The Way Forward for Global Financial Policy

Financial globalization is exploding. Yet, as the world’s leading finance ministers and central bankers convene in Washington this month for the semi-annual International Monetary Fund board meetings, policy paralysis continues. There is simply no agreement on how to address glaring problems such as America’s increasingly fragile trade deficit, or financial dysfunction in a number of emerging markets.

This paralysis has three layers. First, rich countries are deeply reluctant to embrace any collective plan that might impinge on their own domestic policy maneuvers. The United States is the worst offender. US Treasury secretaries have always loved to lecture their foreign colleagues on America’s economic perfection, and why every country should seek to emulate it. Never mind that this logic is now in danger of unraveling along with the US housing market; Treasury Secretary Hank Paulson will stick to it. But the fact that the US looks set to borrow almost $900 billion this year from the rest of the world is hardly a sign of US strength and foreign weakness.

It is difficult to summarize the cacophony of European voices so succinctly. The French are deeply ambivalent about globalization, as if it were yet another invading force. The British have nearly the opposite perspective. Nevertheless, Europeans generally agree that their societies produce the best lifestyles, even if their economies are less efficient than America’s in a Darwinian sense. Thus, European finance ministers, too, will not be keen to admit any need for major policy changes to deal with risks from financial globalization.

The Japanese typically try to keep quiet. As huge winners from globalization, they want to avoid criticism of their trade and financial policies, which arguably remain considerably more protectionist than those of their rich-country counterparts. And they certainly don’t want to be pressed to apologize for holding hostage over $800 billion in foreign currency reserves, acquired to resist yen appreciation.