Rescue?

As G7 finance ministers gather in DC this weekend in connection with the annual IMF and World Bank meetings, one can't help but notice the increasingly strident pleas for concerted and coordinated action coming from economists I greatly respect. Their stridency makes me worried.

One hopes that finance ministers will take concrete steps this weekend. One hopes that someone will emerge as a leader. One hopes, at the very least, that they are not unable to do something. The disaster of this week suggests quite clearly, I think, how markets react when governments prove themselves incapable of coordinated action. One also worries, however, as Sarah and Alex express below, that governments really don't know what they are doing, and lack the conviction to act forcefully anyway.

While the House Burns

Legend has it that shortly after FDR's inauguration in 1932, Congress engaged in a long floor debate on one of the components of the first New Deal. As the debate carried on into the night, a group of legislators began heckling, "the house is burning! the house is burning!" In that spirit, I give you the following.

The Group of Seven meet tomorrow in Tokyo to confirm their unwillingness to work collectively to stabilize the world economy. The list of items on which the world's advanced industrialized countries cannot agree is short but includes practically every policy that matters.
Exchange rates: EU governments are not particularly happy about the dollar's weakness, but the US is unwilling to discuss exchange rates.
Fiscal policy: Governments disagree about the need for a coordinated fiscal response. While the UK is contemplating fiscal expansion, the Japanese and Germans resist. The German attitude is particularly troubling: "Germany’s deputy finance minister has said the blame, and thus the responsibility, lies squarely with the US."
Monetary Policy: The Fed has slashed rates. The ECB remains committed to its current emphasis on holding the line against incipient inflation and shows no indication that it believes that it should shift away from that target (H/T Mankiw). (Brings the old adage to mind: "Generals always prepare to fight the previous war."

I'm not saying that 2007-08 is the same as 1929-1932, but in the face of a pretty serious financial crisis that has raged, with varying degrees of ferocity, since mid-2007, one can't help but be a little concerned (and puzzled) by the systematic unwillingness to consider any kind of cooperative response. Also, isn't it about time we started to invite China to these affairs?