in October 2008, or a separate agreement to lend each other dollars to ensure liquidity in the global financial system—without the need for a grand new global policy infrastructure Of course, central banks generally not have to get reelected, and so have much more freedom than presidents and finance ministers But still, they provide at least some evidence that cooperation can happen informally in smaller groups—minilateralism rather than multilateralism * * * So who’s in charge here? All too often, no one Since the Second World War, the dominant force in running the global economy has been the USA, but the modern-day Roman Empire is in relative decline As one EU official once frankly admitted to me: “The USA cannot lead, but nothing can happen without the USA.” Too often, governments have been weak-willed or wrong, and international institutions have not had the power to compensate for them The crisis that began with mortgages in American suburbia has now rolled around the world from banks to businesses to governments, threatening to bring decades of economic progress to a shuddering halt And the most intensely frustrating thing of all is that we could choose, if we had the wisdom and the strength, to make it stop A free excerpt from Alan Beattie’s False Economy Franklin Delano Roosevelt, perhaps the greatest of all of America’s presidents, loved stories about himself One of his favorites went like this: During the Great Depression of the 1930s, one Wall Street commuter had a daily morning ritual He would buy the newspaper on the way into the train station He would glance only at the front page and then, without taking another look, hand it back to the newsboy and board the train Eventually, the boy got up the courage to ask him why he read only the front page The commuter explained that he bought it solely for the obituaries The newsboy pointed out that the obituaries were at the back “Boy,” the man said, “the son of a bitch I’m interested in will be on page one.” At the time, Roosevelt was busy trying to save the U.S economy in the face of a colossal global dislocation He was working to preserve the most powerful engine for creating wealth in the history of the world To so, he expanded radically the frontiers of American government And a decade later, at the end of his presidency—and his life—he would help to create the institutions that led a global economy shattered by war and by misguided isolationism back on the road to openness and prosperity And yet he was vilified by some, like that New York commuter, who would continue to benefit from the success that FDR helped to restore Roosevelt was trying to save capitalism from itself, and some of the capitalists were resisting Knowing the right thing to to enrich your nation and the world is hard enough Bringing people with you to get it done is even harder The financial crisis that started in 2007 and exploded across the world was a reminder of how fragile and reversible is the history of human progress But it should also remind us that our future is in our own hands We created this mess and we can get ourselves out of it To so involves confronting a false economy of thought—namely, that our economic future is predestined and that we are helplessly borne along by huge, uncontrollable, impersonal forces To explain the vast complexity of the economic history of the world, there is a rich variety of fatalistic myths on hand: that some economies (the United States, Western Europe) were always going to get rich and that others (Africa) were always going to stay poor; that certain religions are intrinsically bad for growth; that market forces are unstoppable; that the strutting vanguard of globalization cannot be routed and driven into retreat The aim of this book is to explain how and why countries and societies and economies got to where they are today—what made cities the way they are; why corruption destroyed some nations but not others; why the economy that fed the Roman empire is now the world’s biggest importer of grain But it will reject the idea that the present state of those economies, countries, and continents was predetermined Countries have choices, and those choices have substantially determined whether they succeeded or failed Economic history is a challenging thing to explain, and to read, for two reasons First, it involves forcing together disciplines that naturally fall out in different directions History, in its most traditional form, lives on specifics and particularities—what the historian Arnold Toynbee (disapprovingly) called the study of “one damned thing after another.” It stresses the importance of narrative in the way that countries develop, the role played by chance and circumstance, and the influence of important characters and events Economics, by contrast, seeks to extract universal rules from the mess of data that the world provides—providing reliable and testable predictions that economies run in a particular fashion, or that starting off from a particular point, they will end up a particular way Both approaches have risks If history can become the undisciplined accumulation of a random heap of facts, economics risks descending into the pseudoscientific compression of a complex reality into a simplistic set of fixed categorical molds Second, economic history is vulnerable to fatalism Any study that takes as its endpoint the present day is always vulnerable to arguing backward from the conclusion History is so rich in scope and detail that it is always possible to pick a particular constellation out of the galaxy of facts to explain clearly and precisely why things are as they are Yet such reasoning is frequently proven wrong by subsequent history Or it completely fails to explain why other, similar, countries and economies came to a different end If we are going to learn from history rather than just record it, we need to stop explanations from becoming excuses Drill too far down into explanations of how things turned out the way they did and you risk hitting a bedrock of determinism There are plenty of reasons why countries have made mistakes Often their decisions are driven by a particular interest group, or a coalition of them, whose short-term gains stand at odds with the nation’s long-term interests But such interests can be overcome Similar countries facing similar pressures can take meaningfully different decisions Most nations that discover oil and diamonds in their ground suffer as a consequence, but not all Some interest groups have captured countries and dragged them down; some have been resisted Islamic beliefs have proved a drag on certain economies at certain times, but they not have to Some economies have managed to capture great benefits from the globalization of markets in goods and services; some have missed out History is not determined by fate, or by religion, or geology, or hydrology, or national culture It is determined by people This book is not a whimsical set of disconnected stories It is an explanation of how human beings have shaped their own destiny It also shows how decisions being taken now are determining our future Nothing can call back the finger of history to cancel even half a line of what has been written But still we can compose the script for the remainder of our lives, and beyond ABOUT THE AUTHOR Alan Beattie was born in Chester in 1971 He studied history at Oxford and took a master’s degree in economics at Cambridge He worked as an economist at the Bank of England until 1998 and then joined the Financial Times, where he is currently the International Economy editor His first book, False Economy, was a New York Times bestseller and was published in 2009 He lives in Washington Riverhead Books Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, USA Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario M4P 2Y3, Canada (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi–110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, Auckland 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England Copyright © 2012 by Alan Beattie Blog extract in Chapter copyright © Financial Times, 2011 All rights reserved No part of this product may be reproduced, scanned, or distributed in any printed or electronic form without permission Please not participate in or encourage piracy of copyrighted materials in violation of the author’s rights Purchase only authorized editions Published simultaneously in Canada This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services If you require legal advice or other expert assistance, you should seek the services of a competent professional ... excerpt from Alan Beattie s False Economy Introduction How we got here And everything had been going so well In the spring of 2007 the big new things in the world economy were the rise of a social... economics are posing the biggest threat of another worldwide depression since the one that followed the crash of 1929 So what went wrong? In the coming chapters we will see how the system we are supposed... grudge in a bar brawl, waiting till the fracas broke out and then taking a swing at the guy he had always wanted to hit, whether or not the target had had anything to with starting the fight in the