Paul Volcker, who was the Treasury official in charge of monetary issues when Nixon decided to abandon the gold standard, is among those who see a connection between the financial crisis and the failure of leaders to create a system that would force China to invest more of its reserves and the U.S. to restrain its credit-fuelled consumption. “This monetary system we have has no discipline in it,” declares Volcker, slouching in a chair in front of delegates.
The legendary former Fed chairman is participating in a moderated discussion with Soros. Their exchange brings to mind Keynes and White: The biggest parallel between 1944 and 2011 is that the rising economic power today is no more interested in co-operating than the U.S. was back then.
Some believe a renewed commitment to co-operation could change this. China, by most accounts, is still finding its feet as a global power and has yet to fully engage. “This is a very bad environment for international co-operation,” says Soros.
But he thinks there is an opportunity to get China on board. Chinese officials have expressed interest in making greater use of the IMF’s in-house currency, the Special Drawing Right, or SDR. It’s an echo of Keynes’s original plan. Before the crisis, China’s central bank floated the idea of using the SDR as a unit of exchange for international trade, giving countries the opportunity to reduce their exposure to the U.S. dollar. “Closer co-operation is what is needed,” says Soros. “SDRs provide an opening to such a discussion.”
Volcker is having none of it. “Creating SDRs is going to do nothing,” he says. “It doesn’t do anything about the lack of discipline in the system.”
Soros has written nine books. Keynes’s Collected Writings span more than 12 volumes. But Soros isn’t trying to change economics by himself. That’s what INET is for. The group’s advisory board includes some of the world’s best economists. Among them is William White, who may be the greatest Canadian you’ve never heard of.
When he was head of the monetary and economic department at the Bank for International Settlements in Basel, Switzerland, from 1995 to 2008, White was in a position to assess how monetary policy was being applied in the world’s major economies. Unlike most of his brethren, White wasn’t seduced by the myth of Alan Greenspan, the Federal Reserve chairman who was dubbed the Oracle. White, who spent two decades at the Bank of Canada, criticized the Fed chairman’s contention that it was pointless for central banks to attempt to prick asset-price bubbles because they were too difficult to spot. According to Greenspan, the best thing for a central bank to do was to allow the bubble to burst and clean up the mess.
“If you have a policy that says, ‘I am never going to raise interest rates in the face of a bubble, but I’m going to reduce them drastically every time we do have a bust,’ it’s simple arithmetic to say you are going to ratchet your interest rates down to zero and eventually you are going to find yourself in a very bad place,” White tells me during the conference.
One would assume the financial crisis would have prompted a dramatic rethink of monetary policy. Not White. “I don’t think what we did made the slightest bit of difference,” he says. “And therein lies a really big tale about political economy and the governance of these systems—even if you can identify the problems, can you get people to moderate the downturn?”
White, who is now a part-time adviser at the Paris-based Organization for Economic Co-operation and Development, says the study of economics needs to be totally rethought. Economists have long been envious of physicists. Over the past three decades, practitioners of the dismal science created mathematical models to predict how different variables would affect economic behaviour. But these models are only as good as the assumptions that went into them—and none predicted how the collapse of the U.S. housing market would submerge the entire global financial system. White’s foresight that Greenspan’s approach to the U.S. credit bubble would lead to trouble wasn’t based on econometrics, but on an undergraduate textbook on the history of business cycles that he bought when he was in his 20s. The pertinent chapter concerned the period before the First World War.