So in yesterday’s late summer book recommendations, I did not include my own book that came out in June. That was mostly because even I was worried about going overboard in self-promotion. For an author, any time your book gets favorable reviews in the New York Times and Financial Times (twice!) is really good week.
That said, I did want to note some of the more trenchant criticisms of the book. To varying degrees, both Alan Beattie in the Financial Times and Jonathan Kirshner in the Boston Review raised three questions in their reviews: whether it was the system that worked or just the U.S. Federal Reserve, whether the system really worked all that well, and whether the system was worth preserving anyway.
On the first point, Kirshner notes:
What, then, accounts for the relative success of public policy? Drezner argues persuasively that the Federal Reserve’s decision to make prodigious currency swaps available to European financial institutions—that is, to provide emergency credit to foreign central banks—was crucial. This assessment is shared by many, including Eric Helleiner in his new book The Status Quo Crisis: Global Financial Governance After the 2008 Financial Meltdown. Helleiner also views the “large-scale lending by the U.S. Federal Reserve to foreign central banks” as crucial in containing the crisis and far more significant than any actions taken by the IMF or the G20. Similarly, Drezner notes correctly that without the Troubled Asset Relief Program (TARP), the massive U.S. government bailout of the banks, the crisis would have been much worse. But both of these remedies were improvisations. Ad hoc emergency measures trumped international institutions.
What Kirshner says is true, but it’s not exactly the whole truth. First, of course these measures were ad hoc — it was an emergency, after all. If it hadn’t been an emergency, then the 2008 financial crisis would have been relegated to being a second-tier episode like, say, Mexico’s financial crisis in 1995. But where Kirshner sees improvisation as a sign of systemic failure, I see it as resiliency and adaptability n response to shocks. Second, there was a surprising degree of central bank cooperation in the immediate aftermath of the crisis, as Neil Irwin documented in “The Alchemists.” That counts as being systemic rather than merely U.S. hegemony. Third, and most importantly, there was substantive cooperation in areas beyond the financial realm, such as keeping trade relatively unfettered and combating piracy. So yes, the Fed mattered a lot, but it wasn’t the only thing that mattered.
As to whether the system really worked as well as I claim, Beattie notes:
The truth, as both of us I think admit, is that the record of global governance is patchy, and its results even now uncertain. An optimist such as Drezner can point to the revised Basel III capital accords as a successful exercise in international policy making which faced down fierce lobbying from the banking industry; a pessimist can note the uncertainty over whether they will prevent renewed financial crisis. An optimist can see a growing global economy and low financial volatility; a pessimist can focus on the eurozone, where wrong-headed ideology is threatening prolonged stagnation – and produce the trump card of unchecked climate change, a global governance disaster likely to swamp all others.
This is a valid point. Part of the reason I wrote an optimistic book is that I went into the project as a sincere pessimist about global governance — and as I started doing the research, I concluded that the more interesting story was what went right rather than what went wrong. But as I acknowledged in the conclusion, it’s not like I have any great faith that the system will tackle climate change particularly well. But when Beattie and others have already done excellent jobs of writing the “political economy of the half-empty glass” book, there is value added in writing about the glass also being half-full.
The most significant critique is the question of whether the system is worth saving in the first place. As Kirshner notes:
Even though Drezner is right that the recession could have easily been the Great Depression 2.0, and the escape from this outcome means something important went right, his formulation omits much that went wrong. The global financial crisis caused the great recession, and aspects of “the system” that underlie the crisis persist. Former Federal Reserve Vice Chairman Alan Blinder warns that proposed reforms must be seen through; we should not forget, he says, that “it was shameful business practices, coupled with regulatory neglect, that got us into this mess.” For Helleiner, if the status quo endures, “it is a virtual certainty that the global financial system would experience further global financial crises, with all their tremendous economic and social costs.”
I guess my answer is that I don’t think any system can sustainably generate high rates of economic growth and low levels of financial volatility (unless that system has been preceded by a crippling global depression and massive world war). As I wrote in the introduction to The System Worked:
Capitalist systems are inherently prone to crisis, which means that open global economies are inherently prone to global crises. In theory, the best forms of global economic governance forestall such crises. In practice, no global economic order to date permits the comprehensive management of key policy variables. Pragmatically, global economic governance helps to contain and repair the damage as quickly as possible after such crises. These repairs can include reforming the rules of cross-border exchange, ameliorating macroeconomic downturns, and establishing guidelines for national regulations.
If I’m more optimistic than Beattie about what happened after 2008, I think I’m more pessimistic than Kirshner about the ability of any system to prevent the crises that are endemic to capitalism. But this is a debate I look forward to having once Kirshner’s own book on the 2008 financial crisis comes out.
Enjoy your weekend!! Read a book!!