By Niall Ferguson
Monday, November 17, 2008
Future historians, I suspect, will look back on Saturday's anticlimactic G-20 gathering in Washington less as Bretton Woods 2.0 and more as a rerun of the London Economic Conference of 1933. Back then, representatives of 66 nations completely failed to agree on a concerted international response to the Great Depression. The fault lay mainly with the newly elected U.S. president, Franklin D. Roosevelt, who vetoed European proposals for currency stabilization.
This time around, it wasn't the newly elected Democrat but the outgoing Republican who wielded the veto. Even before his counterparts reached Washington, President Bush made it clear that recent events had done nothing to diminish his faith in free markets and minimalist regulation. Over the weekend, it was the United States that resisted European calls for a new international regulatory body, opposed significant redefinition of the International Monetary Fund's role and showed no interest in the idea of a global stimulus package.
A real opportunity has been missed.
Just as happened in the 1930s, what began as an American banking panic has now escalated into a global economic crisis. And just as happened in the 1930s, a lack of international coordination has the potential to turn a recession into a deep and protracted depression.
The problem that seems scarcely to have been discussed over the weekend is that each national government is currently responding to the crisis with its own monetary and fiscal measures. Some central banks have already slashed official rates to close to zero. Some treasuries have already launched multibillion-dollar bailouts and stimulus packages. The devil lies in the different timing and magnitudes of these measures. The absence of coordination makes it almost inevitable that we will see rising volatility in global foreign exchange and bond markets, as investors react to each fresh national initiative. The results could be nearly as disruptive as the protectionist measures adopted by national governments during the Depression. Now, as then, a policy of "every man for himself" would be lethal.
At the heart of this crisis is the huge imbalance between the United States, with its current account deficit in excess of 1 percent of world gross domestic product, and the surplus countries that finance it: the oil exporters, Japan and emerging Asia. Of these, the relationship between China and America has become the crucial one. More than anything else, it has been China's strategy of dollar reserve accumulation that has financed America's debt habit. Chinese savings were a key reason U.S. long-term interest rates stayed low and the borrowing binge kept going. Now that the age of leverage is over, "Chimerica" -- the partnership between the big saver and the big spender -- is key.
In essence, we need the Chinese to be supportive of U.S. monetary easing and fiscal stimulus by doing more of the same themselves. There needs to be agreement on a gradual reduction of the Chimerican imbalance via increased U.S. exports and increased Chinese imports. The alternative -- a sudden reduction of the imbalance via lower U.S. imports and lower Chinese exports -- would be horrible.
There also needs to be an agreement to avoid a rout in the dollar market and the bond market, which is what will happen if the Chinese stop buying U.S. government bonds, the amount of which is now set to increase massively.
The alternative to such a Chimerican deal is for the Chinese to turn inward, devoting their energies to "market socialism in one country," increasing the domestic consumption of Chinese products and turning away from trade as the engine of growth.
Memo to President-elect Barack Obama: Don't wait until April for the next G-20 summit. Call a meeting of the Chimerican G-2 for the day after your inaugural. Don't wait for China to call its own meeting of a new "G-1" in Beijing.
Niall Ferguson, a professor of history at Harvard University, is the author most recently of "The Ascent of Money: A Financial History of the World."