Translated material
Role reversal
Role reversal *
When President Medvedev sat down at the negotiating table with President Bush and other world leaders at the G20 summit held on November 15, 2008 in Washington, they essentially had to deal with empty space. There were very few real proposals that could bring such different countries to consensus. As a result, the outcome of the summit was a set of cliched recommendations: to refrain from protectionism, to stimulate economic growth through tax policy, to implement ready-made solutions to improve the legal framework for regulating global financial markets.
At the same time, the symbolic significance of the summit is striking. It was a meeting of the largest debtor countries and the largest creditor countries, facing the greatest economic disaster since the Great Depression of the 1930s. The paradox was that the creditor countries were represented by Russia, China, Japan, Korea, Saudi Arabia and Brazil. What about debtors? The largest debtor among the summit participants was, of course, the United States. Most European countries, with the exception of Germany, kept them company. As we see, the world has fundamentally changed, and the international financial architecture still reflects the former state of affairs, when roles were distributed exactly the opposite.
Currently, countries that were previously on the periphery of the world economy are actively developing, but a system has not yet been created that takes into account the obvious imbalances that have arisen in international finance. Perhaps they should have started by acknowledging the new reality, but at the G20, debtors studiously ignored the status quo (unsurprisingly, given the possible political consequences) and pretended that the old system could be maintained further by incorporating the excess savings of the new ones. creditor countries into the turnover of the main debtor countries. Meanwhile, it is precisely this model, which has been unconditionally followed over the past ten years, that has led us to the current financial impasse. Appreciate the irony of the situation...
We need to understand how we got into this mess. To do this, it is useful to look back, without rushing, however, to final conclusions: at the moment, even preliminary conclusions will inevitably be contradictory and subject to further clarification.
The current financial crisis has surprised even those skeptics who, back in 2005-2006, doubted that the sustainable economic well-being of the United States could, as before, be ensured by constantly rising real estate prices and increased consumption. Some specialists in the field of international economics, including myself, have expressed concerns about a possible violation of the “balance of financial threats” [1] (as former US Treasury Secretary Summers once put it) and the collapse of the so-called “second Bretton Woods system”, in other words, systems where individual countries peg exchange rates to the dollar. Under this system, rapid growth in the reserves of the central banks of China, Russia, and oil-exporting countries made it possible to finance large U.S. deficits. Everyone expected a crisis marked by the fall of the dollar, the weakening of support for the dollar from China, the rise of the currencies of the most rapidly developing countries (such as Russia), and the increase in interest rates on government bonds in the United States - a crisis that, by triggering the classic mechanism of increasing the cost of credit, could provoke recession in the American economy.
However, the financial crisis that began in the late summer of 2007 and turned into a global recession at the end of 2008 does not fit this scenario. Its distinctive features were: a strengthening of the dollar, increased support for the dollar exchange rate from China, the collapse of national currencies of developing countries (including the Russian ruble and the Brazilian real) and a decrease in US Treasury yields.
We saw not so much a dollar crisis destabilizing the Treasury bond market as a banking crisis in the United States, which caused a crisis in the currency markets of the most promising developing countries, not least the Russian foreign exchange market. The dollar is staying afloat despite the fact that the American economy is sinking. Income from the sale of short-term Treasury bonds approached zero at the end of October 2008, and from long-term Treasury bonds reached record lows in late November. So the old forecasts are far from confirmed.
At a deeper level, the current crisis is a crisis of the international financial system, which was characterized by the accumulation of cash surpluses by the governments of developing countries - from which intensive consumer lending in the United States and Europe was financed. Supporters of the previous system believed that it was mutually beneficial.
They argued that China (to a large extent), as well as Brazil, India and Russia, were empowered by their exports to develop, while the United States and European countries benefited from low and stable interest rates - a combination of factors that also explained the lending activity of the United States. and European consumers, and considerable prices for various high-risk financial instruments. Just because the world economy is unbalanced, they believed, does not mean it is unreliable. China, Russia and the Gulf countries, by creating savings, relieved the United States of having to save at home. In turn, ordinary Americans spent so much that they relieved the Chinese government of this need. Meanwhile, one American economist has already asked the question: why have China, Russia and other creditors preferred subsidizing American consumption to subsidizing their own over the past few years?
The answer may not be simple and varies from country to country. Thus, the countries of East Asia and Russia sought to create large stabilization funds, through which it would be possible to minimize future risks in the event of a recurrence of crises similar to those they experienced in 1997-98; China believed that a low RMB exchange rate would help it progress faster and create places for surplus labor from rural areas; and in most developing countries, the imperfections and limited volume of local stock markets encouraged large domestic borrowers to seek resources in world markets.
Crises reveal the weaknesses of any financial structure. And the current crisis is no exception. In retrospect, the stability of this system depended on China's (and Russia's and Saudi Arabia's) relentless pursuit of dollar accumulation. China did not finance lending to American consumers directly; it, like other developing countries, bought up US Treasury securities and such mortgage agencies as Fannie Mae, Freddie Mac and Ginnie Mae.
Contrary to popular belief, Fannie Mae and Freddie Mac were not the primary source of high-risk subprime, alt-A, and other mortgages in 2005, 2006, and the first half of 2007. Consequently, China and Russia did not provide direct loans to the weakest American borrowers in the housing market—or even to those who were buying Chinese and other imported goods. But it was the flow of funds from China, Russia and the Gulf countries that played a decisive role in the process, which made it possible to continue lending to an economy that was not itself accumulating savings, and, as a result, was not creating new sources of credit. Judge for yourself: by buying US Treasury bonds from American insurance companies or banks, Russia (or China) supplied pension funds and banks with funds that could be invested in riskier financial instruments that promised higher returns than these bonds. In meeting this demand, Wall Street has demonstrated an excellent ability to bake increasingly complex types of mortgage-backed securities (and derivatives of these securities).
Credit flows that allowed American consumers to continue to purchase goods imported from China (even as they spent increasingly more on indirect imports of Russian oil, the price of which was priced into those goods), were supported by the willingness of the Chinese and Russian governments to take on currency risks , using their own foreign exchange savings to satisfy the demand for securities of the US Treasury and mortgage agencies, as well as the desire of Americans themselves to sell reliable government bonds in order to buy less reliable, but more profitable mortgage securities. This meant that American (and, as it turned out, European) financial institutions were taking on ever greater credit risks—even as China and Russia allowed an ever-increasing share of government savings to be denominated in dollars. Economists feared that the first pillar of the above structure would not be sustainable, since the desire of China and other countries to buy falling dollars could not last forever. It turned out that the second support is even less stable - and even less durable. US Treasury bonds held by China and Russia will likely not retain their value in local currencies over the longer term, even if the yuan and especially the ruble depreciate in the near future.
The crisis of confidence in American and European financial instruments has shaken the foundations of the global system that has allowed emerging markets to grow at the expense of European and American demand for their products. American families can no longer take out loans against their real estate, which means they can no longer consume more than they earn. Since the beginning of September, consumption levels in the United States have fallen sharply and continue to fall rapidly. China can no longer count on American and European demand for its products to fuel its economic development, and Russia can no longer expect the same demand for oil and other raw materials. The unprecedentedly powerful global growth of recent years may give way to an equally powerful recession. The global economy has now slowed so sharply that it may already be in recession.
It hardly needs proof that bettors who bet that the unbalanced global economy could continue to support high prices for risky financial instruments lost large sums of money. Hence another surprise that the current crisis has presented: the fall in real estate prices and, it seems, a serious recession in the United States has turned into a crisis for developing countries. At the moment, money is leaving them as quickly as during the crisis experienced by Asian countries and Russia in 1997/98.
Why did it happen so? The big banks weren't just lending dollars to American consumers. They provided loans to banks and firms in Russia and other developing countries. At the same time that the governments of these countries were creating savings in dollars and euros, companies were borrowing dollars and euros. This trend is most evident in Russia: at the end of June 2008, the Russian government had about $600 billion in foreign assets and less than $50 billion in foreign debt. Russian banks and enterprises, on the contrary, had 450 billion in external debt. With big American and European banks in trouble, they want their money back and are putting pressure on borrowers in developing countries, forcing banks, businesses and governments in those countries to struggle to scrape together the needed currency. The global banking crisis affected everyone who relied on bank loans - American consumers who lived on debt, spending more than they earned, overactive developers in the real estate market in Moscow, Mumbai and Dubai, Brazilian businesses wanting to increase iron ore production, and etc. The crisis brought even more grief to those who trusted shadow banks - sharashkin's offices, which form their assets not from depositors' deposits, but on the short-term capital market. However, that's another story.
What to do now?
In the short term, the main task is to avoid a spiraling crisis of confidence and a chain reaction of defaults. The governments of the United States and Europe took drastic measures to prevent the collapse of those large financial institutions that had survived to date (exposing American and European taxpayers to growing risk, which, however, was almost inevitable, since the situation essentially left no other choice). The same effort is needed to mitigate the impact of the current crisis on the economies of many developing countries and to try to limit the depreciation of their national currencies. In the case of Russia, a more flexible policy towards the ruble will undoubtedly lead to a depreciation for some time, which, however, may not last too long provided that monetary policy is sufficiently tight, i.e., interest rates are raised to positive level in real terms. Meanwhile, the current strengthening of the dollar will reduce the volume of American exports just when the United States is trying not to reduce it, but to increase it.
In the medium term, the challenge is to ensure that the financial crisis stops fueling the self-accelerating process of contraction: when, on the one hand, a decline in demand causes a decline in production, and on the other, governments respond to falling government revenues by cutting budgets. Now is not the time for policies dictated by concerns about long-term government budget surpluses: governments everywhere need to stimulate the economy to suppress processes that threaten to result in a severe global crisis. This recommendation is especially suitable for those countries that have large external savings and numerous assets abroad. China can already help the world by spending significantly more in its domestic market; similarly, Gulf countries could draw some funds from foreign reserves to stimulate domestic spending. Russia can also play a positive role by using its financial resources to maintain spending levels. This kind of stimulation will not prevent the compression, but we are talking about how to prevent this compression from turning into something much worse.
The long-term challenge is to find stronger foundations for global growth. Events in recent weeks have highlighted once again the difficulties developing countries face in financing rapid growth with loans from the international banking system. But this is not enough: the past few months have also shown how vulnerable is a world in which the active lending of American and European consumers is financed by the rapid accumulation of cash surpluses by developing countries. Now American and European taxpayers are being forced to pay the price for banks' history of lending against inflated values in their own countries. Chinese and Russian taxpayers will also suffer sooner or later because they borrowed in their own currency, which will appreciate in the medium term, to buy foreign currency (euro and dollars), which will depreciate. No one will win. The strategy of recent years has not borne fruit, it is time to try new methods.
It follows from the above that new international monetary agreements are needed, formal (such as the gold standard that dominated before the First World War, or the Bretton Woods system, based on fixed exchange rates and which operated from 1944 to 1971) and informal (such as for example, the more modern “second Bretton Woods system”, in which many developing countries could peg their currencies to the dollar (or target it), which implied the continuous accumulation of surpluses in current accounts and, as a result, the growth of reserves financing large external deficit of the USA and, to a lesser extent, European countries). New creditor countries, including Russia, should take full advantage of the opportunity that has arisen in recent years. Still, the plight of the modern global economy is incomparable to the Great Depression, when the self-serving economic policies of world powers caused a complete collapse of trade, investment and finance, followed by the devastation of World War II.
Although the current economic crisis may continue to lead to increased geopolitical tensions, no one expects consequences on the scale of World War II. The crisis prompts us to think about serious reforms, but it is hardly worth talking about radical reforms comparable to the Bretton Woods agreements of 1944. We must also take into account the fact that after World War II, the United States was the only economic force capable of dictating the rules of the game to the whole world. This system ceased to exist when the situation changed and Europe and Japan began to pursue goals different from those of the United States.
Even now, in times of crisis, when speaking about changes in the international monetary system, Europeans mean at least a partial expansion of the previous mechanism, allowing the use of the vast financial resources of new creditor countries to support the traditional policy pursued by the International Monetary Fund under their control. However, they, like the Americans, are no doubt in no hurry to give up any significant real power over the use of financial resources and the right to make key decisions affecting global finance.
It is the new creditors who should strive to reach an agreement that puts China, Russia and other creditors at the center of the new multilateral system. A comparison with the first Bretton Woods is appropriate here, where outwardly they were talking about multilateral agreements, but in fact, the terms of the deal were largely dictated by the States. Then, in 1944, a debt-ridden Britain had to put aside its imperial pride because it needed American cash reserves to maintain financial stability in the post-war period. As a result, it was the United States that had the final say in determining the structure and role of the IMF. Today, the role of Great Britain will have to be played by the United States, and China, Russia and other creditor countries will act as Americans. Unless it is recognized that new lenders have a greater role to play in the IMF, they may cease to support measures aimed at recapitalizing the Western financial system.
In any case, given how many players operate in today's multipolar world, one cannot expect that they will be able to create a centralized international monetary system enshrined in official documents. Even in the 1970s, after President Nixon depegged the dollar from its gold backing and the collapse of the first Bretton Woods system, the restructuring of international finance required a series of purely ad hoc measures. In 1970, no one could have predicted what the global financial system would look like twenty years later; Currently, we too are moving towards the unknown. In designing any such system, we must recognize the limitations of our foresight: the most complex systems take shape through gradual adaptation to reality, and not as the result of a speculative design.
One of the main criteria for the effectiveness of a system is its political viability. There must be arguments that will induce leading actors to accept a new system of currency regulation, and these arguments can be both persuasive and coercive. Currently, the leading actors are so closely connected with each other that in most cases it is better not to remember coercion. In a global economy where interests are intertwined, coercion is something like a threat to push into the abyss the one with whom you are associated.
The only worthy alternative is persuasion, an appeal to common long-term interests. And here we come up against the unpleasant circumstance that the interests of different countries, especially in the short term, may diverge.
Of course, the new creditor countries have still not agreed on what the new global financial order should be. And even if they unite, they will face strong opposition from debt-ridden Western countries that still dominate international politics. Perhaps that time has not yet come. But as financial and economic power continues to flow to the East and South, sooner or later there will come a time when new creditors will understand that it is in the interests of each of them to unite and, acting together, reform existing institutions or create new ones, free from the domination of debtor countries .
* Martin Gilman. Turning the tables. The article was written specifically for this issue of Otechestvennye Zapiski. Translation from English by Victoria Smirnova.
[1] Summers was referring to the fact that a significant portion of US debt is owned by new creditor countries, which at the same time own enormous US assets. It is in this sense that we can talk about the “balance of fear” or “balance of intimidation” established in world financial relations, by analogy with the balance of terror of military deterrence (the literal translation “balance of financial terror” flashing in the Russian press and the Internet does not seem to be successful) . – Editor's note