Sunday, November 14, 2010

Fallout From the G-20's Failure

Last week's G-20 meeting in Seoul was a failure. Basically, nothing got done, except for an exchange of volleys of antagonistic pronouncements. The major exporting nations--especially China and Germany--criticized America's profligacy and continued monetary easing. America called for structural change from the exporters, demanding that they boost domestic consumption and depend less on selling in America. U.S. officials scolded China for artificially depressing the value of its currency. The group as a whole issued a statement that muttered something about one for all and all for one. But the casual observer might wonder how many members had their fingers crossed behind their backs when they signed the statement.

As the meeting broke up, France's president, Nicholas Sarkozy, began a one-year term as the leader of the G-20. He immediately announced that the tasks at hand would take more than a year to complete, thereby absolving himself of responsibility for producing results. This inspiring act of leadership made clear that there ain't gonna be much happening soon G-20wise.

Perhaps we shouldn't have expected much. The history of the U.N., and before that the League of Nations, teaches that international organizations are always partial to dysfunction. Nevertheless, some world leaders raised expectations. The potential fallout from the failure isn't pretty.

Cranky Financial Markets. In the last couple of weeks, as it became increasingly clear that the G-20 meeting would be unsuccessful, the financial markets hesitated and then fell. Stocks and bonds are both lower (after anomalously rising together). Commodities have fallen back. This isn't surprising. For the past two years, governments worldwide have been transferring risk and losses from the financial markets to taxpayers. Speculators were probably hoping the G-20 would give them yet another undeserved windfall. But taxpayers in Europe and America have rebelled. Faced with risks that aren't being dumped on innocent bystanders, financial market players have apparently chosen to trim their sails.

Policy Makers, Be Not Proud. One thing is for sure, today's financial and economics policy makers are dead set on avoiding the governmental mistakes of the 1930s, which today's conventional wisdom holds responsible for turning a nasty recession into the Great Depression. Most central bankers and other policy makers seem to think they know what their predecessors did wrong, and how to avoid making the same mistakes. But the failure of the G-20 meeting is disquieting.

The member nations were simply doing what was in their interests. They weren't intent on messing up the world's economy, nor did they want to exacerbate the already rising tensions among them. They simply couldn't levitate themselves above their conflicting national interests to the supranational lovefest that the G-20 is supposed to foster. Each nation's domestic politics dictated its views. With the world economy too small a pie for every nation to get as much as it would like, we're now edging toward an international game of musical chairs.

And that's the way it was in the 1930s as well. None of the central bankers and other policy makers of that era whose mistakes are now so routinely and condescendingly decried meant to create a train wreck. Like their modern counterparts, they consulted with each other and tried to find common ground for constructive action. But they were driven, like today's policy makers, by the interests of their own nations. They looked at the rest of the world from differing frames of reference, each crafted by parochial interests. Yes, they blew it. But they weren't gonzo idiots. They simply did what nations generally do in times of international disagreement.

The G-20's failure last week is a disconcerting reminder of the way things fell apart in the 1930s. The G-20 also failed to find common ground, and their pledge to continue working together seemed like little more than press fodder to divert financial reporters while world leaders caught their flights out of Seoul. Before the Fed, the Treasury Department, and other policy makers in America and elsewhere confidently conclude they know how to avoid the mistakes of the 1930s, they ought to step back and think about what just happened. Human nature hasn't changed in the last 80 years. Even though the Fed is taking a sharply different tack from the Fed of the 1930s, its most recent quantitative easing program may provoke the currency, trade and other economic conflicts among nations that hindered recovery during the 1930s. The doyennes of central banking and fiscal policy should be not proud. Their deep and prolonged studies of the Great Depression, and the advantage of hindsight, may still be insufficient to keep us from falling into the abyss. When a group cannot agree on shared sacrifice for the greater common welfare, divided they will have to make their individual ways in a treacherous world.

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