More Bad News for the Trade Bubble

I was reading one of my favorite bloggers, Brad Setser, and he had this to say:

The FT – more than most – has recognized the challenges created by a global banking system and national regulation. A recent leader argued: “The current mismatch of globalised finance and national governance is unsustainable. Either governance becomes more globalised or finance less globalised.“

My guess is that finance will necessarily become a bit more national. The current crisis has shown than highly leveraged intermediaries require a government backstop, and for now there is no global taxpayer willing to bailout global banks that go bad.

Now, I’d argue with Brad about the FT—I’ve written about the importance of having a global central bank multiple times over the years. For example, back in 2006 I had a cover story “Can Anyone Steer This Economy?” where I wrote:

No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington’s ability to control the economy. Whether you’re a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don’t work as well as they once did.


a Big Big Idea—probably too big to even consider right now—would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.

But with the explosive growth of China and India, that sort of role for the Fed is no longer feasible, and no new institution has arisen to take its place. As former Treasury Secretary Robert E. Rubin, now a top official at Citigroup, recently said: “There’s no policy mechanism for bringing together the countries that really matter in the global economy.” The best solution would be some sort of global central bank with real powers—but that’s not going to happen until there’s a big enough financial crisis to truly scare people.

This was written in 2006. Is this crisis big enough to scare countries into a global central bank?

No. No. No. The U.S., utilizing its privileged position as the world currency, has one get out jail free card, which it is playing now. This crisis is more like to end the way that Brad says above—a retreat from the globalization of the financial system, which will mean a retreat from unbalanced trade (which requires massive cross border capital flows).

It’s worth repeating that. You need to have a global financial system to support the cross-border capital flows that come along with unbalanced global trade. So if we don’t have a global financial system…which we won’t…we will inevitably end up with more balanced trade, by one way or another. Poof. Wave a big part of the trade bubble good bye.

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