Global Governance or Governmental Network Coordination for Global Financial Regulation?

Peter Mandelson, currently Business Secretary in the UK government of Gordon Brown and formerly EU trade commissioner, has an op-ed in today's WSJ (June 19, 2009), "We Need More Global Governance: The Crisis Reveals the Weakness of Nation-Based Regulation," (might be behind subscriber wall). (Reader warning: this goes on for a while.)

This piece offers a striking example of the intersection of substantive views of monetary policy affecting one's policy views of what regulatory reform (in this case global regulatory reform) should mean. The explanatory gap I point out below in the piece goes beyond criticism about both the weakness of ideas of global governance, or the careful exploitation of strategic ambiguities in what the term is supposed to mean (one thing to me to get me on board, another thing to you to get you on board). It points in the direction that Ilya raised in his last post on this, to say that if you have one substantive economic view of the crisis, then you can propose that public governance bureaucracies can improve the situation; but if you have another, you have reasons to reach exactly the opposite conclusion.

Mandelson starts by offering a carefully phrased account of how the global financial crisis, next global recession, came about. He liberally spreads around the blame, without putting any of it on identifiable actors, all very diplomatically. However, his assessment of What Went Wrong finally lands on a very specific contention:

[W]hat enabled the banking crisis to happen was a structural imbalance in the growth model of the global economy over the last two decades.

That model has produced unprecedented global growth, but it also developed a serious weakness at its center. Unless we address that weakness, any other counter-recessionary strategy is palliative at best. The risk is that as the global economy slowly returns to growth, the urgency to address this fundamental problem will recede.

Reduced to its crudest form the problem was this: Credit was too cheap in the developed world. It was kept cheap by a number of factors. The commitment of China to an export-led growth model, matched by a willingness from rich-world consumers to keep spending, created persistent surpluses in China in particular.

Those surpluses were invested in developed-world debt, particularly the U.S., pushing down interest rates. That encouraged investors to look for riskier and riskier investments to increase their yield. It also encouraged people to buy houses they couldn't afford with the help of people who probably shouldn't have lent them the money in the first place. That debt was sold around the world. The end of the housing bubble revealed the risk in the system.

Note that the article signally fails to mention the policy of central bank policy, and in particular Fed policy, under Greenspan and later Bernanke, having allowed the money supply to rise too high and allowing interest rates to remain too low. When I first read the piece, I assumed that this was mere diplomacy on Mandelson's part. But, as it happens, the final substantive interpretation that Mandelson gives for ultimate causes takes an unequivocal position in the sharp debate over the role that monetary policy and central bank policy played in allowing the bubble to develop, and that in turn impacts his policy views. And in ways that draw in Ilya's central contention from his last post directly.