The System Worked_How the World Stopped Another Great Depression Read online

  For an even more amusing example, consider the case of the Fédération Internationale de Football Association (FIFA), the world’s governing soccer body. There have been long been allegations of corruption within its executive committee; like the IOC board, FIFA’s executive committee members routinely accepted bribes when choosing the World Cup host cities.18 By early 2011, however, those allegations had mushroomed to a such a degree that FIFA’s governance seemed to border on the farcical. FIFA announced that the 2022 World Cup would be held in Qatar, a country with an average temperature over 100 degrees Fahrenheit during the months the games would be played. The vote took place despite a Guardian investigation revealing that multiple members of the executive committee were alleged to be taking bribes.19

  If FIFA had been a corporation or a government, some housecleaning would have been expected at that point to address the corruption problems. Instead, the Qatar vote-buying scandal managed to eliminate the sole challenger to the re-election bid of FIFA president Sepp Blatter, who had held the office since 1998. In summer 2011, he was re-elected without opposition. In response to the corruption allegations, Blatter allowed that FIFA’s governance was “unstable” and proposed the creation of a “solutions committee” to address the question of ethics—to be chaired by Henry Kissinger. In response to skeptical questions at a post-election press conference, Blatter angrily told reporters: “I am the president of FIFA, you cannot question me.”20 Blatter’s intransigence and buffoonery did lead to some pushback from FIFA’s myriad stakeholders.21 He responded by setting up an independent governance committee. But after the head of the committee acknowledged encountering resistance within FIFA to further reform, Blatter slapped him down in the press.22 The anticorruption NGO Transparency International soon withdrew its support for the reform process.23 Even Blatter’s few defenders acknowledged the need for “greater transparency within FIFA’s decision making and finances.”24 Blatter rejected further reforms, and today remains firmly ensconced as president despite ongoing controversies.25 Even in the positive-sum case of regulating the world’s most popular sport, international institutions find it hard to get things right.

  Most international organizations are not as corrupt as FIFA, but they can be just as sclerotic. Global governance does not always respond to external change with the greatest alacrity. For example, at the start of the twenty-first century, it became clear that China and India were remaking the pattern of global energy usage. By consuming more energy, these behemoths were driving up oil prices, prompting concerns about “peak oil.” A natural reaction was to bring these energy-importing giants into the salient global governance structures. The International Energy Agency (IEA) was the organization of the world’s leading energy consumers, set up following the first oil-price shock in the early 1970s. It made sense to have China and India in the organization. Outside experts concurred that the idea had a great deal of merit.26 In early 2008, key US officials began making both public overtures and private diplomatic entreaties to China and India to join the IEA.27

  A major roadblock quickly presented itself. To become a member of the IEA, a country must also be a member of the Organisation for Economic Co-operation and Development (OECD).28 This was a “membership too far” for the advanced developing countries. The natural solution was to sever the legal relationship between the IEA and the OECD. The United States had in fact proposed five years earlier, to little avail. In March 2010, the executive director of the IEA publicly called for China to join the organization, noting, “Our relevance is under question because half of the energy consumption already is in non–Organization of Economic Cooperation and Development countries.”29 Nevertheless, the Chinese responded coolly to the proffer. Although policy coordination between India, China, and the IEA improved after 2008, those countries have yet to become members. Some IEA members feared a dilution of their influence. China and India feared being isolated among the advanced developed economies.30 Regardless of the reasons, energy experts have been exasperated by the sclerosis.31 The IEA is not that important a multilateral economic institution; if changing the institution’s membership is this hard, then reforming the IMF or the WTO would be next to impossible.

  THE CHALLENGES OF GLOBAL ECONOMIC GOVERNANCE BEFORE THE GREAT RECESSION

  So even before the financial crisis fully bloomed, global governance structures were seen as little more than advertisements for dysfunction, corruption, and stagnation. As the subprime mortgage crisis escalated, it was justifiable to doubt the ability of global economic governance to act effectively in an emergency. Indeed, there were excellent reasons to believe that the failures of these governance structures abetted the crisis. One cause of the subprime mortgage bubble in the United States was the surge in global macroeconomic imbalances to unprecedented levels, leading to greater amounts of capital sloshing around in US financial markets. These imbalances were partly the result of China’s extensive efforts to keep the renminbi from appreciating in value, which included buying up dollar-denominated assets.32 In theory, such actions violated IMF rules, requiring consultations at the fund. In practice, however, IMF management, fearful of China, blocked any serious discussion of exchange-rate issues.33 According to the Fund’s independent evaluation office, IMF staff failed to identify mounting financial risks in developed country because of “a high degree of groupthink.” The IMF had been so dormant in the years leading up to the crisis that it was nicknamed the “Turkish Monetary Fund”—because its only sizable outstanding loan was to Turkey. By spring 2008, IMF leadership had opted to sell off some of the fund’s gold reserves to shrink its operating deficit.34

  The Basel Committee on Banking Supervision’s primary function is to codify standards for banking regulation and supervision. The pre-crisis standards—called Basel II—had failed to prevent bank collapses across Europe. Indeed, multiple analysts have suggested that by permitting greater leverage in large financial institutions, the Basel II standards accelerated the banking crises.35 The Doha Round of world trade talks had been stalemated for years, perpetuating a disturbing pattern in which each multilateral trade round takes longer to complete than its predecessor.36

  In decades past, the Group of Seven (G7) countries had been sufficiently powerful to steer the global economy. In the 1980s, these economies controlled roughly two-thirds of all global output.37 By 2008, the G7’s share of global output had declined by roughly half, and it was clear that this grouping now lacked the economic muscle to act alone. To be fair, the G7 economies recognized the trend38 and tried to ameliorate it. They reached out to the advanced developing economies, such as Mexico, Brazil, India, and China, and made efforts to include them in their summitry. The problem was that the efforts bordered on the insulting. One such initiative, called “Outreach-5,” was launched at the 2007 Heiligendamm summit. Delegates from China, India, and other emerging markets were invited to the first-night dinner, and then dismissed for the rest of the summit meetings. In effect, this created a children’s table at the summit, embarrassing even leaders sympathetic to the outreach idea.39 This practice mercifully ended soon thereafter.

  The final reason to doubt the efficacy of global economic governance at the time was that a breakdown of global cooperation was the proximate trigger of the Great Recession. The global financial crisis began in slow motion with BNP Paribas’s announcement in August 2007 that it would suspend withdrawals from three of its investment funds that focused on US subprime mortgages. It was a signal that the market for those mortgage-backed securities had evaporated.40 Over the next twelve months, the contagion of market panic spread rapidly, outpacing central bank and regulatory efforts to contain the fallout. Indeed, some of the great-power governments actively tried to spread panic in the markets. According to US Treasury secretary Henry Paulson, in summer 2008, Chinese interlocutors informed him of a Russian proposal to sell off holdings of Fannie Mae and Freddie Mac securities in the hopes that it would force the US government into action. Paulson described the eff
ort in his memoirs as “deeply troubling.” That qualifies as an understatement.41

  By September 2008, it was clear that the US financial markets were seizing up, but non-American actors treated the news with more than a little schadenfreude. To Europeans, the subprime mortgage crisis was the fault of US market fundamentalism. In a March 2008 interview, French foreign minister Bernard Kouchner declared that “the magic is over” for the United States. Six months later, German finance minister Peer Steinbrück predicted that the United States would soon lose its status as a financial superpower.42 Most European officials did not think the effects of the crisis would spread across the Atlantic.43 To the BRIC economies (Brazil, Russia, India, and China), the problems of the developed world seemed increasingly remote. For much of 2007 and 2008, there was talk about how these markets were growing less dependent on exports to the advanced industrialized economies. Numerous analysts argued that the BRIC economies were “decoupling” from the West.44 Kishore Mahbubani recommended that the United States and its Western allies simply get out of the way and let the developing world have its turn at global economic governance.45 In other words, just about every other government on the globe assumed that the financial difficulties that were happening in the United States would stay in the United States.

  The final straw was the failure of government efforts to prevent the Lehman bankruptcy. In a last-ditch effort to avert a collapse, US government officials had attempted to midwife a takeover of the bank by British-based Barclays Capital. The US Treasury Department and Federal Reserve Bank of New York coaxed a private consortium of financial institutions to assist in the sale. US-based firms were prepared to absorb some of Lehman’s toxic assets as a way of sweetening the deal for Barclays. After a marathon weekend of negotiations, a deal appeared to be successfully completed. Great Britain’s Financial Services Authority (FSA), however, needed to approve the deal before it could take place.The FSA was unwilling to relax capital adequacy requirements and unable to alter corporate governance protocols to permit the sale.46 Consultations between US and UK finance officials during the crucial weekend were haphazard at best, leading to misunderstandings and mutual recriminations.47 In a pivotal conversation between Paulson and Alistair Darling, Paulson’s British counterpart, Darling made it clear that he was unwilling to coordinate regulatory actions with the United States, telling the secretary that he didn’t want to import America’s financial “cancer.” The failure of cooperation between the world’s two closest allies paved the way for the acute phase of the 2008 global financial crisis—a crisis that eventually ensnared the United Kingdom more deeply than the United States.

  THE ASSESSMENT OF GLOBAL ECONOMIC GOVERNANCE AFTER THE GREAT RECESSION

  By the time Lehman Brothers went bankrupt, global economic governance was stalemated, ineffectual, or being overtaken by events. Public confidence in multilateral institutions was in decline. Policy elites sounded alarms about a global governance crisis, to little avail.48 Some modest steps had been taken to address these governance issues prior to the crisis, but they were feeble efforts in the face of the economic storm that started in fall 2007 and became a tsunami a year later.

  Perceptions have not improved in the half decade since the onset of the Great Recession. Indeed, the very moniker “Great Recession” implies that the global economy has not performed well. Despite massive uncertainty about nearly every aspect of the global political economy, there is a strong consensus about the parlous state of multilateral economic institutions. Opinion polls reveal the public’s frustration with the status quo and its desire for more-robust global governance structures. In early 2009, the overwhelming majority of respondents to a BBC World Service poll said that they supported “major reforms” of the international economic system. In July 2009, majorities in seventeen of nineteen countries polled wanted a more powerful global financial regulator.49 Public pessimism about the global economy has persisted as well.50

  Global public-policy elites were even more disdainful. In early 2011, Richard Samans, Klaus Schwab, and Mark Malloch-Brown concluded, “Nearly every major initiative to solve the new century’s most pressing problems has ground to a standstill amid political gridlock, summit pageantry, and perfunctory news conferences.”51 The World Economic Forum similarly noted, “As the financial crisis unfolded in 2008 and 2009, the world lacked an appropriate and effective crisis response mechanism.”52 Ian Bremmer and Nouriel Roubini blasted the G20 grouping as being particularly toothless, proclaiming instead that we live in a “G-Zero” world: “The divergence of economic interests in the wake of the financial crisis has undermined global economic cooperation, throwing a monkey wrench into the gears of globalization.”53 Bremmer was particularly emphatic on this point. In January 2012, he concluded that “the effectiveness of many global institutions is under severe strain, as they remain largely unchanged from their postwar forms.”54 David Rothkopf, the CEO of Foreign Policy magazine, asserted that the, “current global economic leadership void [is] likely to be seen by history as worst since that preceding Great Depression.” Stewart Patrick, the director of the International Institutions and Global Governance program at the Council on Foreign Relations, warned, “Demand for effective global governance continues to outstrip supply, and the gap is growing.”55

  Trashing global economic governance seemed to be a prerequisite for writing for the Financial Times. Alan Beattie epitomized the collective disdain in his book Who’s in Charge Here? His thesis: “the collective response of the world’s big economies since 2007 has been slow, disorganized, usually politically weak and frequently ideologically wrong-headed.”56 As time has passed, assessments have remained dour well beyond the salmon-pink pages of the Financial Times. At the end of 2012, Mark Leonard predicted that there would be “a single theme in 2013 … the idea of the unraveling of the global economy and the political integration that supported it.” Contemporaneously, Martin Indyk and Robert Kagan warned that “the world’s institutions—whether the United Nations, the Group of 20 or the European Union—are weakened and dysfunctional. The liberal world order established after World War II is fraying at the edges.”57

  The post-crisis skeptics include a broad array of social scientists.58 Tom Hale, David Held, and Kevin Young noted that “in recent years the problem of addressing global policy challenges seems to have grown worse,” attributing the problem to “gridlock” in global governance. In a joint report, Jeffry Frieden, Michael Pettis, Dani Rodrik, and Ernesto Zedillo observed that “on virtually every … important global economic issue, international cooperation is stalled, flawed, or non-existent.” Historian Mark Mazower concluded, “With the WTO’s Doha Round paralyzed and the World Bank chastened, [and] the IMF incapable of helping to rectify the global imbalances that threaten the world economy … the institutions of international governance stand in urgent need of renovation.” David Zaring posited that international financial institutions had been “ineffective or, at best, marginally useful” since the start of the crisis. Naazneen Barma, Ely Ratner, and Steven Weber declared, “It’s not particularly controversial to observe that global governance has gone missing.”59

  Commentators usually proffer two reasons for this pessimism. The first is that the distribution of power in the current era echoes the interwar period of 1919–1939 all too ominously.60 Between the First and Second World Wars, Great Britain’s relative power waned while America’s rose. This power transition greatly complicated the ability to supply global public goods. The traditional theory of hegemonic stability requires the existance of a clear superpower to provide these goods; in the absence of a hegemon, buck-passing between waxing and waning powers becomes a possibility. As Charles Kindleberger famously observed in The World in Depression, “In 1929 the British couldn’t and the United States wouldn’t [stabilize the global economy]. When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all.”61 Not surprisingly, dur
ing the 1930s, multilateral economic institutions were toothless in the face of the Great Depression. The last major effort to rewrite the global rules—the 1933 London Monetary and Economic Conference—ended in acrimony.62

  The parallels between 1929 and 2008 seem strong. In 2008, it was easy to see the United States in Britain’s fading role and China as taking over America’s former rising status. During the depths of the crisis, financier Roger Altman lamented that “there could hardly be more constraining conditions for the United States and Europe” and that “[China’s] economic and financial power have been strengthened relative to those of the West.”63 Altman’s assessment encapsulated the elite consensus on this question. Before the crisis, Thomas Friedman wrote paeans to globalization; after the crisis, he coauthored a book titled That Used to Be Us, bemoaning American decline.64 Similarly, Fareed Zakaria wrote about the “post-American” world.65 Christopher Layne concluded that “in the Great Recession’s aftermath … a financially strapped United States increasingly will be unable to be a big time provider of public goods to the international order.”66

  The question was whether the rising powers would support or spoil the US-created global economic order. Michael Mastanduno worried, “The collective action problem need[s] to be overcome to sustain effective cooperation is more formidable. And the United States will have to sit down not just with good friends but also with potential adversaries.” Charles Kupchan warned that “emerging powers will want to revise, not consolidate, the international order erected during the West’s watch.”67 China’s rise provoked claims of an alternative to the discredited Washington Consensus, a “Beijing Consensus” that rested on principles of mercantilism and state capitalism, and was therefore antithetical to the liberal economic order.68 China’s economic revisionism ostensibly posed a serious challenge to the ossified state of multilateral economic institutions. As the US Congress flailed about in fall 2013, debating whether to increase the debt ceiling, a Xinhua op-ed blasted the United States for acting irresponsibly. The essay rocketed around US foreign-policy circles because of its ominous suggestion “to consider building a de-Americanized world.” Two days later, a prominent Chinese economist penned a Financial Times op-ed urging China’s government to stop purchasing US Treasuries.69