Suppose you were the secretary of the Treasury of the United States, and you had to decide whether or not to urge a meeting with your six fellow finance ministers -- the now famous Group of Seven -- to administer a shot of confidence to the battered financial markets. Would you do it? Or would you be risking disaster if the G-7 met and came up either empty-handed or with a marginal result?
That's the dilemma facing Treasury Secretary James Baker and his two key colleagues, West German Finance Minister Gerhard Stoltenberg and Japanese Finance Minister Kiichi Miyazawa. It's a tight, tough call -- and as of this writing, it would appear that Baker hasn't made up his mind. America's major partners are in the same quandary. Stoltenberg, for example, wants a G-7 meeting, "provided that nobody expects miracles," says Dietrich von Kiaw, economics aide at the German Embassy here.
That precisely defines the puzzle: a miracle to settle the world's trade imbalances, Third World debt and the dollar problem is not in sight. And so long as expectations are deflated to a realistic level, is it worthwhile having a meeting?
It seems to me that the answer is: yes, there is a very strong case to have a G-7 session, and as soon as possible. If the world's big industrial powers can't get together to discuss mutual problems with the goal of avoiding a global recession, that would be an abject confession of weakness that would shake global confidence.
One of Baker's main contributions has been a vigorous demonstration that the United States -- once unconcerned about the impact of its policies -- now understands global economic interdependence and, therefore, is willing to work with its partners.
So this would be precisely the wrong time -- given all of the uncertainties stemming from the stock-market crash -- to abandon the G-7 format. "We have to develop some joint assessment of what happened to markets in October," says former State Department official Robert Hormats. "We won't know what the economic impact of Oct. 19 was until early next year.
"We shouldn't go into that period without knowing that the finance ministers and central bankers are working and planning together, because the risk of a global turndown is there. So they should try to meet before the end of the year."
Not everybody agrees. New York investment banker Geoffrey Bell believes that unless a new G-7 meeting produces a solid result as opposed to vague discussions, "you run the risk of disappointing people." Bell wouldn't announce flat out that no meeting will take place, but would pursue a delaying tactic.
Stephen Axilrod, Nikko Securities Co. international vice chairman and former top Federal Reserve adviser, argues that if there is to be a G-7 meeting, it will have to generate some result, however small: "Something would have to come out of it."
Axilrod would have the G-7 agree to try to stabilize the dollar at the low end of the range of expectations -- say, at 125 to 130 yen to the dollar -- and to promise to participate actively in exchange-market intervention to protect that level. But clearly, any effort to stabilize the dollar would have to involve a good deal of flexibility, involving wide zones, rather than specific targets.
As an earnest of good intentions, Axilrod would opt for a Treasury sale of bonds denominated in yen, a tip of the hat to the Japanese, who stand to lose a lot of money if the dollar moves lower. (Hormats thinks such a commitment should be reserved as a last-ditch defense of the dollar and would be premature at the moment.)
The knotty political problem for Baker, Stoltenberg and Miyazawa is that the Big Three powers have now put on the table all of the fiscal and monetary measures that can easily be contrived to help stabilize the major currencies: the U.S. deficit-reduction package's outer limits are known; the modest German fiscal and monetary stimulants are all that Stoltenberg will promise; and Japan's economy needs no additional stimulus. (The recent growth rate was 8.4 percent in the third quarter.)
Although the other powers would like a commitment from the United States to raise interest rates to support the dollar, it is clear that Baker and Federal Reserve Board Chairman Alan Greenspan are not ready to risk an American economic downturn that could be touched off with tight money, especially just ahead of next year's presidential election.
So, without a dramatic agenda, what could a G-7 meeting accomplish? Might the markets declare it a failure? Maybe: it depends on what they will have been expecting. Played the right way, a G-7 meeting could provide assurance that governments don't consider themselves impotent. The G-7 -- and the smaller G-5 -- has been a useful framework for U.S. leadership. As Hormats suggests, Baker ought to play to that strength.
Perhaps above all, a meeting could provide that essential "photo opportunity," a shot of the seven finance ministers and their central bankers sitting at the conference table. Somebody -- at least -- will be seen minding the store.