Of Our Time: The Bankers' Regime


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emocracy has turned upside down, of late. At this writing, the nation is mesmerized by Oval Sex and related scandal. Elected representatives in Washington are talking about little else. The presidency is under siege. Cable television and talk radio savor every titillating detail. Meanwhile, the larger events now rocking the world are being addressed by people largely hidden from public view, unaccountable to the democratic process, whose decisions are barely noticed, and who thus lack the power and authority to take the larger steps that are now especially needed.

Consider, first, the Federal Reserve Board's Open Market Committee (FOMC). In the old days, when America still had a fiscal policy to speak of (that is, when presidents and Congress could spur the economy through public spending), and when money didn't rush nearly as fast or as easily across national borders, the FOMC's decisions were important, although not dominant. Now, they are definitive. In a previous era, it was possible for elected officials in America to fashion a host of domestic policies affecting jobs, wages, the poverty rate, public spending on health and education, and access to homes and cars, to take but a few examples. Candidates for national office occasionally took positions on such issues; there was occasional public debate about them; laws were even passed.

Now, much of this is beside the point. Domestic policy is handmaiden to the bond market. The level of unemployment, the rate of wage growth, the poverty rate, and access to money for homes, cars, and for a large share of the cost of higher education depend on the rate of interest. And what happens to interest rates, both short-term and long-term, depends largely on the decisions made by the FOMC.

Who, exactly, decides? Alan Greenspan chairs the FOMC, but eleven other people sit on it, and Greenspan needs a majority of their votes. Who are these people and how did they get there? Six seats go to the other governors of the Federal Reserve Board, who are appointed by the president and confirmed by the Senate, for fourteen-year terms. Four of the current crop were appointed by Bill Clinton, one was appointed by George Bush, and the other seat is empty. The five remaining seats belong to the presidents of the regional Federal Reserve Banks. One of them belongs permanently to the president of the Federal Reserve Bank of New York. The other four rotate gradually among the other regional Fed Banks.

Among the current occupants is William Poole, age 61, now president of the St. Louis Federal Reserve Bank. Poole is a strict monetarist who has been an outspoken advocate of zero inflation, regardless of the sharp increase in joblessness that would result. Until last March, Poole was a professor of economics at Brown University. In the 1980s, he was one of the three members of Ronald Reagan's Council of Economic Advisers. From 1985 until last March, he was also an adjunct scholar at the Cato Institute. Another regional seat belongs to Jerry Jordan, age 56, president of the Cleveland Fed. Jordan shares Poole's views as well as his background as a former member of Reagan's Council of Economic Advisers. He was a member of the U.S. Gold Commission. And he has advised the German Bundesbank, perhaps the most inflation-phobic body in the world. Who appointed Poole and Jordan, and the other regional bank presidents? The boards of the regional banks. Who sits on the boards of the regional banks? Mostly, presidents or senior officers of banks and other financial institutions. Who elected them to the boards? Their predecessors.

In an earlier era, America had a foreign policy as well, and an apparatus for setting it and keeping it on course: a State Department staffed with career diplomats and managed by political appointees; a National Security Council linking State and Defense Departments and providing the president with independent advice and analyses; and a national security adviser in the White House itself, to coordinate all of it. But now American foreign policy depends largely on global flows of money, and our apparatus for trying to influence these flows has almost nothing to do with the old apparatus. Here, too, decisions of the FOMC are increasingly important.

At this writing, the Asian economies continue an implosion that started more than a year ago, as money began rushing out in search of a safer haven. Russia is teetering on the edge of financial (and maybe political) ruin. What had until recently been called the "big emerging markets" of the world are now big submerging markets. Such capital flight is, by its very nature, a self-fulfilling prophecy: the last ones out are left holding a near-worthless bag. Much of the money has headed to the United States, which is one reason the value of the U.S. dollar has climbed progressively higher relative to other currencies, and why the U.S. stock market soared to astronomical heights last summer—before the high dollar clobbered exports and squeezed corporate profits, causing the bubble to burst.

Prevailing interest rates in the United States play a critical role. Higher rates render America a relatively more attractive haven; lower rates, a less attractive one. Thus it is not entirely coincidental that the Asian crisis commenced only months after the FOMC raised interest rates slightly in March 1997. The extent of the devaluation in any given place around the globe has been in rough proportion to the prior dependence of that place on American capital. Only the American dollar and, significantly, the British pound, have been ascending. (A key explanation for why the pound has joined the dollar as a magnet for world money is that the Bank of England has increased interest rates five times since Tony Blair gave the bank its independence in the summer of 1997.)



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here is, of course, another important center of American foreign policymaking, which has grown in importance as global money flows have taken center stage. It is the International Monetary Fund. The IMF is now in the business of trying to stem the hemorrhaging of several of these economies by lending them tens of billions of dollars. It has conditioned its loans on the willingness of these nations to do things like increasing domestic interest rates and reducing public spending, or quickly deregulating various state-run enterprises. The avowed reason for insisting upon these steps is to convince global lenders and investors to remain in these nations rather than abandon ship. But these austere measures have had perilous social consequences—they have driven up unemployment rates and shredded social safety nets. Thousands of people have been murdered in Indonesian riots. Workers have gone on strike in South Korea. Labor unrest threatens much of the East Asian region. If the crisis continues or deepens, democracy itself may be threatened, in East Asia as well as in the precarious democracy of Russia.

Who decides on these stringent conditions? The managing director of the IMF is Michel Camdessus, age 65, who began his third five-year term in January 1997. Before his appointment, Camdessus was governor of the Bank of France. Camdessus's first managing director is Stanley Fischer, age 55, who until his appointment was a professor of economics at the Massachusetts Institute of Technology. Who appointed the two of them? The Executive Board of the IMF. Who are they? Mainly banking and financial types, placed there by the various governments who finance the IMF.

A third and final power center should be included in this inventory: the U.S. Treasury Department. Twice in the last four years, Treasury officials have directly intervened in world currency markets. In 1995 they assembled $40 billion in IMF and Treasury loans to prop up the Mexican peso. Then last June they converted an estimated $2 billion into yen, temporarily halting the yen's slide. Treasury Secretary Robert Rubin confers regularly with Alan Greenspan about what should be done to keep the global economy afloat. Greenspan's views carry particular weight, because it's up to Greenspan to reassure his colleagues—who might otherwise be inclined to follow Poole and Jordan—that the sharp run-up in asset prices in the United States caused by the vast inflows of foreign capital will not be inflationary. Treasury officials, in turn, confer regularly with Camdessus and Fischer about how to get global money to stay put. The Treasury officials' opinions carry particular weight with the IMF officials, because the IMF depends for much of its ongoing funding on the United States.

It is more complicated than this, of course, as all human and institutional interactions are. But this thumbnail sketch gives you the basic outline: decisions of the FOMC are not only affecting domestic policy in the United States but also are influencing global capital flows—to which officials at both the IMF and the Treasury are responding by pressuring other nations to alter their domestic policies. Thus it is that a small number of people—mostly economists and financial specialists—are exercising substantial influence over the lives of many millions.

One question to ask is whether the risks and trade-offs implicit in their decisions—involving unemployment and growth, social insecurity and economic stability, in the United States and elsewhere around the world—are the correct ones. The economic and financial specialists responsible for making these choices have no particular political or social expertise; and, let us emphasize again, they are neither directly accountable to democratic processes nor visible to the people whose lives are profoundly affected by what they decide. For example, it is to be hoped that by the time you read this the FOMC will have reversed course and cut interest rates, the inclinations of Poole, Jordan, and other inflation hawks to the contrary notwithstanding. By making America a less attractive magnet for global capital, lower interest rates would take some of the pressure off countries on the losing end, in turn making the IMF's job simpler. There would be other benign consequences as well. Lower interest rates would reduce the value of the dollar and thus ease the plight of American exporters, thereby restoring some of the stock market's vitality. Lower rates would also help maintain a tight labor market in the United States, enabling people at the bottom to find jobs that pay a somewhat higher wage. But even if the FOMC has had the good sense to lower interest rates, will they have lowered them enough?

There is a more basic issue here. One of the reasons governments exist is to make sure economies function for the benefit of people, and not the other way around. Markets do not exist in a state of nature. Markets—even global markets—are human creations. After all, global financial markets functioned in a particular fashion after the major industrial powers explicitly established certain rules for them shortly after World War II. This included a system of exchange rates coupled with international loans designed to maintain their values and to explicitly discourage speculation. Governments were thus free to pursue, within broad limits, whatever mix of fiscal and monetary policies they felt to be in the best interests of their people. But now, all that has been changed. Nations bob up and down on tidal waves of global speculation, helpless to do much of anything other than rely on decisions made by people such as Messrs. Poole, Jordan, Greenspan, Cam dessus, Rubin, and a smattering of central bankers elsewhere (including, next year, the governors of a new European Central Bank).

It was ironic, in this regard, to hear the encomiums China has received from America for its willingness to forbear from devaluing the yuan. As President Clinton embarked for his extended visit last June, it was widely reported that the Chinese signaled that they would continue their forbearance on condition that the United States prop up the Japanese yen. Shortly thereafter, the Treasury Department obliged. Since then, China has been praised as a source of economic stability in the region. But, curiously, American officials have failed to mention one unique aspect of the Chinese yuan. It is not freely convertible into dollars. Thus, unlike almost everyone else, China has the power to determine its economic fate.


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ltimately, the United States holds the key to all of this. The dollar is king. America is preeminent, both economically and politically. Should we wish to do so, we could lead the way to a new system of global finance. We could create a coordinating mechanism among major central banks for reducing interest rates across the board, so that individual nations could relax them without fear that capital would flee elsewhere. We could invent a global form of bankruptcy reorganization for nations in trouble, which would forgive their older debts and reschedule payments on newer debt. We could clamp down on global speculation, imposing a small Tobin Tax (named after the economist, James Tobin, who first proposed it) on all financial transactions. We could deny tax deductibility on all loans made for the purpose of short-term portfolio investment. We could treat the financing of new factories, equipment, and other forms of new infrastructure more favorably than portfolio investment, and pressure the IMF to do the same. We could convene a new Bretton Woods and establish global "escrow" accounts for short-term loans and portfolio investments, which would guarantee that the money could not be moved until a certain length of time had elapsed. We could assign fixed "bandwidths" for the movements of currencies in relation to one another, enforced by a much larger and more predictable system of IMF-coordinated "insurance" in the form of purchases of currencies about to descend below their band and sales of currencies about to ascend above. And, for banks and institutional investors, we could create a system of mandatory insurance against the possibility of bad global loans or worthless global investments—with premiums set according to the degree of risk. And so on.

On September 14, the President asked Treasury Secretary Rubin and Alan Greenspan to convene a meeting of their global counterparts to design a new "international financial architecture." But it is less than likely that the same group of people who have failed to reverse the present deterioration will have the breadth of vision to create a fundamentally new system. These people continue to view the turmoil elsewhere as somehow the fault and the responsibility of others: it has become fashionable in economic circles to talk of the "contagion" that spread from Thailand outward, as if it were an infectious disease. Such talk implicitly relieves the United States of any responsibility in the matter. We piously proclaim that their domestic lending practices have been shoddy; they have succumbed to "crony" capitalism; their "planned" economies are inefficient; and so forth. [See Richard Katz, "What Japan Teaches Us Now," TAP, September-October 1998.] But it was not so long ago that the Asian economies were thought to be economic models of the virtues of saving and investing for the long term. And our focus on East Asia and Russia has blinded us to the stresses building elsewhere around the world, like in Latin America.

The crisis is truly global, and it is driving a deep wedge between rich countries and poor countries, as it is between the rich and the poor within nations. Steps must be taken, and soon. Yet despite the belated call for action from the President, the sad fact is that the White House and Washington as a whole are too preoccupied with scandal to grasp the larger opportunity to create a truly new global financial order. There will be no real reform until global money is rendered more responsible. Long after we have put Monica Lewinsky behind us, it will take a much bolder assertion of leadership and vision to make the global economy servant rather than master.




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