Troubling Interventions

PRINCETON – The most noteworthy commemoration of the second anniversary of Lehman Brothers’ collapse on September 15, 2008, was Japan’s unilateral currency intervention to depreciate the yen. That move marks a shift in the character of the global financial crisis, away from concern with banking problems and toward a focus on the world’s dysfunctional exchange-rate system – or, rather, its current lack of one.

The Japanese intervention was immediately controversial. American politicians denounced it as predatory; Europeans saw it as a step on the road to competitive devaluations. And Switzerland’s central bank recently launched a costly and futile attempt to stop the Swiss franc’s rise against the euro – an effort that produced only large losses on the bank’s balance sheet.

Japan’s new activism also was widely imitated. South Korea and then Brazil started similar action to drive down their currency.

The 1980’s was the last time anyone tried this sort of intervention. At that time there was little agreement about its usefulness as a tool of international policy, and the G-7 summit at Versailles in 1982 was extraordinarily conflict-ridden and unproductive. Indeed, it was to be the first act in a long exercise of futile mega-diplomacy.