Global Imbalances and Liquidity-Induced Bubbles

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GLOBAL IMBALANCES AND LIQUIDITY-INDUCEDBUBBLES: REFLECTIONS ON THE GREATRECESSION AND THE NEED FOR INTERNATIONALMONETARY REFORM*

Juscelino F. Colarest

IN TRO DU CTION ..................................................................................... 603I. THE CRASH OF 2 8 AND THE EARLY RESPONSE ........................ 6II. STRUCTURAL CAUSES AND CONSEQUENCES OF EXCESSLIQUIDITY IN GLOBAL FINANCE ................................................. 607III. PERSISTING GLOBAL IMBALANCES IN THE INTERNATIONALMONETARY SYSTEM ................................................................... 609IV. THE WAY FORWARD: REBALANCING THE GLOBAL ECONOMY 612A Rebalancing Through CoordinatedAdjustments in

NationalandRegionalPolicies 612B. Rebalancing Through Changing he InternationalMonetary System 614

C ONCLUSION 16 Our diagnosis of the crises that ail us ... depends in part on the

theoretical tools through which we define them and the vocabulariesthrough which we narrate their possible solutions. ' The limits ofmy languagemean the limits of my world. ,2

INTRODUCTIONContributors to this symposium issue agree that the domesticfinancial system is broken. Their diagnoses may vary with respect tothe extent to which deregulation contributed to the financial crisis of

2008-2009, but they seem to coalesce on one major cause: excessiveleverage and risk-taking in new collateralized debt instruments and This essay contains the substance of he remarks the author made during the Syracuse

Law Review 2010 Symposium, entitled Law and the Financial Crisis: Economic RegulationDuring Turbulent Times. The author thanks David Zaring for his insightful comments onan earlier draft.t Associate Professor of Law, Syracuse University College of Law. The author maybe contacted at [email protected] Jacqueline Best, Hollowing out Keynesian Norms: How the Search or a Technical

Fix Undermined he Bretton Woods Regime 30 REV. INT L STUD. 383 385 (2004).2. LUDWIG WITTGENSTEIN TRACTATUS LOGICO-PHILOSOPHICUS 115 (D.F. PearsB.F. McGuiness trans., 1961) (emphasis in original).


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Syracuse aw Reviewderivatives. Due to the role excessive risk-taking played in this crisis,proposals for regulatory reform have so far focused, understandably, onmeasures that would promote better risk management. Yet, excessiverisk-taking was nearly ubiquitous and occurred despite different levelsof regulatory stringency across nations, suggesting that regulatoryfailure, though a contributing factor, ought not to be singled out as thesole cause of such widespread damage. One example illustrates thepoint: the immediate effects of the financial crisis of 2008 were initiallytransmitted to European banks due to their large holdings of U.S.corporate securities. Clearly, these banks were subject to regulatoryregimes with varying and, in some cases, stronger leveragerequirements than those imposed on U.S. banks. However, the suddensevere deterioration in their balance sheets reflected not only theunraveling of their U.S.-based debt positions, but also their enormousforeign currency exposure. They held massive stocks of fast-tumblingdollar-denominated assets. This demonstrates that net flows and majorgross positions in foreign currencies can have quite a destabilizingpower in the international financial system and, thus, require seriousconsideration. Significantly, it demonstrates why regulatory reform thatfocuses on reducing excessive risk-taking in debt markets, thoughdesirable, would not be effective in checking the non-debt relatedcauses of the last financial crisis.

This commentary goes beyond the traditional focus on financialrisk and leverage regulation to discuss how some essential features ofthe current international trade and monetary regime have played a majorrole in producing the recent financial crisis. Specifically, the authorposits that persistent underlying global imbalances in exchange rates,trade, savings and consumption contributed to the pre-crisis expansionin credit and liquidity in a number of countries, leading to the formationof bubbles, as financial institutions (investment banks, insurancecompanies, etc.), commercial concerns and private households wereallowed to take excessive risks.Part I briefly describes the crash of 2008 and the initial U.S. an dG-20 coordinated responses. Part II then develops a sketch of the globalimbalances that create the liquidity conditions ideal for the developmentof bubbles, and Part explains how the current international economicarchitecture is responsible for these imbalances. By explaining a) thatstructural imbalances in exchange rates, trade, savings and consumption

3. Olivier Blanchard Gian Maria Milesi-Ferretti, GlobalImbalances In Midstream?6 (Int l Monetary Fund Staff Position Note SPN/09/29, 2009), available athttp://www.imf.org/extemal/pubs/ft/spn/2009/spn0929.pdf.

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InternationalMonetary Reformare a result of the current structure of the international economicsystem; and b) that they contribute to excessive liquidity, which, inturn, fuels the formation of bubbles through financial markets, theauthor posits that localized regulatory fixes to risk-taking are not likelyto avoid future bubbles. Therefore, Part IV proposes a set ofcooperative comprehensive exchange rate adjustments that would limitthe destabilizing effect that accumulation of massive reserves in on ecurrency has produced. These adjustments could be achieved throughdifferent cooperative mechanisms, which the author discusses. Byreducing the incentives for the formation of massive currency reserves,this change would reduce the likelihood of excessive pools of liquidity,which, through the operation of the international financial system havebeen the cause of worldwide economic instability. This commentaryconcludes by highlighting that such reform can be attained only viaglobal macroeconomic coordination, requiring different countries toaccept certain short-term monetary, budgetary and geopolitical trade-offs if they wish to forestall the rise of protectionism and promote astable international economic environment in the long run.

I THE CRASH OF 2008 ND THE EARLY RESPONSEThe last financial crisis is American-born in more ways than onecan imagine. It was in the United States that flawed regulatory

structures, poor risk-management and innovations in securitization i.e.,the repackaging of collateralized debt, such as mortgages, corporateloans credit card receivables among other financial assets intopresumably liquid securities then sold to investors throughout theworld) and derivatives i.e., the creation of synthetic credit defaultswaps insurance-like contracts issued by and traded among financialinstitutions containing promises to pay in the event of a counterpartydefault) combined to channel easy money to the various sectors of theeconomy. Residential households, commercial businesses, consumersand of course, financial institutions were all participants in a bubble thelikes of which we had last seen prior to the Crash of 1929. Onceexpectations of ever rising real estate prices collapsed and the crisisarrived, policy response was strong, initially counting on a certainbipartisan support, to wit the Bush and Obama Administrations'Troubled Asset Relief Program (TARP) and the successive rounds ofFederal Reserve agency debt purchases that began in the fall of 2008.Together with a zero-interest policy, this is now the biggest liquidityinjection in modern history.

The severity and scope of the crisis required a remarkable shift ineconomic policy: macroeconomic tools were deployed worldwide to

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606 Syracuse Law Review [Vol. 60:603counteract the effects of a strong downturn in global private-sectordemand. While these changes also took place during a period ofdomestic political transition of remarkable significance to the UnitedStates they occurred foremost in response to new geopolitical realities.In this broader sense the rise of the G-20 was remarkable. The Londonand Pittsburgh meetings among leaders of the world s twenty greatesteconomies marked the transition from a G-8 to a G-20 format, whichreflected a greater appreciation of cross-border spillovers in a globalizedworld and a major political rebalancing between the developed worldand the large and rapidly growing economies of the developing world.This timely update in the power structure of an increasinglyinterdependent global economy gave macroeconomic policy thenecessary scope to effectively attenuate the effects of the financialcrisis.

Notwithstanding lingering problems with unemployment in theUnited States and other high-income countries) and excess capacity(worldwide), this policy has so far been a qualified success: forecastgrowth for 2010 for the largest economies in the world is higher than itwas a year ago see chart below).

onsensu frcasts for reM GDP growth n23.0 110

GDP sh resof th G adthe s5

4. Martin Wolf, What the World Must Do to Sustain Its Convalescence FIN. TIMES,Feb. 2, 2010, at 13.

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nternationalMonetary ReformIndeed, the United States and the world economy have managed to

escape from another Great Depression, but unemployment rates are notlikely to rebound even in the medium term. Congressional BudgetOffice unemployment forecasts for 2010 actually went up from 6.1 inSeptember 2009 to 9.0 in January 2009, a remarkable sign of aprotracted, if not fickle, economic recovery. 5

Remarkably, from California to New York, from Ireland to Spain,and from Dubai to Abu-Dhabi, the combination of free flowing capital,financial deregulation, excessive risk-taking and now G-20-orchestratedgovernment bailouts has created the mother of all moral hazards:bankers throughout the world are rewarded when their bets are rightwhile governments (i.e., taxpayers) absorb their losses when they arewrong (even while they keep their bonuses). Indeed, in the case of theUnited States, the current crisis is only the last in a series of financialearthquakes where government intervention occurred to avoid ormitigate the economic effects of a market crash, thus further creatingperverse incentives to taxpayer-subsidized risk-taking. To name onlythe most recent interventions, recall the Long Term CapitalManagement shock of 1998 (Fed-coordinated suspension on collectionof hedges from an overleveraged fund and lowering the Federal FundsRate three times in the following three months) and the post-NASDAQbubble bailout (2000-2001) (dropping the Federal Funds Rate to belowtwo percent) to name only the most recent interventions. Indeed,scholarly focus on moral hazard and the design of prophylactic publicpolicy is of crucial importance. However, reducing moral hazard infinance is but one of the more pressing questions facing policymakers.

II. STRUCTURAL CAUSES AND CONSEQUENCES OF EXCESS LIQUIDITY INGLOBAL FINANCE

One must not ignore that liquidity/excess risk-taking-inducedcrises have also occurred in other countries (e.g., the Japanese realestate crisis and protracted banking bailout in the 1990s, the Mexicansovereign bond crisis and bailout of Wall Street investors in 1995) an deven entire regions (e.g., the Latin American debt crisis of 1982 and theAsian crisis of 1998). True, each crisis had its peculiarities. Yet, in all,a similar mechanism seemed to be in operation: substantial capitalinflows came to less than ideally regulated one might suggest poorlyregulated ) domestic financial markets, causing internal bubbles instock markets (Korea and Japan), real estate (Japan), bond markets

5 ee CONG. BUDGET OFFICE THE BUDGET AND ECONOMIC OUTLOOK: FISCAL YEARS2 9 TO 2019 2009), http://www.cbo.gov/ftpdocs/99xx/doc9957/MainText.3. 1.shtml.

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Syracuse Law Review(Mexico) or exchange rate markets (Asia and Brazil), which eventuallycrashed, each bringing about economic slumps and some kind ofgovernment or IMF-managed bailout.With moral hazard lurking everywhere, mainstream orthodoxyinvariably suggested voluntary or IMF-imposed reforms based on someversion of The Washington Consensus, a recipe calling for furtherfinancial and trade liberalization in combination with fiscal austeritymeasures on the part of governments, never mind the profoundeconomic damage that reductions in government spending duringprofound economic downturns would cause. This neoliberal consensuswas largely premised on the notion that the ever-expanding pool ofsavings available in international markets presented nations and privateconcerns with greater opportunities (e.g., greater access to globalfinance, lower though variable interest rates, etc.) as well as risks e.g.,sudden capital outflows, market, interest rate and currency volatility,etc.). Nations had to maintain constant fiscal discipline and healthyeconomic indicators so as to keep the status of good debtors, therebysecuring themselves access to international financing opportunities.

Participants in the new world financial order took sudden exchangerate reversals very seriously. On one side, borrowers feared, andtherefore attempted to avoid, exchange rate volatility due to itsdestructive effect, although contagion due to deteriorating regionalconditions sometimes did not spare even those otherwise regarded as in good behavior (South Korea in 1998 is a classic case). On the other,world financiers perceived exchange rate declines both as a reaction todeteriorating economic indicators and, of course, as one moreopportunity to profit from launching speculative attacks against thecurrencies of bad debtor nations. The traditional rhetoric of bigfinance remained unaltered until quite recently, when, in a classicdisplay of situational ethics, the Anglo-American hegemonic discourseunderwent a quick transformation: from heralding the virtues of strictadherence to market discipline to pleading too-big-to-fail when thetwin effects of overleveraging and counterparty exposure brought thefinancial system to the brink of collapse.While the quick unraveling of the last bubble caused the mostsophisticated financiers to suspend their reliance on market orthodoxyeven if momentarily (and opportunistically), the unquestionablesteadiness of the dollar's status as the world's reserve currency hasallowed the United States to maintain a constant, self-interested,although not self-reflecting, free-market discourse during every crisis.Indeed, from the perspective of the United States, a major borrowernation, it has been easy to say do as we say, not as we do, regardless

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nternationalMonetary Reformof macroeconomic conditions. Due to the dollar s perennial reservecurrency status, U.S. foreign debt is dollar-denominated, so any suddenplunge in the dollar (in the unlikely event of a currency attack) wouldnot bring about an explosion in debt. Furthermore, under the currentlyoperating international monetary system, should an interruption in theflow of foreign private finance occur, foreign central banks would stillbe buying dollars, as some seek protection from currency attacks byaccumulating substantial dollar reserves, 6 while others, also adept toexport-oriented growth, feel compelled to sterilize the inflow of dollarsfrom their trade surpluses by buying U.S. treasury bills.7 Thus, so longas the United States is willing to accept trade deficits resulting fromexport-dependent growth strategies, these imbalances are likely tocontinue.Accordingly, it is this willingness to take on trade deficits thatexplains the dominance of the dollar in reserve accumulation. Ofcourse, this willingness is based on the United States' ability to continuerunning large deficits and adding to its debt. As this debt grows andreaches unprecedented levels in the next few years, this situation islikely to change as foreign central banks reduce their dollar exposureand the dollar will lose its status as the single dominant currency forreserve accumulation. In this sense, the impact of the latest financialcrisis cannot be overstated. It did bring us closer to the inevitablecurrency realignment because the U.S. government s rescue of thefinancial system and dealing with the consequences of an economicslump greatly added to its debt. Yet, other noneconomic factors mayalso contribute to this transformation. For instance, the politicalimplications of a long, drawn out U.S. jobless recovery appear to haveaggravated simmering trade and exchange-rate tensions between theUnited States and China, which might accelerate the pace ofinternational currency reform.

III. PERSISTING GLOBAL IMBALANCES IN THE INTERNATIONALMONETARY SYSTEM

Even as United States and global economic recovery takes place,persistent exchange rate and trade imbalances between surplus countries(China, Germany, Japan and many other East Asian economies) an ddeficit countries (Australia, Spain, United States, United Kingdom, etc.)

6. Blanchard Milesi-Ferretti, supra note 3, at 5 10 (describing the insurancerationale for dollar accumulation and suggesting that the overall amount of reserveaccumulation is difficult to justify [solely] on the basis of insurance motives ).7. Paul Krugman, Op-Ed., hineseNew Year N.Y. TIMES, Jan. 1, 2010, at A29.

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yracuseLaw vi wwill contribute to continued, though slower-paced, accumulation ofdollar reserves by surplus countries. Seeking to avoid currencyappreciation, China and East Asian economies are likely to carry oninvesting their reserves abroad thus dumping excess liquidity on worldfinancial markets. Because these persistent trade surpluses vastlyexpand liquidity in international financial markets, they contribute toasset and capacity bubbles by enhancing the conditions for excessiveleverage and risk-taking. This linkage between exchange rates,international trade and the international monetary system must beunderstood if one wants to reduce the likelihood of more internationalfinance-induced boom and bust cycles. Until a rebalancing of theglobal monetary regime takes place, this linkage will continue to play amajor role in the formation of asset and capacity bubbles.The recognition that persistent trade surpluses and deficits are notsustainable and that reform is due in the international trade andmonetary system also has important and timely analytical implications.It focuses attention on the notion that, at least in principle, both surplusand deficit countries share an interest in reform, even if the path to suchreform might be a difficult one. This shared interest arises from therealization that the economies of each (surplus and deficit countries) rexposed to detrimental effects of liquidity-induced bubbles, even if thelegal and economic infrastructure through which liquidity connects withexcessive risk-taking in their economies might differ. Yet, as countrieswith fiscal and budgetary discipline and high savings-to-gross domesticproduct (GDP) ratios, surplus countries might have a harder timeunderstanding how they are not immune to the risks that persistent,large currency reserves impose. In fact, although the idea that massivecurrency hoards guarantees economic stability may seem intuitive,strong anecdotal historical evidence would suggest that protection fromexternal debt and currency crises in no way protects a country from therisks of excessive domestic liquidity. For example, the Japanese hightrade surpluses of the 1980s fueled a domestic real estate bubble whosebursting resulted in a profound debt recession that eventually led to the Lost Decade. Going back in time, the United States' massiveaccumulation of reserves in the 1920s (five percent to six percent ofglobal GDP by some estimates), resulted in a capacity and stock marketbubble that eventually produced the Great Depression. 9 In the currentworld awash with cheap money, some experts have suggested that

8. See Rebalancing he orldEconomy: Japan ECONOMIST Aug. 13, 2009, at 65.9. See Never hort Country with 2 Trillion in Reserves?http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves (Feb. 2, 2010).

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nternationalMonetary ReformChina is currently experiencing a real estate and capacity bubble,' despite parking high foreign-currency reserves abroad (estimates varyfrom 2.3 to 3 trillion dollars,' 1 or about four percent to five percent ofglobal GDP' 2) and imposing restrictions in foreign capital inflows. 3 Asits large developing economy experiences rapid urbanization andgrowth in labor productivity, it is not surprising that China would attractmassive capital inflows, tighter regulatory controls notwithstanding.

If excess liquidity fed the growth of major bubbles in Japan andcurrently feeds one in China--despite the strong anti-consumption biasresulting from Chinese trade, exchange rate and capital inflowmanagement policies-the environment for asset bubbles (stocks,commodities, real estate, etc.) to develop in deficit countries is evenmore favorable. First, the legal and economic framework that connectsdomestic and international finance is much less restricted in thesecountries. Second, deficit countries impose very few restrictions onconsumer demand. Third, these countries characteristically have lowimport tariffs. Thus, the combination of a sophisticated consumer creditindustry, free-floating currencies and free trade policies feed a pattern ofhigh consumption that has led to major asset bubbles in stocks andcommercial and residential real estate. Indeed, the high consumptionpattern that fed and reflected these asset bubbles in the model deficitcountry is captured in the current account deficits it accumulated inrecent years: from 2005-2008, the U.S. current account deficit averaged1.4% of global GDP. 14

Viewed in combination, these trends mean that the world economyfaces a conundrum: jump-starting global demand is essential to anysustainable economic recovery, but after a decade that saw the largeststock market bubble and the biggest credit-fueled commercial an d

10. See David Barboza, Shorting China: The Man Who PredictedEnron sFallSeesBigger Collapse Ahead, N.Y. TIMES Jan. 8, 2010, at BI, B4, (quoting James S. Chanos'sview that China's real estate sector looks like Dubai times 1,000-or worse. ).

11 Compare Bloomberg News, China s Foreign-Exchange Reserves Surge,Exceeding 2 Trillion, BLOOMBERG.COM, July 15, 2009,http://www.bloomberg.com/apps/news?pid=20601087&sid=alZgl4B 1 t3s, with SaraHaimowitz, China s Record Reserves, TRADEREFORM.ORG, Jan. 27, 2010,http://www.tradereform.org/content/view/2319/52.

12. World Bank, Key Development Data Statistics,http://web.worldbank.org/WBSITE/EXTERNALIDA TASTATISTICS/0,,contentMDK :20535285-menuPK: 1192694-pagePK:64133150-piPK:64133175-theSitePK:239419,00.html(reporting global GDP at $60,587 billion in current US dollars).13. See Eswar Prasad Isaac Sorkin, Brookings Inst., Sky s the Limit?: Nationaland

Global Implications of China s Reserve Accumulation, BROOKINGS, July 29, 2009,http://www.brookings.eduI/articles/2009/072 1_chinasreserveprasad.aspx#table 1.14. Blanchard Milesi-Ferretti, supra note 3, at 7 tbl. 1.

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Syracuse aw Reviewresidential real estate bubble in the United States, there is little doubtthat the United States alone could provide the cure for the global declinein demand by taking on increasingly higher trade deficits. Nor can theworld rely solely on other deficit countries to do the job since highunemployment and precarious economic conditions have drainedpolitical support for free trade.

IV. THE WAY FORWARD: REBALANCING THE GLOBAL ECONOMYRebalancing trade and financial flows could occur either by aseries of coordinated national policy changes achieved throughconsultations among major economic players, or by pursuing a moreambitious approach through the negotiation of a new multilateral

currency regime in the form of an international agreement. Regardlessof the means employed, rebalancing would depend on two criticalquestions: (i) whether surplus countries are willing to provide thenecessary expansion in global demand by reorienting their economicdevelopment strategies to domestic consumption instead of free-ridingon other countries' economic stimulus plans-largely the option China,East Asian countries and Germany have taken so far-and (ii) whetherthe United States is prepared to live with the geopolitical implicationsresulting from the dollar's loss of its status as the primary reservecurrency-a topic conveniently avoided by U.S. officials who, so far,seem inclined to focus only on renminbi appreciation, while eschewingdiscussion of its own free-rider problem.A RebalancingThrough CoordinatedAdjustments in National n

RegionalPoliciesIn the case of China and East Asian countries-Germany sautonomy in exchange rate policy is more constrained due to itsparticipation in the euro, which is itself already overvalued vis-A-vis thedollar-this would require their governments to allow their currencies

to naturally appreciate against the dollar. This would reduce theirexports and trade surpluses and force their industry to focus on highervalue added production, a transition that Japan and South Koreasuccessfully underwent in the past. A recent econometric analysissuggests that an across-the-board currency appreciation in China andEast Asia would reduce processed exports by ten percent, which would switch [global] expenditures towards US and European goods, andthus rebalance world trade. 15 To offset falling foreign demand, these

15. Willem Thorbecke Gordon Smith, How Would an Appreciation of he Renminbiand Other East Asian CurrenciesAffect China s Exports?, 18 REV. INT L ECON 95, 106

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nternationalMonetary Reformcountries would have to rebalance their growth strategies towards morereliance on domestic demand, which would obviously come at the costof a reduction in their current accounts.A similar refocusing on domestic consumption must occur inGermany and other European surplus nations. Because currencyappreciation cannot be prescribed to these countries, only anexpansionary fiscal policy would contribute to regional and globalrebalancing by stimulating domestic employment and consumption. Atthe regional level, any European Union-wide effort to cure its deficitcountries' economic slump through trade surpluses would be viewed asa beggar-thy-neighbor policy, leading to trade friction with its globalpartners and threatening global macroeconomic coordination at a criticaltime. Therefore, policies that stimulate eurozone surplus countries'domestic demand must be coupled with a region-wide expansionarymonetary policy so that a resurgence in debt-financed growth reduceseurozone deficit countries' large external and fiscal deficits. Absentsuch coordinated response, demand weakness will persist, the slump inthe entire eurozone will be long-lasting and political crises will likelyoccur

From the United States perspective, the rebalancing of the dollarvis-d-vis other world currencies would increase its saving-to-GDP.ratio, make its exports more competitive and reduce its trade deficit.While this would be welcome news for U.S. competitiveness andemployment, such change would not come without a cost. The declineof the dollar in world trade and finance would not only be a symbolicloss of geopolitical power, but it would also have profound internationaland domestic consequences. Once trade and capital flows occur in abasket of world currencies-in which the dollar would still beimportant, though not as predominant-any further downward slide inthe dollar relative to other currencies would increase the United Statesinternational debt. Because this debt would in turn need to be financedin a new, less dollar-dominated currency, the budgetary flexibility of theold system would be gone, and the United States, like any other country,would have to accept the fiscal and budgetary discipline it used toprescribe to other countries. Yet, the transition to a new internationalmonetary regime would not imply that the United States would face(2010).

16. ee Matthew Saltmarsh, Europe sRecovery Comes to Near Halt, N.Y. TIMES Feb.13 2010, at B7 ( The Federal Statistics Agency in Germany said that the 'only positivecontribution [in the fourth quarter of 2009] was made by foreign trade,' while stating thatGerman GDP was flat in the fourth quarter of 2009 with domestic consumption andinvestment declining.).

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Syracuse aw vi whigher interest rates in the future-that would depend on post-GreatRecession U.S. fiscal deficit and private saving trends.

One of these fundamental adjustments is already taking place: U.S.private saving rates have increased since the onslaught of the currentcrisis. Personal saving is now 4.8 of disposable personal income, amajor improvement if one considers the zero or negative savings beforethe crisis. 7 This explains the reduction in the U.S. current accountdeficit and provides a glimpse of the path for further rebalancing. 18Although the improvement in the savings statistics has occurred largelyas a response to the greater uncertainty in the economy, it demonstrateshow responsive domestic savings rates are to changes in domestic andinternational economic conditions. Unavoidably, under the new rules,the U.S. government would have less budgetary and fiscal discretionthan it currently enjoys, but, as discussed, the present rules, too, havetheir own costs. One thing is certain: the new world would be quitedifferent from the one in which Democratic and Republicanadministrations of the past forty years lived.B Rebalancing Through Changing he InternationalMonetary System

Despite the G-20 contribution in engineering the economic rescueduring the worst days of the crisis, the global imbalances thatcontributed to it persist. They do so because multilateralmacroeconomic coordination ceased to operate once the worst of thecrisis passed. Post-crisis policy response continues to be made at theindividual country level or, at most, at the regional level, withquestionable efficacy due to lack of multilateral policy coordination. 19While rebalancing could occur through the series of coordinated actionsdiscussed above, that is hardly the only method to achieve that end.A multilateral international monetary agreement that creates a newforum for macroeconomic coordination with some enforcementmechanism would be an alternative to the current rhetoric-based method17. Compare News Release, Bureau of Econ. Analysis, U.S. Dep t of Commerce,Personal Income and Outlays: December 2009 (Jan. 31, 2008),http://www.bea.gov/new sreleases/national/pi/pinewsrelease.htm, with News Release,Bureau of Econ. Analysis, U.S. Dep t of Commerce, Personal Income and Outlays:December 2007 (Feb. 1, 2010),http://www.bea.gov/newsreleases/national/pi/2008/pi1207.htm.18. See Blanchard Milesi-Ferretti, supra note 3, at 12 tbl. 2 (forecasting that theU.S. current account deficit will decline to an average -0.6 of world G.D.P. in the 2010-14period).19. See e.g. Wolf supra note 4, at 13 (pointing out China s continued reliance on

export-led growth); Saltmarsh, supra note 16, at B7 (discussing the current effects ofGermany s reliance on exports).

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Syracuse Law vi wto reduce imports, generally with a focus on securing a safe balance-of-payments position.23 Accordingly, WTO members will have a difficulttime relying on these provisions if they decide to take legal action inhopes of addressing the current global imbalances and their associatedcurrency causes. To be any help, a new international institution oughtto have broader powers than the IMF currently has in this restrictedtrade context.

Furthermore, past is not necessarily prologue, especially when, thecosts of perennial currency misalignments have become clearer and acontinuously operating organism with some deliberative andenforcement powers would offer some clear benefits. Indeed, such aninstitution would improve information exchange among members andwould more likely produce outcomes that are within the tolerance ofdifferent members, most of which would favor multilateralism even ifit came with weighted voting, the current deliberative method within theIMF) over often) asymmetric bilateralism. Whether or not a newinternational institution is created, the fact remains that globalrebalancing can only come as a result of multilateral cooperation; short-term nationally or even regionally-focused fixes are too limited in scopeand can be quite divisive.

CONCLUSIONIf an international monetary system awash with liquidity has beena major conduit to bubbles, crashes and bailouts, the transition to a new,

more stable system, would require major changes to the status quo andthus constitutes a daunting challenge. Certainly, global macroeconomiccoordination will not be easy whichever form it takes. However, suchtransition is absolutely inevitable in an increasingly interdependentinternational system plagued by major imbalances that call for greatermacroeconomic coordination and flexibility. Failure on the part ofpolicymakers to grasp the scope and transnational causes of thefinancial crisis and the Great Recession of 2008 2009 would not bodewell for the future of the global economic system. The stakes could notbe higher as failure to restore the world to a sounder, more balancedfooting could produce major disruptions and a resurgence ofprotectionism.

23 ee id art XII paras. 1-2 art. XVII paras. 4 9.

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