Thursday, August 28, 2008

Imagining a GCB and world financial integration

Continued from here. David Smith at EconomicsUK is right. A global central bank would not work, though there is scope for better co-ordination of monetary policy between countries.

Realistically, it would take a really, really major global financial catastrophe before a majority of countries would consent to their CBs being subordinated, and their domestic monetary policy being determined by, such a Global Central Bank. A really major meltdown of global proportions.

Also, for a GCB to work out, it will need to implement differentiated policies across countries, to account for different local growth rates, as opposed to one just one uniform global rate or policy. That means we will need a really smart GCB who can crunch and analyze endless reams of data coming from all corners world-wide, be completely unbiased, and have a better understanding of the global economy than we have now. He will need to quickly determine which region is experiencing real growth vs. having a financial bubble, and which region has the better prospects to attract financial flows, and which will likely suffer an attack in the future.

To be effective, this theoretical GCB should have its own discretion in determining rates, albeit after consultation with the individual country CBs. In most cases, country CBs will have autonomy in setting domestic policy. But since the buck ends with the GSB, it should have an over-ride to the individual decisions of the domestic CBs, if global conditions warrant a policy alignment world-wide. The theory is, having a GCB would be taking the job of global macroeconomic and monetary policy coordination a step further – by putting the final say on these policies to just one governing body with global jurisdiction.

If we were to subject GCB policy-making to an international votation each time, we would likely end up with votes made according to various bloc interests. Therefore, this theoretical GCB should have an international charter, be widely accepted to have a global affiliation and mindset, and should never be construed as acting in the interest of some countries only. Then all countries should willingly comply, and I mean ALL, for its policies to work.

A GCB is unworkable, given our current circumstances. Institutions such as the IMF could only dream of having such power. If multilateral trade talks, such as Doha, have collapsed, how could global financial integration work?

But you never know where globalization could go next. Who knows in 20 years? Perhaps by then, there will be free mobility of anything and everything, including people, such that domestic policies won’t matter as much anymore.

Globalization in the long-term, if continued in its current form, could only lead to either this eventuality, or to another world war. Globalization in its current form will keep on creating intra-country economic dislocations, because while labour and small-scale businesses are stuck in just one country, capital can and will traverse the globe at a blip. A recipe that fosters resentment and protectionism among countries.

As John Lennon used to say, imagine a world without…..

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