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.
This debate can be summed up as the argument between monetary economist John Taylor (Taylor of the "Taylor rule") of Stanford's Hoover Institution (full disclosure, with which I'm also affiliated) in a famous WSJ op-ed and a now widely read book, Getting Off Track (a 90 page read which you can get in hardback for $10 at Amazon; I know I've mentioned it before, adv.)), and Alan Greenspan, also responding in the WSJ as well as in his famously contrite Congressional testimony. The debate comes down to Taylor saying that the Fed goofed and Greenspan saying, no, there was a global savings glut about which the Fed could do not much. Mandelson comes down firmly on the side of Greenspan, with no suggestion that central bank policy might have served as a causally-necessary mediator for the transmission of the savings glut into easy credit, as at least an important part of the explanation of What Went Wrong.
This substantive commitment to ultimate causes (in one way explicit but in another way quite opaque, because it does not even acknowledge to the casual reader the debate of which it is one side) matters a great deal, as it turns out, to Mandelson's policy prescriptions. Consistent with the primacy of the global savings imbalance thesis, and conversely the unmentioned alternative primary explanation of central bank policy failures, Mandelson calls for a global regulator to address the systemic issue - not systemic risk, in the sense currently discussed, but instead global savings imbalances. He indirectly absolves the central bankers - let me stress, I am not interested in crucifying them or demonizing them, but the question of their mistakes directly poses the question of whether they plausibly can do that which Mandelson puts to them (emphasis added):
The stability or otherwise of the global economy is the sum of sovereign national macroeconomic policies. There is no mechanism to mediate between those policies or insist on action that would counter systemic risk. Similarly, national financial regulators have a clear enough remit for national market stability, but financial markets are now regional and global. Nobody was asleep at the wheel of globalization because there is no wheel to speak of.
Taylor would say that central bankers were asleep at the wheel, in failing, among other things, to follow the Taylor rule. Ilya would presumably say that it was not so much being asleep as that there is no good reason to think that central bankers are especially good at accomplishing this task. I would say that they were asleep at the wheel, they probably are not great at accomplishing this task, but that there are certain aspects of it that are best performed by regulatory actors, because expertise aside, there is a question of public fiduciary status for the market-establishing rules, rather than market-outcome rules. I would say those actors have to be national in character. Mandelson, however, insists that the global nature of what he sees as being the problem - a system that allows imbalances to develop - requires a global regulator, that is, global governance:
If these imbalances are to be unwound in an orderly way, China will have to build a social welfare system that reduces huge levels of precautionary saving and thus boost domestic demand. It will need to continue to move towards greater currency flexibility. The export-led growth models of other surplus economies such as Germany and Japan are also both going to have to give way to greater domestic demand. Both consumers and governments in the U.S. and Britain are going to have to repair their balance sheets. We are going to have to save and invest more and export more.
Is any of this actually possible? Is it possible to preserve the benefits of open trade and an open global economy, addressing macroeconomic risk while totally respecting the choices of sovereign governments?
The answer has to be: not really. No government in the global economy, and certainly not economies on the scale of the U.S., China, Japan and the European Union, can claim a prerogative over domestic action that entirely ignores the systemic affects of its policies. The only way forward is a totally renovated approach to international coordination of economic policy.
An odd contradiction emerges tacitly in the above passage. The op-ed speaks of "global governance." But it then frames policy as a matter of "international coordination." Later in the op-ed Mandelson again refers to this global governance as consisting of "much greater global coordination." Is there a difference here worth mentioning? Well, governance is one of those terms, like multilateral, that can be used in strategically ambiguous ways - as noted above, it can be used to mean one thing to one player and another thing to another.
Put simply, what Mandelson seems to think is required is "global governance" in some supra-national sense, some regulator with power over all the others. But what he proposes is a different creature entirely - something that seems to indicate the "global government regulators network" model that Anne-Marie Slaughter has made famous (read a review nearly as long as the book, here), but ultimately a creature of coordination in which "peer pressure" on the model of trade regimes "is going to be vital."
We are now back at a familiar conundrum in international economic law - networks without independent enforcement powers, subject to the familiar game theory problems of free riding, insincere promising, and defection. It is true, certainly, that such arrangements have been (on my reckoning) remarkably successful at finding ways to keep players from defecting in the large scale trade regimes (although no one should be too sanguine about the erosion of free trade in the current global recession). Sophisticated new game theorists of international economic law have been elaborating ways in which cooperation games can work in these arenas, moreover, and although I do not think they have much application in such areas as international security, I think they have promise in trade and economic relations. David Zaring, Kal Raustiala, and Pierre-Hugues Verdier, among others, have all written very interesting and important academic work on the promises and limits of networked government regulators in the global economy.
That said, there is an important - to my mind fatal - elision here, the oft-fatal elision seemingly [sorry Eugene!] endemic to international law discussions in this as in other areas in which governance, multilateralism, engagement, and such activities are at issue: you seek a way to bridge the chasm but the only way to do so is by reach to a concept, a term, a rubric that allows you to assert two things at once, often to different audiences. We need global governance to, well, govern things; we need global governance to, well, coordinate things. They are not the same thing, and the claims are addressed frequently to different constituencies whose political support is important. Eventually the inconsistency is exposed and you fall into the depths, because it is not merely a matter of terminology, but a term that one has used to signify two quite distinct courses of action.
These distinct courses of action are dependent upon distinct bases of authority, legitimacy, and power. Mistaking one for the other is, once again, politically attractive when trying to formulate a workable policy at the front end, but eventually causes one to fall into the abyss when the kind of action required by policy depends upon an actor lacking the kind of political authority, legitimacy, and power to do so: networks are not truly governing bodies, which was the point of creating them as networks, and most of the time that becomes especially true in a crisis. There are some important exceptions - one can point to the trade regimes, and one can point to the prestige of an otherwise powerless WHO in bringing about a globally coordinated response to pandemic disease. (So far; the day is still young, and WHO has not yet been tested in a true crisis in which free riding became a matter of life and death for large numbers of people to whom sovereigns are accountable.)
So far I have questioned Mandelson's explanation of the crisis, or at least questioned his failure to acknowledge the rest of the substantive debate, and suggested that his substantive commitment largely determines his preferred policy or, more precisely, his preferred actor for policy. I have also questioned the gap between the coercive strength of governance that his substantive take on the problem might be understood to imply, and the merely coordinating body and activity that, presumably taking account of political reality, actually proposes. But now consider what specific global body Mandelson thinks should take on this role, and on what basis. It is, to say the least, remarkable:
We need to strengthen and depoliticize the International Monetary Fund and give it a new surveillance role that covers all aspects of systemic risk. It needs to be mandated to make recommendations on weaknesses in the system, and countries should be obliged to take these recommendations extremely seriously.
The IMF? Mandelson makes no mention of another debated question over the reason for the global savings glut. He implies that it is on account of the lack of social security, pensions, and such public structures in Asia and China in particular that force high private savings rates and dampen consumption - a huge factor I do not doubt in the least. However, he fails to mention that view that the lesson Asian governments took away from the Asian crisis of the late 1990s was ... never trust the IMF, and as government policy - not private savings policy - hold so much in governmental reserves that the currency markets can never take you on. Whether that explanation is right or wrong, or how important it is as an explanation - I myself am agnostic - it cannot be left aside in assessing institutions that might provide regulatory oversight. Ilya's point again - if it is the case that the IMF got it massively wrong in the 1990s, not just for the economies of Asia way back when, but in ways that have substantially contributed to global misalignments of savings today, on what grounds does one suggest that it or any similar institution has any special ability to do a better job now?
The argument that the IMF, or really any public body, is the right body to do it depends not only on the assumption of expertise - that is, that as a fiduciary it is capable of exercising a substantively meaningful duty of care on this topic - but also on the assumption that it is a universal body that owes, and will exhibit, a duty of loyalty to everyone. Ilya has challenged the first, expertise or duty of care, assumption. Let me also challenge the second, universal or duty of loyalty, assumption.
Another example of strategic ambiguity is the presumed identification of "universal" with "international" or "global." The hidden assumption is that the global and international are universal, and to the extent they have "interests," those interests are by definition not parochial, partial, merely national. Whereas that assumption leaves aside the possibility both that beneath the language of universality lies an entire web of interests and parochialisms, as public choice theory would teach us; and, moreover, the possibility that the "international" and the "global" have their own set of interests, the interests of those who spend their time in the jet-stream between New York and Geneva.
We thus cannot assume that just because it is the IMF - international organization with a heroically worded charter, etc., etc. - that it has the interests of the world's people (whatever that abstraction might conceivably mean) at heart. Indeed, effective and expert policy might depend upon the organization not being "representative" of the people whose interests it is supposed to universalize. And this goes to the heart of a separate, weltering debate that is starting to intersect with the global financial regulation debate: should the IMF and the World Bank be reformed so as to give greater, perhaps even proportionate, governance say to those affected by the institutions' policies - rather than leaving it in the hands, as a shareholding institution, of the countries that provide the funding?
Whatever modest effectiveness, if any, the IMF and the World Bank have had in their decades of existence is owed in considerable part, in my estimation, to the fact that the donors call the tune and have board seats in proportion to their funding. Any move to alter that introduces the usual problem of moral hazard, which is to say, in UN terms, it risks turning governance of these organizations into the General Assembly, in which the 90% or so of the money spent by 190 or so countries is provided by about 10 of them. But this puts me on the wrong side of the powerful movement to reform these institutions.
And this only touches on the many deep governance and political and mission issues that underlie the IMF at this moment. (One of those, which I do not take a position on here, though I am not hostile to it, is the new funding currently before Congress for the IMF to provide it with funds to serve as the receiver, as it were, for basket case second-world economies such as Latvia; there are virtues in this plan, but in that case, one needs to decide what one thought of the IMF's expertise, judgment, and policies in the Asian crisis.)
Mandelson implicitly recognizes there is a gap here. So he says, remarkably, that we need to "depoliticize" the IMF to enable to serve in this new role even as we "strengthen" it. Leave aside the controversies that faced the IMF as matters of governance before the financial crisis arose - all of them involved, however, not depoliticization, but questions of governance that would inevitably make it ever more political. Inevitably and, one wants to, of course. Mandelson's is a genuinely astounding formulation - Mandelson proposes global governance, and proposes the IMF, and then proposes that it be somehow depoliticized: what is governance of the political economy if not political? After all, the strongest proposal for the IMF yet - one that Mandelson does not broach and it is not clear what he thinks of it - is that the IMF, through its special drawing rights, become the world's central banker. A worse idea, from the standpoint of fiat money and moral hazard, is hard to imagine, but that has been offered as a proposal, and not merely by the unserious.
Mandelson limits himself to proposing the IMF have a "surveillance" role - not necessarily a bad idea, on its own - and the power to make recommendations that countries must take "extremely seriously." We know that when diplomats say "extremely seriously," they typically mean nothing of the kind. That is, of course, the likely realist outcome of this kind of attempt to bridge multiple chasms. But more interesting than the usual problems that the facts of the real world pose for ideal solutions is that Mandelson insists, right to the end, of the strategic ambiguity of actual "governance" and "mere" coordination.
I've said that you can't finally have it both ways. But the temptation is to go after the more modest version in the hopes of converting it into the stronger version down the road. (I've written about this as a problem for the UN.) That's finally how the inconsistency is overcome - governance will mean mere coordination today, but real governance tomorrow. Yet the two remain different ideas, different in kind and not just degree, dependent upon different sources, as said above, of authority, legitimacy, and power, and the biggest risk is that you warp out of shape the modestly practical possibilities of "mere" coordination by a body such as the IMF because you are holding out for what you hope it might become as a body of true "governance" in the future. It is holding out for this possibility that seems to me to explain Mandelson's insistence on using strategically ambiguous language. It allows him to offer as consistent a project that is, finally, inconsistent.
Related Posts (on one page):
- Global Governance or Governmental Network Coordination for Global Financial Regulation?
- A Flaw in George Soros' Case for Increased Government Regulation of the Financial System:
- Soros on Principles of Financial Regulation and Efficient Market Hypothesis:
- Thomas Sowell on Public Ignorance and the Financial Crisis:
- Political Ignorance and Blaming "the Jews" for the Economic Crisis: