Stiglitz's U.N. Panel: Replace the Dollar
A U.N.-appointed international panel led by Nobel laureate economist Joseph Stiglitz has urged a replacement of the dollar as the global currency, doing away with the Group of 20 financial organization, a global restriction on the size of banks, and a limit on bank transactions with tax havens.
The Stiglitz-led U.N. Commission of Experts, appointed in October to recommend how to overcome the global financial crisis, also proposed tight limits on financial risks that banks can assume. The group's report is to be issued Mar. 26, but a shorter, preliminary version has already been distributed.
The U.N. report joins numerous proposed financial-system fixes in recent days by world leaders, experts, and multilateral bodies. This latest report comes a week before the heads of state of the 20 largest industrial and developing nations meet to try to coordinate a response to the financial crisis.
It won't be easy. The U.S. is continuing to push greater fiscal stimulus by all the countries, the European Union is urging decisive financial regulation, and China this week proposed replacing the dollar. The leaders argue forcefully that the media has exaggerated their differences. Yet, in one illustration of the sharp divide, Mirek Topolanek, the Prime Minister of the Czech Republic, which holds the European Union's rotating presidency, on Mar. 25 denounced the Obama Administration's stimulus and bailouts.
"All of these steps, these combinations and permanency, is the road to hell," Topolanek said. "The United States did not take the right path."
Although written by an 18-member panel of experts, the U.N. report often corresponds with ideas long advocated by the iconoclastic Stiglitz, who resigned as the World Bank's chief economist in 1999 after serious policy differences with the Clinton Administration.
The report says that its recommendations are the result of concluding that "the rapid spread of financial crisis from a small number of developed countries to engulf the global economy provides tangible evidence that the international trade and financial system needs to be profoundly reformed."
The Panel's Pull
In an interview, Stiglitz expressed confidence that the panel's ideas will be influential despite their boldness. Yet the assault on the G-20 itself reflects the challenge that the panel may face in getting its ideas enacted.
The panel recommends scrapping the G-20's role in financial matters, and replacing it with a Global Economic Coordination Council associated with the U.N., with powers equivalent to the Security Council.
"There is no rhyme or reason to the current system other than who President Bush invited to it," Stiglitz said. "The new body would have more political legitimacy and a broader mandate. It could demand, for instance, that the World Bank and the [International Monetary Fund] report to it and evaluate how they are performing."
Uri Dadush, director of the International Economics Program at the Carnegie Endowment in Washington, and former director of world economic forecasting for the World Bank, isn't convinced. "I love Joe, but it isn't going to work," he said.
Selling Out the Dollar
On the dollar, Obama Administration officials were asked repeatedly on Mar. 24 and Mar. 25 about China's proposal to replace the American currency with an IMF-supervised basket of currencies. In his news conference Mar. 24, Obama said, "I don't believe there's a need for a new global currency." The following day, Treasury Secretary Timothy Geithner was forced to clarify a statement to which the market had reacted by punishing the dollar. Traders appeared to perceive Geithner as hedging on the issue until he said flatly, "The dollar remains the dominant reserve currency and is likely to remain that for a long period of time."
Many economists agree that in the coming decades the dollar will become less central to the world economy as China continues to grow. But the proposal assumed the appearance of something imminent. One worry is that, if it loses its status as holding the preeminent currency, the U.S. will have far more difficulty financing its deficits. Stiglitz said, "No one thinks it would happen overnight."
"The central idea is that the current system of depending on a single currency and the political and economic management of that currency is volatile," he said. "It's inequitable because poor people are lending to the U.S. at low interest rates. In a global economy, you need a global reserve system, and that's what we've proposed."
As for Obama's rejection of the idea, Stiglitz asserted that the President "has to say that. It doesn't mean anything. If he were to say anything else, it would suggest he doesn't have confidence in the dollar. It's a little bit disappointing that he is not a little bit more open. He is worried as you might imagine that there is a bandwagon forming that there is something wrong with the dollar, with the balance sheet of the Fed. So they are putting on a brave face."
While not going into detail, the U.N. panel also suggested that regulations be enacted to put a ceiling on the size of banks. It said that the rules would "limit their size and the extent of their interactions, to limit the scope of systemic risk." It also said that financial institutions in developed countries should have restrictions on transactions with so-called tax havens "that fail to meet basic standards of transparency."