One oft-noted fact about U.S. financial-reform efforts is the significant international component to the project waiting in the wings -- with globalization, it's necessary to craft, as best we can, an international regulatory regime that prevents bad practices from springing up in one country and affecting the entire world. In practice this means negotiations on prudential requirements like capital reserve standards, rules about exchanges and bankruptcy, and frameworks for capital flows. Ideas like these are knocked around at global conferences like Basel I and II that proceed at a maddeningly slow pace and often feature deep-seated disagreement.
The U.S., however, has distinguished itself by being far ahead of other countries in terms of its financial reform efforts; other global market centers, primarily in Europe, are still in earlier stages of the debate. This has prompted concerns that the U.S. may be out of step with the global community, but at a White House briefing earlier today, Assistant Treasury Secretary Michael Barr made a different argument: The U.S. should lead by example.
"We will lead more by action than by talk," he said. "[We are] starting U.S. reform here so we can work with our colleagues around the world." This has already had an affect, he continued, on the derivatives debate in Europe, where leaders have coalesced around ideas similar to those in U.S. financial-reform legislation after early discussions fractured. American championing of higher capital standards has also raised the profile of the topic abroad, as the always-excellent Binyamin Appelbaum chronicles here.
This contrasts with the Obama administration's approach to global-warming legislation, which has been marked with a dual track approach: legislation at home and negotiations abroad that rarely seem to match up; indeed, despite recent international agreements, it is unclear whether the cap-and-trade bill stands a chance in Congress this year.
While there may be different dynamics in the climate-change debate that I'm not familiar with -- broader up front costs across the economy, more controversy over the nature of the problem -- it seems to me that following a financial-reform approach would give the U.S. greater leverage when negotiating climate change agreements abroad. Showing our approach, rather than telling people about it, could be a powerful argument as negotiators descend into the great morass of international debate.
-- Tim Fernholz
