1929. Fiscal and monetary policies are as expansionary as anybody would have thought imaginable, so
as to err on the other side of Hoover. But what are the
likely mistakes of 2009 that policymakers and economists during the next crisis will be trying to avoid?
One possible candidate is the fact that the recapitalization and reflation is planned mainly for the U.S.
domestic economy, while the problem and the borrowed resources are global. The current strategy constitutes an attempt to restart the global economy through
a widening of the U.S. external deficit. Clearly, this is
not the best way forward because it tries to solve one
problem by aggravating another. It may cushion the fall
now, but it will slow down the recovery later.
AP Photo/RicARdo MoRAes
If current trends continue, by 2011, the U.S. balance sheet will look pretty weak, given all the
additional debt. Tax rates will need to go up, as is currently planned through the expiration of the Bush
tax cuts. If by then the recession is not over, investors
will feel much less sanguine about U.S. Treasuries
and the super-borrower power may evaporate.
It seems reasonable to assume that if the crisis is
global, the solution must also have a global character, even if the world has just a few super-borrower
nations. A more sustainable alternative is to use the
super-borrower capacity to reflate the global economy and to re-establish financial links globally.
This would imply using the capacity to borrow
to buy financial assets abroad, thus allowing other
countries to expand their spending and investment.
Through this approach, the balance sheet of the U.S.
does not get worse: the additional debt is balanced by
additional claims on foreigners, and the interest-rate
differential will make the U.S. taxpayer better off.
The additional foreign spending would seep into the
U.S. through higher American exports, thus stimulating the economy in a more sustainable manner.
How To Get It Done
Global reflation can be accomplished in several ways.
First, multilateral development banks should be
recapitalized by having countries subscribe to new
issues of callable capital (i.e., de facto guarantees).
This will allow the IFIs to raise funds in global capital markets, which they can then lend to the credit-starved developing world. For Latin America, this
would imply a recapitalized World Bank and Inter-American Development Bank (IDB).
The goal is for these institutions to be able to lend
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