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Financial risk, resilience and realism: ‘New Economic Thinking,’ amid ominous tremors from the eurozone

Christopher Colford's picture



How safe and how stable is today’s international financial system? Eight years since the global bond markets started quaking – and almost seven years since the Lehman Brothers debacle triggered a worldwide meltdown – is the financial system resilient enough to recover from sudden shocks?

These are not just rhetorical questions, but urgent ones. Amid the ominous recent tremors within the European Union – with the intensifying risk that insolvent Greece could soon “crash out” of the eurozone if it fails to extract more bailout money from its exasperated rescuers – the global financial system may be about to get another real-life lesson in riding out traumatic turbulence.

So mark your calendars for this Wednesday, May 6, when a top-level conference with some of the world’s leading financial luminaries will be livestreamed online at (click here) this website from 9 a.m. to about 5 p.m. Many of the world’s top regulators, policymakers and scholars – brought together by the Institute for New Economic Thinking – will gather at the International Monetary Fund for a day-long exploration of “Finance and Society.”

A sense of déjà vu might seem to surround the conference agenda, especially for World Bank and IMF colleagues who recall the nonstop financial anxiety that consumed the Spring Meetings just a few weeks ago. A similar economic dread reportedly pervaded last week’s Milken Global Economic Conference in Los Angeles.

Yet the INET conference may be poised to offer a somewhat different perspective. The Spring Meetings featured the familiar lineup of business-suited, grim-and-greying Finance Ministers – mostly male, mostly middle-aged, mostly mainstream moderates – but the group of experts at the “Finance and Society” conference will reflect a welcome new dose of diversity. Every major speaker on the agenda is a woman.

The economists at the pinnacle of the world’s most powerful financial institutions – Christine Lagarde of the IMF and Janet Yellen of the U.S. Federal Reserve System – will keynote the conference, and the proceedings will include such influential financial supervisors as Sarah Booth Raskin of the U.S. Treasury and Brooksley Born and Sharon Bowen of the U.S. Commodity Futures Trading Commission. There’ll also be a pre-conference speech by the woman who has suddenly galvanized the Washington economic debate: No, not Hillary Clinton, but Senator Elizabeth Warren.

The new global roster of financial leaders – in this conference's case, all of them women – illustrates how economic policymaking is now, at last, drawing on the skills of an ever-wider-ranging talent pool. The economic expertise featured this week is bound to mark a positive step forward, considering the ruinous impact of the recent mismanagement by middle-aged mainstream men. (Sorry, guys, but can you really blame people for noticing that the pale-stale-and-male crowd allowed the world to drift toward the Crash of 2008?)

This week’s conference agenda is admirably forthright about the challenge: “Complexity, special interest, and weak systems of governance and accountability continue to interfere with the ability of the financial system to serve society's needs.” With Lagarde and Yellen setting the tone – and with Warren adding an injection of populist vigor – this week’s INET conference seems likely to offer some imaginative insights that go beyond the familiar Spring Meetings formula.

If ever there were a time when an INET-style dose of “new economic thinking” might be needed, it’s now. Growth is sluggish and sometimes even stagnant in many developed nations, amid what Largarde calls “the new mediocre.” Markets are fragile and currencies are volatile in many developing countries. A commodity-price slump may drain the coffers of many resource-rich but undiversified economies. As mournful pundits have been lamenting seemingly ad infinitum and sans frontières, the global economy is suffering from a prolonged hangover after its pre-2008 binge of irrational exuberance.

As if the worries about “secular stagnation” were not enough, there’s also the tragedy of Greece, where an economic calamity has unfolded like a slow-motion car wreck as financial markets breathlessly await the all-too-predictable collision. Regular readers of this blog will surely have noted that fears of Greece’s potential crashout from the eurozone have been nearing a crescendo – and the possible default-to-the-drachma drama may soon reach its catharsis.

Athens will struggle to pay the giant installments of debt that are coming due this spring to the IMF and the European Central Bank. Even if the cash-starved country somehow keeps its finances afloat this month, managing its debt repayments throughout the rest of this year looks like a Herculean task.

Time is short to enact far-reaching reforms. And, whatever the putative merits of academic “game theory,” the brusque brinkmanship and loose-cannon negotiating style of the now-sidelined Yanis Varoufakis have proven to be a disastrous waste of precious time.

Beyond the day-to-day tensions of the fraught eurozone negotiations and the futile flailing of the latest government of Greece, larger-scale dilemmas pervade the current Eurozone impasse. Three such points are readily apparent.

First: There’s a question that’s destined for the history books. How can the very country that dreamed up the idea of democracy now have descended into being ungovernable? How have Greece’s institutions become so paralyzed that no government, of any political stripe, can apparently make any policy decisions really stick? (This, in a country whose history has molded the Western mindset. Just consider the classical metaphors that occur in everyday conversation, and that have been running through the recent news coverage: “The marathon talks have been an odyssey toward a Pyrrhic victory, but the delphic pronouncements of Athens’ solons may have included a ‘Trojan Horse'  that will prove all the Cassandras correct.”)

Second: Can the 70-year-long European project – arguably history’s most successful experiment in peacebuilding through economic integration – endure a possible disorderly crashout by a member state? Granted, even if Greece were to default on its debts, it might not necessarily be required to give up its membership in the eurozone, much less the European Union. (No doubt many lawyers in Brussels are now parsing the precise phrasing of the EU's crucial Lisbon Treaty.) Yet the very possibility of a departure of a eurozone member – showing that membership might not be irreversible – sows doubt about the durability of European cohesion.

Third, and perhaps most paradigm-shaking: Greece’s plight challenges a basic tenet of development theory. The textbooks envision a country nurturing its assets, building its institutions, honing its competitive edge, reaching “escape velocity” from poverty, and then striding steadily toward middle-income and perhaps even high-income status. The very idea of a wealthy economy – embedded, no less, within the common currency of the world’s largest economic bloc – slipping back into the condition of a lower-income country defies the standard development trajectory. (An advanced economy going backwards? And even reverting to the status of a World Bank client country? Development theory supposes that this simply will not happen.)

Economy-watchers remain riveted by the Continent’s continuing cliffhanger – amid heightened anxieties that somebody, somehow must find a way to avert financial catastrophe. That’s a mighty tall order for any group of policymakers to fill. But this Wednesday’s INET conference on “Finance and Society” will at least help put the current crisis in a wider financial and historical context. Offering expert economic analyses with a welcome new range of perspectives, the “New Economic Thinking” discussions at the IMF – accessible to all via the all-day livestream – could make an invaluable contribution to the policy debate.

 

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