What will it take to get them to stop blowing the recovery with unforced errors?
Christine Lagarde, managing director of the IMF/Reuters
Why have our supranational institutions become such punchlines? That's the question Alan Beattie, the International Economy editor at The Financial Times, asks in his forthcoming e-book, Who's In Charge Here? (which you can, and should, buy here). Whether it's Europe's top officials blithely stumbling from one bailout to the next, or our own voluntarily flirting with default last summer, there's been a deficit of clear thinking among policymakers. Add to that a lack of will among international institutions like the G20, and the results have been tragicomic.
Consider the latest example of financial legerdemain out of Europe. During its most recent meeting, the G20 neared an agreement to create a "firewall" to contain the Euro crisis. Headlines trumpeted a huge, imminent $2 trillion deal. This figure is accurate. Give or take $2 trillion.
What made the new money fictitious? First, it wasn't new. International leaders had been hinting a trillion-dollar firewall for a while. Second, nobody trusts Germany to contribute the funds it has promised, which makes them less likely to put up their own billions. In other words, there was no firewall. The world's greatest powers had agreed, in principle, to agree to something fictitious, at a later date. And that was one of the more successful G20 summits!
So are refurbished global institutions the answer? Beattie offers an emphatic no -- and not just because he'd have to cover these Kafkaesque proceedings for his day job at The Financial Times. He argues that the institutions we have are good enough, but suffer from two deficiencies. First, we're at a historical moment when emerging markets like the so-called BRICS are too big to ignore, and not big enough to lead, which leads to gridlock. More importantly, we haven't been able to shed the wrong ideas.
There's a difference between wrong ideas and bad ideas. A bad idea is bad all of the time. Think tariffs, or gulags. A wrong idea is bad only some of the time. Raising interest rates can curb inflation, but it's bad when you're suffering from too little investment and too much saving. Unfortunately, too many of leaders are stuck in the thralls of obsolete dogmas. Policies like hard money, tax-cutting and deregulation made sense to people who grew up amid the statist and stagflationary 1970s. They worked for a long time. They don't now.
This is both hopeful and depressing. It's frustrating that we're subjecting ourselves to so much needless suffering. But the fact that it is needless means that it could end soon.
Now we just need the G20 to agree on it.