Global imbalances and the US crisis: is a bad excuse really better than none? KuNIBERT RAFFER
A report published by the Council of Foreign Relations is more explicit (Dunaway 2009), quoting Treasury Secretary Paulson, who saw “addressing” global imbalances as more critical than mere “regulatory issues” as these imbalances would otherwise simply find “another outlet”. However “Secretary Paulson did not go far enough” as “Global imbalances . . . did indeed play a major role in creating the current crisis”. The “savings glut helped to reduce world interest rates” (ibid.: 13), driving investors into asset bubbles and subprime mortgages: just as OPEC surpluses in the 1970s drove banks to lend to Southern countries (SCs) without any regard to the most basic principles of sound banking. The real problem was the inflow of money “enforcing” such investor behaviour. This argument strongly recalls the “blame OPEC arguments” for the debt crisis of the 1980s. The “Fed is a convenient scapegoat” (ibid.: p. 18) for loose monetary policies. The historically low level of interest rates over years and frequent rate cuts by the Fed go unmentioned, as does deregulation allowing if not encouraging ninja and liar loans. Once mentioned, global imbalances quite correctly found their way into the list of causes of the financial crises prepared by the Congressional Research Service (Jickling 2009). What seems strange is that this “explanation” made it into the report of the President of the UN General Assembly, obviously so because his Commission of Experts (2009: 11) also sees global imbalances as playing “an important role in this crisis”. According to Miguel D’Escoto Brockmann (2009: 12) “The global imbalances which played an important role in this crisis can only be addressed if there is a better way of dealing with international economic risks facing countries than the current system of accumulating international reserves.” There is – exercising one’s membership rights to control capital (Raffer 2010), but it goes unmentioned. While the President at least indirectly refers to the IMF ’s inappropriate policies of capital account liberalisation, this perfectly wrong “explanation” is nevertheless gaining ground. The IMF (2009) – much to its credit – seems the only global player stating that global imbalances were neither the reason nor the trigger of the present mess. McKinley (2009: 1) spotted a “bandwagon” on which “[M]any commentators in the West have jumped . . . lately to blame China for playing a leading role in causing the current global crisis, as well as for preventing a sustainable recovery”. He traces this back to “Martin Wolf, the well-known columnist of the Financial Times”, who laid out a case for pinning the principal blame for global imbalances on China. Economically as well as logically, this is a patently wrong explanation. Neither China nor OPEC countries have unwound their surpluses. They could not have done so without losing a substantial amount of money, let alone did so in a way that triggered shocks. Thus their disorderly unwinding able to aggravate the crisis may remain a not unjustified fear of the Commission of Experts, but it has never turned into reality. None of these Southern surplus countries issued liar or ninja loans or encouraged unsound practices in the name of the free market and pursuant to the Robichek/Greenspan doctrine. After the putsch by Chile’s fascist junta, which provided ideal preconditions to implement neoliberal
ideas, the IMF ’s Director of the Western Hemisphere, E. Walter Robichek, had assured Latin Americans that exchange and other risks would presumably be taken into account as private firms can be expected to be careful. Private borrowers (as opposed to governments) were very unlikely to overborrow, even with official guarantees. Briefly, private, voluntary transactions were the private sector’s own business, and unquestionably optimal. This view is sometimes called the Robichek doctrine. It might as well be called the Greenspan doctrine. Exactly as nowadays, the private sector was finally bailed out at great cost in Chile by the military junta. The Chilean catastrophe was one early test-run for the US crisis. In the interest of fairness, this contribution must therefore pierce the wool the North is busy pulling over the eyes of the world. It discusses the nature and reasons of surpluses, putting things right. It shows that the basic line is very similar to the blame put at OPEC surplus countries’ door after 1982. An English proverb rightly says: “Throw dirt enough and some will stick.” The purpose of this contribution is to clean away whatever dirt willingly thrown might be about to stick. It discusses the specific and different situations of country groups with large forex reserves:
• OPEC countries with a lot of crude and relatively few inhabitants that cannot but accumulate surpluses unless they decided to export just enough to cover their current forex, especially their import, needs, which no one really wants them to;
• poor SCs, forced by the IMF not to use resources productively because the Fund still forces them not to use capital controls if and as necessary;
• Asian countries that have learned the lesson of the Asian crisis and obviously prefer to “self-insure” at considerable costs rather than using their IMF membership right of controlling capital flows – a political rather than an economic decision;
• China, the one outstanding case, whose surpluses are explained by her political decision to follow an export-led development path.