42
Kenneth Rogoff
professor of Economics
and public policy at Harvard University
Brave new
financial world
A huge struggle is brewing within the G-20
hell.” He could just as well have said the same thing about
over the future of the global financial system.
European views on US financial leadership.
The outcome could impact the world – and
The stakes in the debate over international financial
reform are huge. The dollar’s role at the center of the global
not only the esoteric world of international
financial system gives the US the ability to raise vast sums of
finance – for decades to come. capital without unduly perturbing its economy. indeed, former
US president George W. Bush cut taxes at the same time
INaNCE shapes power, ideas, and influence.
that he invaded iraq. However dubious Bush’s actions may
Cynics may say that nothing will happen to the
have been on both counts, interest rates on US public debt
fundamentals of the global financial system, but
actually fell.
they are wrong. in all likelihood, we will see huge
More fundamentally, the US role at the center of the
changes in the next few years, quite possibly in the form
global financial system gives tremendous power to US courts,
of an international financial regulator or treaty. indeed, it is
regulators, and politicians over global investment throughout
virtually impossible to resolve the current mess without some
the world. That is why ongoing dysfunction in the US financial
kind of compass pointing to where the future system lies.
system has helped to fuel such a deep global recession.
The United States and Britain naturally want a system
On the other hand, what is the alternative to Geithner’s
conducive to extending their hegemony. US Treasury
vision? is there another paradigm for the global financial
Secretary Timothy Geithner has recently advanced the
system?
broad outlines of a more conservative financial regulatory
China’s approach represents a huge disguised tax on
regime. Even critics of past US profligacy must admit that the
savers, who are paid only a pittance in interest on their
Geithner proposal contains some good ideas.
deposits. This allows state-controlled banks to lend at
above all, regulators would force financiers to hold more
subsidized interest rates to favored firms and sectors.
cash on hand to cover their own bets, and not rely so much
in india, financial repression is used as a means to
on taxpayers as a backstop. Geithner also aims to make
marshal captive savings to help finance massive government
financial deals simpler and easier to evaluate, so that boards,
debts at far lower interest rates than would prevail in a
regulators, and investors can better assess the risks
liberalized market.
they face.
a big part of russia’s current problems stems from its
While the rest of the world is sympathetic to Geithner’s
ill-functioning banking system. Many borrowers, unable to
ideas, other countries would like to see more fundamental
get funding on reasonable terms domestically, were forced
reform. russia and China are questioning the dollar as the
to take hard-currency loans from abroad, creating disastrous
pillar of the international system. in a thoughtful speech, the
burdens when the ruble collapsed.
head of China’s Central Bank, Zhou Xiaochuan, argued the
Europe wants to preserve its universal banking model,
merits of a global super-currency, perhaps
with banks that serve a broad range of
issued by the international Monetary
functions, ranging from taking deposits to
Fund.
making small commercial loans to high-
These are the calmer critics. The
level investment-banking activities. The
current president of the European Union’s
US proposals, on the other hand, would
Council of Ministers, Czech prime Minister
make universal banking far harder, in part
Miroslav Topolanek, openly voiced the
because they aim to ring-fence depository
angry mood of many European leaders
institutions that pose a “systemic risk” to
when he described america’s profligate
the financial system. Such changes put
approach to fiscal policy as “the road to
pressure on universal banks to abandon
april 2009
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