G-20 Thinking: In the Medium Run We Are All Retired

It looks like the G-20 on Friday will emphasize its new “framework” for curing macroeconomic imbalances, rather than any substantive measures to regulate banks, derivatives, or any other primary cause of the 2008–2009 financial crisis.

This is appealing to the G-20 leaders because their call to “rebalance” global growth will involve no immediate action and no changes in policy—other than in the “medium run” (watch for this phrase in the communiqué).

When exactly is the medium run?

That’s an easy one: it’s always just around the corner. Not today, of course; that would be short run. And not in 20 years; that’s the long run.

The medium run is perhaps in three or five years. It feels close enough not to be meaningless at the press conference, but it’s not close enough to be meaningful.

And—here’s the key—whatever you agree on for the medium-term, you know that the world will change, quite dramatically, two or three times before you get there. At that point you can say, quite reasonably: But the conditions today are quite different from what they were when we made this medium-term commitment, so we really need to rethink it.

Of course, having the IMF report back every year on progress towards these medium-term goals is equally pointless. This is what the IMF has been doing since 2006 and what it was preparing diligently to do just as the global crisis broke out.

Expectations for the G-20 summit are low. But unless and until the leaders take any steps to address our pressing financial sector vulnerabilities, the summit is not worth its carbon footprint.

Remember what the financial experts said at the previous summit (April) and the one before that (November): We can’t fix the financial system in the height of the crisis. True enough, although the opportunity to break the power of the largest players was squandered in both the United States and Europe.

So, now the crisis is over—as the G-20 heads of government will affirm—where are their efforts to fix the financial system? Please don’t tell me, “that’s what we’re doing, in the medium-term.”

Also posted on Simon Johnson’s blog, Baseline Scenario. The following were posted previously.

You Cannot Be Serious (September 21)

According to the WSJ this morning (top of p.A1), the United States is pushing hard for the G-20 to adopt and implement a “Framework for Sustainable and Balanced Growth,” which would amount to the United States saving more, China saving less, and Europe “making structural changes to boost business investment” (and presumably some homework for Japan and the oil exporters, although that is not stressed in the article).

This is pointless rhetoric, for three reasons.

  1. Such an approach has been tried before, mostly recently in the Multilateral Consultation, run by the IMF. This achieved little, as the WSJ article points out.
  2. This approach will always be fruitless unless and until you can put pressure on surplus countries to appreciate their exchange rates. But the IMF, with US connivance, just punted on this exact point—letting China off the hook. Tell me exactly, in detail, how the administration’s proposal would change this, particularly with Mr. Geithner and Ms. Clinton so keen to be deferential to Chinese official buyers of US government securities.
  3. Where is the evidence that this kind of “imbalance” had even a tangential effect on the build up of vulnerabilities that led to the global financial crisis of 2008-2009? I understand the theoretical argument that current account imbalances could play a role in a US-based/dollar crisis, but remember: interest rates were low in 2002-2006 because of Alan Greenspan (who controlled short-term dollar interest rates); the international capital flows that sought out crazy investments came from Western Europe, which was not a significant net exporter of capital (i.e., a balanced current account is consistent with destabilizing gross flows of capital); and the crisis, when it came, was associated with appreciation—not depreciation—of the dollar.

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