The G20 is scheduled to meet this Saturday to outline a set of guidelines for the world's 20 largest economies to coordinate action in light of the worsening global economic milieu. An illustrious crew of economists at VoxEU have written the book (literally) on what government officials need to say and do to deliver the world from catastrophe. The prescriptions are as banally predictable as all the doomsday yarns and the fact that government officials will inevitably do the wrong thing. Beyond the obvious calls for increased cooperation and coordination, one piece of advice struck me as quite odd. Guillermo Calvo, via Dani Rodrik: The new Bretton Woods institutions should be more tolerant of controls on capital mobility, especially as those controls centre on limiting the actions of the banking sector.
True, these new capital controls may certainly help developing countries stall capital flight; but there are a number of complications. The dollar is still seen as the safest asset in the world. For that reason, SWFs (from China to Dubai) have been sinking ever more money into dollar denominated assets - at least one piece of anecdotal evidence to explain the recent rise of the dollar. This has, at least in part, kept the US out of the worst of the crisis. There is no way the US will allow new restrictions on capital outflows to be the bulwark of any new "Bretton Woods". Not only are such controls notoriously hard to enforce, they would probably bring the dollar back down, and I have a feeling that's something we would be loathe to support.
To be sure, global capital flows were somehow involved in the current financial troubles. But to reiterate, our current situation is far too complicated and opaque to be blamed on any single silver bullet: whether they are swaps, the housing bubble, or capital outflows. The underlying root was a mispricing and misunderstanding of risk throughout the financial model.
Capital outflows allow investors to put their money where they see fit. SWFs represent, by far, the largest outflows of capital. They are intended to mitigate risk and exist to safely invest currency reserves in the way that will most diversify national wealth. For their sake, and ours, let's keep letting them.
To be sure, global capital flows were somehow involved in the current financial troubles. But to reiterate, our current situation is far too complicated and opaque to be blamed on any single silver bullet: whether they are swaps, the housing bubble, or capital outflows. The underlying root was a mispricing and misunderstanding of risk throughout the financial model.
Capital outflows allow investors to put their money where they see fit. SWFs represent, by far, the largest outflows of capital. They are intended to mitigate risk and exist to safely invest currency reserves in the way that will most diversify national wealth. For their sake, and ours, let's keep letting them.
(Image: New Yorker)
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