The superclass

by | Apr 8, 2008 | Cooperation and coherence, Global system, Influence and networks

In our Progressive Governance paper, Alex and I argued that ad hoc ‘shared platforms’ are a vital part of the management of a globalised world, particularly at times of rapid change. In Newsweek, David Rothkopf provides a glimpse of how these platforms have swung into action during the current financial meltdown:

To get a sense of how the world’s elite acts in a moment of global crisis, a moment like the one we are in now, it’s instructive to watch a player like Timothy Geithner at work. The New York Federal Reserve Bank president has been at the center of frantic behind-the-scenes efforts to stem the spread of the U.S. credit collapse, to manage the bank run that brought down Bear Stearns, and many crises before it…

Because interest-rate changes and cash infusions have less lasting impact on markets than in the past, the power of central banks is effectively more limited. In today’s world, no one institution, not even the U.S. Fed, has the power to contain a crisis. Being a successful central banker now depends on what Geithner calls “a convening power … that is separate from the formal authority of our institution and which can be a very powerful tool.” […]

Recalling an earlier crisis in global securities markets that he helped to manage, Geithner said the Fed brought together the leaders of the world’s 14 major financial firms, from five countries, representing 95 percent of all the activity in global markets. The Swiss were there, the Germans were there, the British were there. Interestingly, no Asians were there, not even the Japanese. Goldman Sachs chairman and CEO Lloyd Blankfein “jokingly called them ‘the 14 families,’ like in ‘The Godfather’,” says Geithner. “And we said to them, “You guys have got to fix this problem. Tell us how you are going to fix it and we will work out some basic regime to make sure there are no free riders to give you comfort; you know that if you move individually everybody else will move with you.”

There was nothing in writing, no rules, no formal process, and while no one asked the Fed to act, the Fed let everyone in the markets know it was acting. The beauty of the process was its absolute efficiency, seeing what a tight circle of large firms with “some global reach” could get done, fast-with an executive committee of only four running the weekly conference call until the crisis was past. “There is no formal mechanism we could have used to force this on anybody, so we had to invent it. I think the premise going forward is that you have to have a borderless, collaborative process. It does not mean it has to be universal, every jurisdiction or every institution,” said Geithner. “You just need a critical mass of the right players. It is a much more concentrated world.”

In Superclass, his new book on global elites, Rothkopf identifies a group of around 6000 key movers and shakers – literally ‘one in a million’. Their role is generally a stabilising one, if they can keep in line with the wishes of the wider population (a point echoed by Gideon Rachman in the FT today). But sometimes it doesn’t work out this way:

I once overheard a dinner conversation among the CEO of a leading aircraft manufacturer and a senior member of the U.S. House Armed Services Committee. “Here’s the deal,” said the CEO. “I want to sell a plane to Muammar Kaddafi and he wants to buy one. But we have sanctions in place that won’t let me sell to him. The U.S. wants this guy dead. So, what I’m thinking is, if you help me get the OK to sell him the plane, I’ll build with explosive bolts connecting the wings to the fuselage. Then, one day he’s up flying over the Med and we push a button. He’s gone. I make my sale. Everyone’s happy.” Fortunately, the conversation took place in the 1990s, a time before U.S. foreign-policy makers began bending international laws to achieve national security goals. The congressperson declined the offer.

The shape of things to come

by | Apr 8, 2008 | Global system

Nouriel Roubini wins the prize for metaphor of the week: will the US recession be shaped like a V (short and shallow), a U (a bit more sustained at the bottom, but with recovery after 12-18 months); a W (a double dip, in other words) – or, horror, an L (a protracted slump like Japan’s in the 1990s after, er, its housing bubble burst)?

Roubini says his own view is closest to a U – because, he says, the last 2 recessions (1990-91 and 2001) were 8 months each, and this is worse (see the post for why).  Still, for me the real story here is that Roubini thinks the L to be unlikely: he’s been the bear of bears for months (and generally correct with it), so light at the end of the tunnel from the Stern School’s Mr Downturn is a welcome thing indeed.  He thinks an L is unlikely, by the way, because:

…the policy response of the US is already more aggressive than the one of Japan. Japan waited almost two years after the bursting of its bubble to ease monetary policy; and it waited two years before providing fiscal stimulus. In the US, instead, both monetary and fiscal stimulus have started in earnest early on.

Also Japanese postponed the necessary corporate and banking restructuring for years keeping alive zombie firms and zombie banks via inappropriate forms of forbearance. In the US both private and especially public efforts to restructure the impaired assets and firms will start faster and more aggressively. Thus the risk of a decade-long economic stagnation is quite limited so far.