In his piece “International Cooperation is the Way Out of the Financial Crisis” Wall Street Journal, March 13, 2009, U.K. Chancellor of the Exchequer Alistair Darling makes three recommendations, the first two of which are wrong-headed and the third threatens much the same.
Mr. Darling observes correctly that we are in the midst of a deep, global, synchronized contraction. His first two prescriptions for the recession are the dual follies of fiscal stimulus (read: more spending) married to monetary stimulus, and increased funding for two of the least useful institutions on the planet: the World Bank and the IMF. Enough said there.
The more interesting and important recommendation is for the nations of the G-20 in particular to work together to reform the world’s financial regulatory architecture. The need for reform, and for consistency of reforms across countries, is plain. But just as plain is the need for reforms to be effective at preserving the safety and soundness of the financial system while simultaneously preserving the full functionality of the financial system in advancing economic growth broadly. It is on this latter point, especially his reference to a “college of supervisors”, that Mr. Darling’s thinking threatens to join his other two recommendations.
The idea of a college of supervisors is to create an international uber-bureaucracy to monitor national regulatory and financial market developments, and make pointed recommendations when the college concludes something is amiss. We already have such an institution in non-politicized form. It’s called the Bank for International Settlements (BIS), where the world’s central bankers’ meet to discuss matters of deep monetary consequence. Yet despite its low public profile and hence near zero politicization, neither the BIS nor the various other fora available to central bankers and finance ministers to compare notes permitted those most in the know to recognize the building dangers. A college of supervisors would do no better, and almost certainly far worse.
Not all of Mr. Darling’s notions are so far-fetched however. He also refers to increased capital for banks, avoiding pro-cyclical effects from maintaining bank capital, and a heightened concern over the leverage taken on by institutions subject to regulatory oversight. Good points all.
The upcoming G-20 meeting in London is the proper place to discuss these matters and to agree to study them together. It is also a time to agree on those ideas that are non-starters, like a global regulatory body or college of supervisors. Having cleared the table of the most wrong-headed ideas, the markets can breathe a sigh of relief and get about the business of healing themselves while the rest of us get a better sense of what reforms we really need.
