Many years ago, I used to attend Paris meetings at which senior officials from advanced nations gathered to discuss, and in principle to coordinate, their macroeconomic policies. The head of the U.S. delegation chaired the meetings and supposedly wrote the communique summarizing the discussion; in reality, of course, the job was delegated to an underling. Hey, I can write officialese as well as anybody.
The only challenge involved was timing: A draft had to be written a day before the end of the meeting, so that its language could be negotiated over dinner with representatives of an inner circle of major players. That meant that I had to summarize the last day's discussion before it happened. No problem: Since delegates were invariably under instructions to state predetermined positions, not hold a genuine discussion, I could have written that summary weeks in advance without missing anything important. The hard part came over dinner, when the national representatives engaged in their real mission-what was known in the trade as "policing the nuances."
Ever since, I have been deeply cynical about proposals for high-level meetings at which world leaders will hammer out solutions to global economic problems. And yet that cynicism is apparently not shared by either the media or the markets, which fall time and time again for the romantic notion that gathering the great and the good around a baize-covered table will somehow make everything all right.
The latest case in point, of course, was President Clinton's recent call for a global meeting to deal with the worsening world financial crisis. It seemed crushingly obvious that this was essentially an "open mouth operation"-a basically content-free attempt to improve confidence without any real action. Nonetheless, there were front-page headlines and a lot of market reaction: a major rally in the U.S. markets and a 43% gain in Brazil's Bovespa.
What, realistically, are the G7 countries going to do? Incredibly, quite a few people took Clinton's remarks-together with a characteristically Delphic utterance by Alan Greenspan-as an indication that large, coordinated reductions in interest rates are imminent. Why would anyone think this is plausible? True, the drag from crises abroad and slumping stocks at home has put America's inflation threat on temporary hold and made it easier for the Federal Reserve to make its quarterpoint rate cut in September. But it is hard to believe that this cut-or even another quarter-point cut-would make much difference to the rest of the world, even if matched by similar cuts in Europe. (Japan cannot cut rates, of course, because they are already effectively zero.) And it is equally hard to believe that either the U.S. or Europe would put its own hard-won price stability at risk by cutting rates by the two or three percentage points it would take to make an appreciable difference to the position of troubled nations in Asia and Latin America.
Or take the rumors that the G7 will create a large Latin American rescue fund; at the time of writing, the gossip says either $30 billion to $40 billion for Brazil or $100 billion for all of Latin America. I have a hard time understanding where that much money will come from, given the growing distaste of legislators here and abroad for such rescue funds, and Clinton's, um, diminished powers of persuasion. But suppose that the legal wizards at the Treasury find a way to do yet another end run around Congress, and their counterparts in Europe and Japan do the same. So what? At the beginning of the summer, Latin American nations had more than $150 billion in foreign exchange reserves; Brazil alone had more than $70 billion. If that wasn't enough to prevent a crisis, why would another $30 billion, or even $100 billion, make a big difference?
It's true that there are times when the actions of world leaders are less important than what military historian John Keegan calls the "mask of command"creating the impression that things are under control can sometimes be all that it takes to restore confidence and turn the military or financial tide. But more often than not, leaders who promise, or even seem to promise, more than they can de- liver only squander the little credibility they have left.
The truth is that right now it is pretty much every country for itself. Brazil's basic dilemma is that it is already an economy with high and rising unemployment; yet it must sharply cut its budget deficit, and keep interest rates at punishing levels, in order to fend off speculators. That is, it must follow tight monetary and fiscal policies in the face of a slumping economy, making the slump even deeper. A quarter- or half-point off the Fed funds rate won't change that picture; neither will a $40 billion credit line. (A $200 billion credit line, which would allow the Brazilian government to pay off most of its short-term debt, might be another storybut so would divine intervention. In other words, it just isn't going to happen.) The stark alternatives are to hang tough, suffer, and hope that virtue is somehow rewarded; cut interest rates, let the currency float, and hope that disaster doesn't strike; or break the rules, impose some kind of capital controls, and again hope that disaster doesn't strike. It's a pretty grim menu, but the point is that the choice is Brazil'sand we do it no favors by pretending that the cavalry is on its way to save it.
Originally published, 10.26.98