Does Barry Eichengreen Have A Cure For The Financial Crisis?

Welcome to Eichenomics 101

Predictably, the global financial crisis that began a year and a half ago with the collapse of the Thai baht has engendered repeated and noisy calls for solutions. Among the numerous, often contradictory suggestions: The International Monetary Fund should be disbanded, a global central bank should be the lender of last resort, an international bankruptcy court should convene, fixed exchange rates should be adopted, emerging nations should impose controls on foreign capital. Consensus has proved impossible. The best that officials from the Group of Seven nations could agree on in late February was to form a "financial stability forum" which would regularly disseminate financial data from emerging nations.

Exchanging more information is all well and good, but it won't solve the nagging problems of the global financial system. For that, says economist Barry Eichengreen of the University of California at Berkeley, bankers, regulators, investors, and legislators around the world have to agree on a number of solutions that are practical but not necessarily easy to achieve.

In his new book, Eichengreen advocates everything from the adoption of tough new accounting and regulatory standards to imposing a tax on short-term capital inflows. Popping up everywhere from Congress to the Council on Foreign Relations in New York to the World Economic Forum in Davos, Switzerland, Eichengreen is the economist of the day for analyzing the global financial crisis and prescribing a cure. "Of all the academics looking at international issues today," says economist Peter B. Kenen of Princeton University, "he's on the right track, saying, `I don't have a scheme, a gimmick, or a new institution to solve all these problems. We're going to have to nibble away at this.' He's pragmatic." Adds his Berkeley colleague, economist Andrew K. Rose: "He's not an airy-fairy theorist."

Maybe that's because of his training. Eichengreen, 47, was born and raised in Berkeley, and did his undergraduate work in the early 1970s in both economics and political science at the University of California at Santa Cruz, where there were "no grades, no requirements, no structure." That, says Eichengreen, gave him the license to be an "intellectual trespasser" across disciplines. A year spent studying European history in Scotland sparked a scholarly interest in Europe, while a year working at the Brookings Institution in the mid-1970s whetted his appetite for economics. He went to Yale University, acquiring a masters in history and a PhD in economics in 1979.

DON'T CHUCK IT. Eichengreen's early work focused on Europe's economy, but more recently he has written on international finance. When the Asian crisis was in full swing, in 1997-98, Eichengreen was a senior policy adviser at the International Monetary Fund, working on special projects. He commuted weekly between Washington and Berkeley to be with his wife, a physician.

In Toward a New International Financial Architecture: A Practical Post-Asia Agenda, published in late February by the Institute for International Economics in Washington, Eichengreen argues for improving the system rather than chucking it altogether. Since capital mobility across borders is now a fact of life, he says, "the problem for policy is to ensure that the benefits of capital mobility exceed its costs, rather than pretending that it can be made to go away."

Eichengreen opposes capital controls such as those adopted by Malaysia last summer, but he believes that a tax on short-term capital inflows, such as Chile has used, is a worthwhile tool. It should be viewed as a transitional instrument for emerging nations, providing cover during the long process of building the institutions and regulations that will allow financial systems to function. Eventually, the tax could be lifted.

Similarly, Eichengreen is a believer in floating exchange rates, and finds the alternatives unpalatable or unrealistic. In Asia, countries that had pegged their currencies to the dollar found themselves losing currency reserves rapidly in 1998 as they tried to back exchange rates that were insupportable. And although the new unified currency may make sense for Europe, it doesn't offer a model for other regions, he says. "It took Europe 50 years under a unique set of political circumstances" to reach monetary union and a common currency, says Eichengreen, and it will take at least 20 to make that happen elsewhere.

HISTORY LESSON. Economic historians are getting more respect from the economics profession these days for two reasons. First is the popularity of the new growth theory which, on the basis of historical data, credits technological innovation with increasing economic returns. Second is the challenge of liberalizing the economies of the former Eastern bloc, which has highlighted the historical perspective on institutions and property rights. Paul M. Romer, economist at the Graduate School of Business at Stanford University and one of the top new-growth theorists, says Eichengreen's work offers an "unusual and productive mix" by combining history, policy, and institutional concerns.

With respect to institutions, Eichengreen doesn't envision a drastically changed role for the much-maligned IMF. But he does think it should be more activist, corralling private lenders into restructuring loans. And it should make its own financing conditional on certain technical changes. Emerging-market borrowers, for instance, should meet higher accounting and regulatory standards. And new legal provisions for emerging-nation debt should make it easier for restructurings to occur.

Some of these ideas sound terribly nitty-gritty, almost boring. But bold schemes "have not a snowball's chance in hell of being implemented," says Eichengreen. The historian and the policy maven in him tell Eichengreen that the world's financial architecture is best rebuilt with care, step by step. That way, when financial crises recur, lenders, borrowers, and governments will be on a firmer footing, better able to cope.

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