Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.
From May 25, "Is the Subprime Crisis a Transformative Event?":
The new issue of International Affairs is out, and is titled "Global economic governance in transition". That is obviously a topic that interests me, so I was happy to find it, and a contributors list including Paola Subbachi, Andrew Cooper, Alexander Payne, and others is more than enough to attract my attention.
I'm still working my way through the articles, but I did want to highlight Eric Helleiner's contribution, "A Bretton Woods moment? The 2007-2008 crisis and the future of global finance." (Ungated pdf here.) Helleiner argues that those expecting the 2007-2008 crisis (which did not end in 2008 and still has not) to be a transformative moment spawning a new global order to be disappointed. But this is not because the system is irredeemably controlled by bank lobbyists, or obstructionists in Congress, or Chinese planners, or recalcitrant Greeks. Rather, it's because Bretton Woods itself was not a moment, but a process:
The success of the Bretton Woods conference was a product of a remarkable combination of concentrated power in the state system, a transnational expert consensus and wartime conditions. The absence of a similar political environment today makes its accomplishments very difficult to replicate. Even more important, the significance of the Bretton Woods conference itself should not be overstated. Not only did the innovative aspects of the conference agreements have long historical roots, but the implementation of the agreements after the conference was a troubled and painstaking process. The creation of a new international financial system, in other words, was not a product of that single meeting but rather the outcome of a much more extended historical process. The importance of this analytical point is brought out even more clearly when we examine the successor to the Bretton Woods financial system—what I call the ‘neo-liberal globalized’ financial regime—which emerged through a process with no clear foundational moment.
Helleiner identifies four phases in the process of change of governance structures: a legitimacy crisis, an interregnum, a constitutive phase, and an implementation phase. He claims that the global economy is currently in the interregnum, and a new global order could yet emerge. Helleiner argues that the subprime meltdown and ensuing policy responses have destroyed the legitimacy of the 'neo-liberal globalized' financial regime based on the Anglo-American model. Interestingly, he argues that the legitimacy crisis did not arise because of the crisis itself, but rather the responses of governments to it:
The fact that US and British policy-makers have responded to the crisis in a much more interventionist way than they recommended to East Asian countries during the 1997–8 crisis has undermined their credibility abroad. Since this crisis originated in their own markets, US and British policy-makers can no longer offer up their own regulatory practices as a model. As one Chinese official recently put it, ‘We used to see the US as our teacher but now we realise that our teacher keeps making mistakes and we’ve decided to quit the class.’
I have heard this claim quite -- that the Anglo-American economies were more interventionist in 2008 than the Washington Consensus proscribed for East Asia in 1997 -- a lot in the past few years. (I recall Emmanuel making it, for example, tho I'm too lazy to dig up posts right now.) It's always struck me as completely wrong-headed in two ways: first, it assumes that the Anglo-American economies were anti-interventionist; second, it assumes that the East Asian crisis and the subprime crisis are similar events.
It doesn't more than two seconds of thought to realize how absurd these claims are. On the first point, as Joshua Green's recent profile of Timothy Geithner (discussed here) emphasizes, large intervention in financial crises has be the modus operandi of the U.S. for quite some time. Green emphasizes the experiences of Geithner and Summers in the Mexican crisis in 1994 and the Asian crisis in 1997 in formulating this instinct, but the pattern is more entrenched than that: the U.S. has not hesitated to intervene in financial markets during panics since the Great Depression.
Which brings us to the second point, which is that the Asian financial crisis and the subprime crisis are not remotely similar. The former was a currency/balance of payments crisis, while the latter was a banking crisis*. Asian countries in the late-1990s had very different economies than Atlantic countries in the late-2000s. Why in the world should we expect the same reaction to different types of crisis in different countries? And why in the world does divergent responses to these crises represent a loss of legitimacy? Wasn't the big criticism of the Washington Consensus its "one-size-fits-all" ideology? If the Asian crisis had been a banking crisis, and if Asian governments had responded by bailing out their banks, does anyone think the US/UK/IMF would have been critical of that policy?
In fact, the Atlantic economies have been very consistent in their policies: they intervene when necessary to support their financial firms, boost their economies, or protect their investments. The conditionality attached to IMF loans given to Asian countries didn't exist because the Atlantic economies wanted to be mean to Asian upstarts, but because they wanted their money back. And here's why this was necessary: because unlike the US and the UK, Asian economies could not borrow in their own currencies, nor could they borrow from private markets at less than pecuniary rates. More developed economies can do those things, and when they can't they face fairly significant austerity as well. Witness Greece.
So no, I don't think the subprime crisis represents the beginning of a transformative process, according to Helleiner's own typology: if there is no crisis of legitimacy, there can be no interregnum. Whether the EU crisis eventually does remains to be seen, and in my opinion it represents a much greater chance**. What the Atlantic economies have done in this crisis is combine the monetary lessons from Friedman with the fiscal lessons from Keynes in pretty much textbook fashion. I'd hardly call that a paradigm shift.
*The Asian crisis eventually led to the collapse of LTCM... which caused the U.S. government to intervene in financial markets. I.e., the US reacted the same then as it did now: it protected its firms when their collapse would have broad systemic consequences.
**I don't necessarily consider the subprime crisis and the EU sovereign debt crisis to be two separate events, but I do think they have very different implications for global governance.