Tuesday, May 25, 2010

Is the Subprime Crisis a Transformative Event?

. Tuesday, May 25, 2010

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.


Emmanuel said...

??? -

We've been through this before. To paraphrase Dick Cheney, "deficits don't matter because the ROW will lend us all we care to borrow." Consider...

1. Some have actually bothered to do the math. Even if you take the dubious assumption that America can borrow at low rates indefinitely, debt servicing costs will become such a large part of the US budget that the current fiscal trajectory is indeed unsustainable.

2. Aren't fears of excessive government borrowing exacerbated by the crisis behind a lot of recent market action?

3. The real problem in the world economy is disciplining America. Its actions have been worse than useless in that housing prices are not appreciating despite de facto nationalization and an unlimited lifeline. Hopefully, rising delinquencies and foreclosures will (eventually) drive it into the ground and recognize the folly of its ways.

The dysfunctional US housing segment which triggered so much grief is even more so now than before. Some progress.

Kindred Winecoff said...

None of that addresses the crux of my post, which is that the Atlantic economies have *not* been hypocritical in their response to crises, therefore there is no crisis of legitimacy. But to address your points:

1. Look, Moody's is not going to downgrade the U.S. Did you see what lengths it went to before it finally downgraded Greece? And the U.S. can monetize its debt in a way that no other country can, so servicing the debt is less of a concern than it is in other places.

2. I don't know what's behind recent market actions, and neither do you, but I doubt it has anything to do with U.S. deficits. Those have been pretty constant while other things have varied.

3. Discipline America for what? For going into to debt to buy their goods? For taking their investment dollars that they can't/won't spend domestically? The U.S. has had willing partners in digging the whole they're in now, so getting on a high horse about it now is just laughable.

Emmanuel said...

Ah, but they are hypocritical, KW:

1. If what the IMF did in Asia were a model of crisis response, then its current head wouldn't be so keen on putting distance between current efforts and past ones, would he?

2. The IMF is for balance of payments troubles, not fiscal ones. To use it for the latter purpose indicates double standards. Why should poor countries which have been major contributors to the IMF as of late have their monies used to bail out rich country fiscal crises?

3. The American government employs so much double talk it even lies to itself by not admitting the extent of Fannie Mae and Freddie Mac's woes as on-budget items.

Sounds like Enronitis to me. As with the Asian crisis, citing others' comparably minor fiscal woes as needing remedy while not even recognizing your own, far larger ones is hypocrisy. The truth is that America is bankrupt in the commonly accepted use of the term, and we should all hope that the lie is revealed sooner rather than later to get real changes underway.

Is the Subprime Crisis a Transformative Event?




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