A DECADE or so ago, I often dined with a journalist and his current ladyfriend, a young financial writer. He liked to drink wine. She liked to discuss economics. Along about the third bottle of bordeaux, he would grin wickedly and challenge her to explain Eurodollars.
These two books not only explain Eurodollars and similar esoteric financial instruments; they usefully challenge the giddy global money-changing that is so fashionable today. Standard conservative economics celebrates turbulence as innovation. The conservative version of what went wrong with the economy in the l970s tells a story of bloated governments stifling productive entrepreneurs with deadweight regulation; this story set the ideological stage for resurgent laissez-faire.
The authors of these succinct critiques tell an altogether different story. They invite the reader to consider the entire international economy as a system -- one whose private actors have lately outflanked the public body of institutions and rules that make a stable private economy possible. Viewed in this light, the reversion to laissez-faire promises not solutions, but deeper problems. And the economic maladies of the 1970s and '80s are less the result of convergent welfare-state policies, than of the universal divergence between a turbulent international economy and weakened governmental stabilizers.
Howard Wachtel's ostensible subject is the breakdown of the postwar economic order, most notably the system of monetary stability created at Bretton Woods. His money mandarins are the supranational bankers whose global financial innovations overwhelm the stabilizing mechanisms of the nation-state. His broader theme is the uneasy relationship between the State and the Market in a period when virtually all of the new international institutions are market institutions -- supranational banks, money markets, corporations, trading empires -- while there has been little compensatory institution-building by governments across national boundaries.
Wachtel, who teaches economics at the American University, contends that this imbalance has reached a point where nations are threatened with a loss of their policy-making sovereignty, while the private economy faces an escalating instability born of its own excesses. He writes: "The supra-national economy, by definition, erodes the importance of the economic role of the nation-state, while elevating the influence of private economic values."
Whether or not you sympathize with the perspective, Wachtel is worth reading. Not the least of the book's virtues is an ability to demystify economics, in concise English prose. Wachtel explains the erosion of the postwar "Pax Americana Economica" in the best nontechnical 60 pages I have read on the subject; his discussion of the rise of a supranational deregulated order is nearly as good, though his chapter on multinational corporations adds little that is new.
Wachtel's one weakness is his recurring rhetorical habit of placing a punch line in the mouth of an unimpeachable establishment source, often dredging up quotes so unremarkable that they are not worth quoting. For example, from Business Week, we learn that "The new banking order tremendously increases the efficiency of moving cash around the globe . . ." Well, of course it does. But a quote should not be dressed up as a primary source, particularly when the writer makes the point more cogently in his own words. This stylistic tic, however, is a minor blemish, and Wachtel's book is a superb primer on the perils of deregulated globalism. IF YOU CARE to delve more deeply into the subject of Third World debt (which Wachtel treats briefly), Lever and Huhne's Debt and Danger is a small masterpiece, technically precise yet lucid enough for the lay reader. Lever, a former financial adviser to British Labor prime ministers, and Huhne, economics editor of The Guardian, are eclectically Keynesian in their perspective. They share Wachtel's concern that substitution of private banking for public internationalism of the Marshall Plan/World Bank variety seeds both austerity and calamitous instability.
Lever and Huhne locate the genesis of the debt mess in the cowardice of Western governments after OPEC quadrupled the price of oil. The major industrial nations were all too happy to let their private banks "recycle petrodollars," as the phrase went. That meant that oil-producing nations could stash their inflated profits in Western banks, which in turn lent the money to non-oil producing nations of the Third World. In the short run everybody gained. The oil producers made the banks bear the risks of default. The poor countries could maintain their standard of living. And the industrial nations got a debt-driven recovery of sorts, to compensate for the depressive effect of the oil shock.
But when times turned bad and real interest rates rose, the banks suddenly turned risk-averse. Poor nations were put in a financial vise where they were made to pay out more money to Western banks than the banks supplied. This reverse flow of capital out of the Third World, "is a perversion of common sense and sound economics," say the authors. For the system as a whole, it creates a kind of prisoner's dilemma. Each bank, acting rationally, contributes to global austerity, leaving everyone poorer and the system more precarious. For the debtor nations, the price of bank-enforced austerity has been impoverishment, worsened income distribution, and political instability. Between l981 and l984, the authors observe, real per capita income in Latin America declined 8.9 percent.
Private banks, argue Lever and Huhne, are the wrong institutions to dominate development finance: "Today's crisis stems above all from the decision to push private finance into fulfilling public purposes for which it was profoundly ill suited." Although the current crisis is seen as a crisis of debt repayment, that view misses the point, say Lever and Huhne. "The question is not merely how to give the banks' balance sheets some semblance of financial rectitude but also how to ensure new money flows to the third world."
In a concluding chapter, titled "Towards Reform," the authors, with Wachtel, urge "re-regulation" of private international banking, as well as new long-term, guaranteed, low-interest development credits. Not addressed is the question of loan supervision -- how to assure that Third World loans bear fruit. On that score, Lever and Huhne are all too eloquent in documenting how the Third World loans of the easy money era leaked back into Swiss or American private bank accounts, but less persuasive in explaining how the next round of Third World development finance will be different.
Both books are important antidotes to the claims that the only necessary remedy is more private financial activity and more deregulation. As the recent activity of Treasury Secretary James Baker suggests, the pendulum has already begun to swing back from ultra laissez faire to institution building. It is encouraging to see first-class intellectual work again making the case for financial stability and public statecraft, of the sort that served the postwar era so well.
Robert Kuttner, economics correspondent of The New Republic, is the author of "The Economic Illusion: False Choices Between Prosperity and Social Justice."