If you ask American central bankers about the harmful side effects of their monetary policy on other countries, you receive an answer along the lines of: “Our monetary policy is for the benefit of the U.S.”
Or you get the smug answers. Stanley Fischer, the Federal Reserve’s vice-chairman, once said: “First the Brazilians complained that too much money was flowing into their country. Now they are complaining that too much money is flowing out.”
In fact, that is exactly the problem. Developing countries have become places where international capital markets shunt money. This trend has only been exacerbated since the 2008 financial crisis, and weaker euro countries run the danger of slipping into a similar role.
When capital is greedily grasping for profit, countries on the fringes of the international financial world are flooded with liquidity. If greed turns to fear, the money disappears. The function capital markets perform in capitalism — namely to finance investments — is thereby to a great extent annulled.
A little while ago at an event in New York, the head of the Indian Central Bank delivered a homily to central bankers of the West — including those of Europe. Raghuram Rajan called for the introduction of internationally accepted rules of the game with regard to monetary policy. A specification of what is allowed and what is not. Or more precisely: what is permitted in which situation. Mr. Rajan, who worked earlier at the World Bank in Washington and at the University of Chicago, knows what he’s talking about. And he’s right.
He is especially irritated that, with their massive purchases of debt, both Americans and Europeans are ultimately manipulating the foreign exchange market. Direct interventions in the capital markets, especially the artificial devaluation of a country’s own currency, are frowned upon and are regularly criticized by the Americans in particular when this happens in developing countries such as China. But the excessively easy monetary policies of the European Central Bank and Mr. Fischer’s Fed have the same effect.
At some point, the legitimate attempt to revive one's own economy mutates into a policy of enriching oneself at the expense of weaker trading partners.
Mr. Rajan compares the current situation with that of the 1930s, when industrial countries had plummeted into a devaluation spiral that ultimately harmed everyone. He doesn’t utter the word “currency war,” but that’s what he’s talking about.
The reaction to the chaos of the 1930s was the system named after the tiny American town of Bretton Woods, where participants at an international conference in 1944 agreed to the system’s fundamental contours. The goal was to bring order to capital markets. The basis was the dollar, which in turn was linked to gold; the other currencies were anchored to them.
The International Monetary Fund and the World Bank arose as assisting and monitoring agencies. The system held up for almost 30 years and brought the world a lot of prosperity. In 1973, it fell apart — due to the forces in the market or the irresponsible financial policies of the participants, however you want to interpret the matter.
Would a return to this system make sense? Probably not to the Bretton Woods system in its old form. The dynamism of the capital markets is too strong to be enclosed in a controlled system over the long run. What we need today is a more flexible concept, a sort of Version 3.0 for the 21st century in which, however, a communal objective and the political will to cooperate are revived.
Today monetary policy is a purely national affair, with the exception of the ECB, which is concerned solely with the needs of its own currency zone. The requirement to cooperate on an international level is not included in the statutes of the central banks. And the IMF doesn’t have a genuine mandate to supervise this sort of collaboration. At best, the Bank for International Settlements in the Swiss city of Basel constitutes a sort of organ for consensus and control above the level of national and international central banks. But without corresponding backing on the political level, it too is basically toothless.
Two fundamental demands should be anchored on a political and institutional level. First, massive interventions in monetary policy such as occurred first in the United States and now in Europe must be better adjusted so as to factor in the fallout for the rest of the world.
Second, they must be employed in moderation, with a timely return to a normal monetary policy. Because at some point, the legitimate attempt to revive one’s own economy mutates into a policy of enriching oneself at the expense of one’s weaker trading partners.
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