Fund-amentals

Plenty have highlighted the promises to the IMF as one of the greater success of the G20 Summit. Free Exchange doesn't agree:

In the quest for a big headline number to throw at the world and the press, and in an attempt to equate this to the missing globally coordinated fiscal stimulus, there's been a fair amount of hand-waving. Of the money that the IMF is supposedly getting, the only clear new commitment is a relatively small $40 billion from China.

True, the new commitments aren't as stellar as the media is reporting. But, the big change is not the new money; it's the Flexible Credit Line. To be fair, the author correctly notes that countries aren't exactly lining up for these IMF handouts. But if Mexico has a decent time with the revamped IMF system, you better believe a few more governments will be putting in a call to Mr. Strauss-Kahn.

Besides, the amount of money isn't that important: it's the fact that after years spent resisting change and asserting their right to essentially dictate monetary policies to countries (ahem, Thailand), the IMF is loosening its grip, albeit slowly. Countries still must have "sound monetary policies" to qualify for these new loans. But the definition of "sound" hasn't been spelled out and more importantly, the loans don't come with IMF staff. With nationalist rhetoric rising in the wake of the financial crisis, taking IMF money is going to be a much easier political sell if it doesn't come with resident Fund officials. The US and Europe may still have de facto veto power within the Bank group, but that's something most people won't know when they head to the ballot box.

(Photo from Kyrion)

G20 deliverables

There's been some grumbling about how the G20 London Summit's deliverables are disappointing. Regardless, I feel like one substantial achievement has been underreported: the G20 pledged $250 billion in new trade financing to help plug a $300 billion worldwide gap. Trade finance isn't as sexy as financial regulation, new global reserve currencies or fiscal stimulus coordination, but it is absolutely essential to world commerce, the engine of economic growth. As an added bonus, it will disproportionately benefit developing nations.

On the G20

On the G20:

One risk is that the group, if it seeks consensus, will produce an anodyne statement that adds little or nothing to the existing efforts to respond to the global slump. A greater risk is that the summit is so badly divided, and the outcome is so feeble, that dashed expectations actually worsen confidence.

Unfortunately, I don't see the two as mutually exclusive. I have a feeling "confidence" - whether of investors, politicians, or pundits - is going to be eroded either way. In fact, the only people coming away with a morale boost will be either the protesters or the police.

(Photo from G20London2009)

Gallows humor

President Obama has had a rough few months. As the global economy continues its slide, what the crisis means for global trade and financial regulation will dominate discussions in London on Thursday. Rightfully so. After the economy, North Korea's impending missile launch and Afghanistan's gradual decline into disarray dominate any foreign policy discussions. With so much on his plate, not to mention health care reforms and an understaffed Administration, Iraq has fallen by the wayside. The President has admitted as much.

But lest we forget how perilous the gains we've made in Iraq are, Tom Ricks is happy to remind us:

The Maliki government is putting the screws to the Awakening movement (for those who just arrived, that's a mainly Sunni group of about 100,000 people, many of them former insurgents, who in late 2006 and 2007 arrived at ceasefires with the U.S. military presence in Iraq). The American plan was to integrate 20,000 members...into Iraqi security forces, and help the rest find other work...But the Shiite-dominated Baghdad government never really like the idea. Indeed, the first deals were cut by U.S. officials behind the back of the Iraqi government...I think Maliki's gambit is to crack down on the Sunnis while American forces are still available in sufficient numbers to back him up. This is turning into a test of strength, Sunni vs. Shiite.

Sound familiar? 

The President may be better served to focus on actually shoring up our international standing, rather than just paying lip service to the notion while using our current crisis environment to push big government, domestic programs that most independent voters hoped he would avoid.

Free trade petition

The Atlast Global Initiative for Free Trade, Peace and Prosperity has written a petition for free trade, to be unveiled on April 1st before the London Summit. My favorite part:

Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

Trade promotes peace by encouraging people to build bonds of mutually beneficial cooperation. Just as trade unites the economic interests of Paris and Lyon, of Boston and Seattle, of Calcutta and Mumbai, trade also unites the economic interests of Paris and Portland, of Boston and Berlin, of Calcutta and Copenhagen – of the peoples of all nations who trade with other.

Trade papers worth reading

Trade policy wonks have their hands full.

On Monday, the Obama administration released their 2009 Trade Policy Agenda, outlining their general strategy on trade for the next year. (Never mind that they don't have a USTR yet.) Unless you want to torture yourself, skip the 100+ page report on trade policy in 2008. Trust me, I'm speaking from experience. That said, it's definitely worth reading the five page summary on trade policy going forward at the beginning.

VoxEU has a phenomenal new e-book on the new "murky protectionism". It is absolutely fascinating reading all the way through, but at least have a look at the introduction. I'd write a much longer post on this if I could. Suffice to say that things have gotten worse since the G20 summit in November, and they could get much, much worse if things don't change.

Go check them out. I want a report on my desk by Monday morning at 8am.

Hello G20, goodbye G7

In a new piece on Vox EU, the legendary Barry Eichengreen considers some of the repercussions of the G20's rise as the new forum for addressing global economic issues. My two cents: the G20, while more unwieldy than the G7 and yet not as representative as one would like, is still the most logical place to tackle global economic problems right now. Hey, path dependence can be a real pain.

The G20 and SWFs

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.

(Image: New Yorker)