Ken Rogoff, an amazing prognosticator thus far and an economist with a great overview of the history of financial crises, highlights the key debate about the future of the global currency system. Basically, the options come down to the following:
(1) A more conservative revision of today’s system.
Above all, regulators would force financiers to hold more cash on hand to cover their own bets, and not rely so much on taxpayers as a backstop. Geithner also aims to make financial deals simpler and easier to evaluate, so that boards, regulators, and investors can better assess the risks they face
The US proposals…. would make universal banking far harder, in part because they aim to ring-fence depository institutions that pose a “systemic risk” to the financial system. Such changes put pressure on universal banks to abandon riskier investment-bank activities in order to operate more freely.
(2) Everything else.
It is #2 that is scary, as Rogoff highlights, because no one has really come up with a better alternative. People like China’s system, but forget that it requires a massive number of people to oversave because the state’s social support structures (retirement, health care, education) are inadequate. Rogoff runs through the other options as follows:
China’s approach represents a huge disguised tax on savers, who are paid only a pittance in interest on their deposits. This allows state-controlled banks to lend at subsidized interest rates to favored firms and sectors.
In India, financial repression is used as a means to marshal captive savings to help finance massive government debts at far lower interest rates than would prevail in a liberalized market.
A big part of Russia’s current problems stems from its ill-functioning banking system. Many borrowers, unable to get funding on reasonable terms domestically, were forced to take hard-currency loans from abroad, creating disastrous burdens when the ruble collapsed.
Europe wants to preserve its universal banking model, with banks that serve a broad range of functions, ranging from taking deposits to making small commercial loans to high-level investment-banking activities.
No easy answers. Sadly, concerns over sovereignty will derail a lot of the discussions about international financial regulators and/or reserve currencies. But let’s not forget the stakes fr the U.S.
The stakes in the debate over international financial reform are huge. The dollar’s role at the center of the global financial system gives the US the ability to raise vast sums of capital without unduly perturbing its economy. Indeed, former US President George W. Bush cut taxes at the same time that he invaded Iraq. However dubious Bush’s actions may have been on both counts, interest rates on US public debt actually fell.
More fundamentally, the US role at the center of the global financial system gives tremendous power to US courts, regulators, and politicians over global investment throughout the world. That is why ongoing dysfunction in the US financial system has helped to fuel such a deep global recession.
Posted by econophile 
Posted by econophile 
Posted by econophile 
