Posted by Kenneth Anderson:
Global Governance or Governmental Network Coordination for Global Financial
Regulation?
http://volokh.com/archives/archive_2009_06_14-2009_06_20.shtml#1245464850
Peter Mandelson, currently Business Secretary in the UK government of
Gordon Brown and formerly EU trade commissioner, has an op-ed in
today's WSJ (June 19, 2009), [1]"We Need More Global Governance: The
Crisis Reveals the Weakness of Nation-Based Regulation," (might be
behind subscriber wall). (Reader warning: this goes on for a while.)
This piece offers a striking example of the intersection of
substantive views of monetary policy affecting one�s policy views of
what regulatory reform (in this case global regulatory reform) should
mean. The explanatory gap I point out below in the piece goes beyond
criticism about both the weakness of ideas of global governance, or
the careful exploitation of strategic ambiguities in what the term is
supposed to mean (one thing to me to get me on board, another thing to
you to get you on board). It points in the direction that Ilya raised
in his last post on this, to say that if you have one substantive
economic view of the crisis, then you can propose that public
governance bureaucracies can improve the situation; but if you have
another, you have reasons to reach exactly the opposite conclusion.
Mandelson starts by offering a carefully phrased account of how the
global financial crisis, next global recession, came about. He
liberally spreads around the blame, without putting any of it on
identifiable actors, all very diplomatically. However, his assessment
of What Went Wrong finally lands on a very specific contention:
[W]hat enabled the banking crisis to happen was a structural
imbalance in the growth model of the global economy over the last
two decades.
That model has produced unprecedented global growth, but it also
developed a serious weakness at its center. Unless we address that
weakness, any other counter-recessionary strategy is palliative at
best. The risk is that as the global economy slowly returns to
growth, the urgency to address this fundamental problem will
recede.
Reduced to its crudest form the problem was this: Credit was too
cheap in the developed world. It was kept cheap by a number of
factors. The commitment of China to an export-led growth model,
matched by a willingness from rich-world consumers to keep
spending, created persistent surpluses in China in particular.
Those surpluses were invested in developed-world debt, particularly
the U.S., pushing down interest rates. That encouraged investors to
look for riskier and riskier investments to increase their yield.
It also encouraged people to buy houses they couldn't afford with
the help of people who probably shouldn't have lent them the money
in the first place. That debt was sold around the world. The end of
the housing bubble revealed the risk in the system.
Note that the article signally fails to mention the policy of central
bank policy, and in particular Fed policy, under Greenspan and later
Bernanke, having allowed the money supply to rise too high and
allowing interest rates to remain too low. When I first read the
piece, I assumed that this was mere diplomacy on Mandelson's part.
But, as it happens, the final substantive interpretation that
Mandelson gives for ultimate causes takes an unequivocal position in
the sharp debate over the role that monetary policy and central bank
policy played in allowing the bubble to develop, and that in turn
impacts his policy views. And in ways that draw in Ilya�s central
contention from his last post directly.
([2]show)
This debate can be summed up as the argument between monetary
economist John Taylor (Taylor of the "Taylor rule") of Stanford's
Hoover Institution (full disclosure, with which I'm also affiliated)
in a famous WSJ op-ed and a now widely read book, [3]Getting Off Track
(a 90 page read which you can get in hardback for $10 at Amazon; I
know I�ve mentioned it before, adv.)), and Alan Greenspan, also
responding in the WSJ as well as in his famously contrite
Congressional testimony. The debate comes down to Taylor saying that
the Fed goofed and Greenspan saying, no, there was a global savings
glut about which the Fed could do not much. Mandelson comes down
firmly on the side of Greenspan, with no suggestion that central bank
policy might have served as a causally-necessary mediator for the
transmission of the savings glut into easy credit, as at least an
important part of the explanation of What Went Wrong.
This substantive commitment to ultimate causes (in one way explicit
but in another way quite opaque, because it does not even acknowledge
to the casual reader the debate of which it is one side) matters a
great deal, as it turns out, to Mandelson's policy prescriptions.
Consistent with the primacy of the global savings imbalance thesis,
and conversely the unmentioned alternative primary explanation of
central bank policy failures, Mandelson calls for a global regulator
to address the systemic issue - not systemic risk, in the sense
currently discussed, but instead global savings imbalances. He
indirectly absolves the central bankers - let me stress, I am not
interested in crucifying them or demonizing them, but the question of
their mistakes directly poses the question of whether they plausibly
can do that which Mandelson puts to them (emphasis added):
The stability or otherwise of the global economy is the sum of
sovereign national macroeconomic policies. There is no mechanism to
mediate between those policies or insist on action that would
counter systemic risk. Similarly, national financial regulators
have a clear enough remit for national market stability, but
financial markets are now regional and global. Nobody was asleep at
the wheel of globalization because there is no wheel to speak of.
Taylor would say that central bankers were asleep at the wheel, in
failing, among other things, to follow the Taylor rule. Ilya would
presumably say that it was not so much being asleep as that there is
no good reason to think that central bankers are especially good at
accomplishing this task. I would say that they were asleep at the
wheel, they probably are not great at accomplishing this task, but
that there are certain aspects of it that are best performed by
regulatory actors, because expertise aside, there is a question of
public fiduciary status for the market-establishing rules, rather than
market-outcome rules. I would say those actors have to be national in
character. Mandelson, however, insists that the global nature of what
he sees as being the problem - a system that allows imbalances to
develop - requires a global regulator, that is, global governance:
If these imbalances are to be unwound in an orderly way, China will
have to build a social welfare system that reduces huge levels of
precautionary saving and thus boost domestic demand. It will need
to continue to move towards greater currency flexibility. The
export-led growth models of other surplus economies such as Germany
and Japan are also both going to have to give way to greater
domestic demand. Both consumers and governments in the U.S. and
Britain are going to have to repair their balance sheets. We are
going to have to save and invest more and export more.
Is any of this actually possible? Is it possible to preserve the
benefits of open trade and an open global economy, addressing
macroeconomic risk while totally respecting the choices of
sovereign governments?
The answer has to be: not really. No government in the global
economy, and certainly not economies on the scale of the U.S.,
China, Japan and the European Union, can claim a prerogative over
domestic action that entirely ignores the systemic affects of its
policies. The only way forward is a totally renovated approach to
international coordination of economic policy.
An odd contradiction emerges tacitly in the above passage. The op-ed
speaks of �global governance.� But it then frames policy as a matter
of �international coordination.� Later in the op-ed Mandelson again
refers to this global governance as consisting of �much greater global
coordination.� Is there a difference here worth mentioning? Well,
governance is one of those terms, like multilateral, that can be used
in strategically ambiguous ways - as noted above, it can be used to
mean one thing to one player and another thing to another.
Put simply, what Mandelson seems to think is required is �global
governance� in some supra-national sense, some regulator with power
over all the others. But what he proposes is a different creature
entirely - something that seems to indicate the �global government
regulators network� model that [4]Anne-Marie Slaughter has made famous
(read a [5]review nearly as long as the book, here), but ultimately a
creature of coordination in which �peer pressure� on the model of
trade regimes �is going to be vital.�
We are now back at a familiar conundrum in international economic law
- networks without independent enforcement powers, subject to the
familiar game theory problems of free riding, insincere promising, and
defection. It is true, certainly, that such arrangements have been (on
my reckoning) remarkably successful at finding ways to keep players
from defecting in the large scale trade regimes (although no one
should be too sanguine about the erosion of free trade in the current
global recession). [6]Sophisticated new game theorists of
international economic law have been elaborating ways in which
cooperation games can work in these arenas, moreover, and although I
do not think they have much application in such areas as international
security, I think they have promise in trade and economic relations.
[7]David Zaring, [8]Kal Raustiala, and [9]Pierre-Hugues Verdier, among
others, have all written very interesting and important academic work
on the promises and limits of networked government regulators in the
global economy.
That said, there is an important - to my mind fatal - elision here,
the oft-fatal elision seemingly [sorry Eugene!] endemic to
international law discussions in this as in other areas in which
governance, multilateralism, engagement, and such activities are at
issue: you seek a way to bridge the chasm but the only way to do so is
by reach to a concept, a term, a rubric that allows you to assert two
things at once, often to different audiences. We need global
governance to, well, govern things; we need global governance to,
well, coordinate things. They are not the same thing, and the claims
are addressed frequently to different constituencies whose political
support is important. Eventually the inconsistency is exposed and you
fall into the depths, because it is not merely a matter of
terminology, but a term that one has used to signify two quite
distinct courses of action.
These distinct courses of action are dependent upon distinct bases of
authority, legitimacy, and power. Mistaking one for the other is, once
again, politically attractive when trying to formulate a workable
policy at the front end, but eventually causes one to fall into the
abyss when the kind of action required by policy depends upon an actor
lacking the kind of political authority, legitimacy, and power to do
so: networks are not truly governing bodies, which was the point of
creating them as networks, and most of the time that becomes
especially true in a crisis. There are some important exceptions - one
can point to the trade regimes, and one can point to the prestige of
an otherwise powerless WHO in bringing about a globally coordinated
response to pandemic disease. (So far; the day is still young, and WHO
has not yet been tested in a true crisis in which free riding became a
matter of life and death for large numbers of people to whom
sovereigns are accountable.)
So far I have questioned Mandelson�s explanation of the crisis, or at
least questioned his failure to acknowledge the rest of the
substantive debate, and suggested that his substantive commitment
largely determines his preferred policy or, more precisely, his
preferred actor for policy. I have also questioned the gap between the
coercive strength of governance that his substantive take on the
problem might be understood to imply, and the merely coordinating body
and activity that, presumably taking account of political reality,
actually proposes. But now consider what specific global body
Mandelson thinks should take on this role, and on what basis. It is,
to say the least, remarkable:
We need to strengthen and depoliticize the International Monetary
Fund and give it a new surveillance role that covers all aspects of
systemic risk. It needs to be mandated to make recommendations on
weaknesses in the system, and countries should be obliged to take
these recommendations extremely seriously.
The IMF? Mandelson makes no mention of another debated question over
the reason for the global savings glut. He implies that it is on
account of the lack of social security, pensions, and such public
structures in Asia and China in particular that force high private
savings rates and dampen consumption - a huge factor I do not doubt in
the least. However, he fails to mention that view that the lesson
Asian governments took away from the Asian crisis of the late 1990s
was ... never trust the IMF, and as government policy - not private
savings policy - hold so much in governmental reserves that the
currency markets can never take you on. Whether that explanation is
right or wrong, or how important it is as an explanation - I myself am
agnostic - it cannot be left aside in assessing institutions that
might provide regulatory oversight. Ilya�s point again - if it is the
case that the IMF got it massively wrong in the 1990s, not just for
the economies of Asia way back when, but in ways that have
substantially contributed to global misalignments of savings today, on
what grounds does one suggest that it or any similar institution has
any special ability to do a better job now?
The argument that the IMF, or really any public body, is the right
body to do it depends not only on the assumption of expertise - that
is, that as a fiduciary it is capable of exercising a substantively
meaningful duty of care on this topic - but also on the assumption
that it is a universal body that owes, and will exhibit, a duty of
loyalty to everyone. Ilya has challenged the first, expertise or duty
of care, assumption. Let me also challenge the second, universal or
duty of loyalty, assumption.
Another example of strategic ambiguity is the presumed identification
of �universal� with �international� or �global.� The hidden assumption
is that the global and international are universal, and to the extent
they have �interests,� those interests are by definition not
parochial, partial, merely national. Whereas that assumption leaves
aside the possibility both that beneath the language of universality
lies an entire web of interests and parochialisms, as public choice
theory would teach us; and, moreover, the possibility that the
�international� and the �global� have their own set of interests, the
interests of those who spend their time in the jet-stream between New
York and Geneva.
We thus cannot assume that just because it is the IMF - international
organization with a heroically worded charter, etc., etc. - that it
has the interests of the world�s people (whatever that abstraction
might conceivably mean) at heart. Indeed, effective and expert policy
might depend upon the organization not being �representative� of the
people whose interests it is supposed to universalize. And this goes
to the heart of a separate, weltering debate that is starting to
intersect with the global financial regulation debate: should the IMF
and the World Bank be reformed so as to give greater, perhaps even
proportionate, governance say to those affected by the institutions�
policies - rather than leaving it in the hands, as a shareholding
institution, of the countries that provide the funding?
Whatever modest effectiveness, if any, the IMF and the World Bank have
had in their decades of existence is owed in considerable part, in my
estimation, to the fact that the donors call the tune and have board
seats in proportion to their funding. Any move to alter that
introduces the usual problem of moral hazard, which is to say, in UN
terms, it risks turning governance of these organizations into the
General Assembly, in which the 90% or so of the money spent by 190 or
so countries is provided by about 10 of them. But this puts me on the
wrong side of the powerful movement to reform these institutions.
And this only touches on the many deep governance and political and
mission issues that underlie the IMF at this moment. (One of those,
which I do not take a position on here, though I am not hostile to it,
is the new funding currently before Congress for the IMF to provide it
with funds to serve as the receiver, as it were, for basket case
second-world economies such as Latvia; there are virtues in this plan,
but in that case, one needs to decide what one thought of the IMF�s
expertise, judgment, and policies in the Asian crisis.)
Mandelson implicitly recognizes there is a gap here. So he says,
remarkably, that we need to �depoliticize� the IMF to enable to serve
in this new role even as we �strengthen" it. Leave aside the
controversies that faced the IMF as matters of governance before the
financial crisis arose - all of them involved, however, not
depoliticization, but questions of governance that would inevitably
make it ever more political. Inevitably and, one wants to, of course.
Mandelson's is a genuinely astounding formulation - Mandelson proposes
global governance, and proposes the IMF, and then proposes that it be
somehow depoliticized: what is governance of the political economy if
not political? After all, the strongest proposal for the IMF yet - one
that Mandelson does not broach and it is not clear what he thinks of
it - is that the IMF, through its special drawing rights, become the
world�s central banker. A worse idea, from the standpoint of fiat
money and moral hazard, is hard to imagine, but that has been offered
as a proposal, and not merely by the unserious.
Mandelson limits himself to proposing the IMF have a �surveillance�
role - not necessarily a bad idea, on its own - and the power to make
recommendations that countries must take �extremely seriously.� We
know that when diplomats say �extremely seriously,� they typically
mean nothing of the kind. That is, of course, the likely realist
outcome of this kind of attempt to bridge multiple chasms. But more
interesting than the usual problems that the facts of the real world
pose for ideal solutions is that Mandelson insists, right to the end,
of the strategic ambiguity of actual "governance" and "mere"
coordination.
I�ve said that you can�t finally have it both ways. But the temptation
is to go after the more modest version in the hopes of converting it
into the stronger version down the road. (I've written about this as a
[10]problem for the UN.) That�s finally how the inconsistency is
overcome - governance will mean mere coordination today, but real
governance tomorrow. Yet the two remain different ideas, different in
kind and not just degree, dependent upon different sources, as said
above, of authority, legitimacy, and power, and the biggest risk is
that you warp out of shape the modestly practical possibilities of
�mere� coordination by a body such as the IMF because you are holding
out for what you hope it might become as a body of true �governance�
in the future. It is holding out for this possibility that seems to me
to explain Mandelson�s insistence on using strategically ambiguous
language. It allows him to offer as consistent a project that is,
finally, inconsistent.
([11]hide)
References
1. http://online.wsj.com/article/SB124536757998629319.html
2. file://localhost/var/www/powerblogs/volokh/posts/1245464850.html
3.
http://www.amazon.com/Getting-Off-Track-Interventions-Institution/dp/0817949712/ref=sr_1_1?ie=UTF8&s=books&qid=1245453717&sr=8-1
4.
http://www.amazon.com/New-World-Order-Anne-Marie-Slaughter/dp/0691123977/ref=sr_1_1?ie=UTF8&s=books&qid=1245463447&sr=1-1
5. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=669842
6.
http://www.amazon.com/How-International-Law-Works-Rational/dp/0195305566/ref=sr_1_1?ie=UTF8&s=books&qid=1245464613&sr=1-1
7. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=960484
8. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=333381
9. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1333201
10. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1265833
11. file://localhost/var/www/powerblogs/volokh/posts/1245464850.html
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