Finance: FDR, Bush Blew It

21 November 2008 |permalink | email article

Last Saturday’s G-20 economic gathering in Washington, compared to a rerun of the London Economic Conference in 1933 when 66 nations failed to agree on a concerted response to the Great Depression, drew little media attention.

Harvard historian Niall Ferguson wrote in the Washington Post the fault then lay mostly with the newly elected U.S. president Franklin D. Roosevelt, who vetoed European proposals for currency stabilization. (See “Wall Street Lays Another Egg.” Vanity Fair, December 2008).

This time it was outgoing President George W. Bush, even before his counterparts reached Washington, who made it clear that nothing in the current economic crisis has diminished his faith in free markets or minimalist regulation.

His action doomed European calls for a new international regulatory body. Is that why there were no Bush handshakes with his counterparts?

“As happened in the 1930s, what began as an American banking panic has now escalated into a global economic crisis. And just as it happened in the 1930s, a lack of international coordination has the potential to turn a recession into a deep and protracted depression.”

He writes that the absence of any global coordination as investors react to each fresh national initiative could be nearly as disruptive as the actions of national governments during the Depression, but opines the relationship between China and the U.S. as crucial.

“More than anything else, it has been China’s strategy of dollar reserve accumulation that has financed America’s debt habit. Chinese savings were the key reason U.S. long term interest rates stayed low and the borrowing binge kept going.”

Now that the age of leverage is over, “Chimerica” – the partnership between the big saver and the big spender is over, and what Ferguson sees as a need for the Chinese to be supportive of U.S. monetary easing and fiscal stimulus by doing more of the same themselves.

His advice to Obama: Don’t wait until April for the next G-20 summit. Call a meeting of the Chimerican G-2 for the day after the Jan. 20 inaugural. Don’t wait for China to call its own meeting of the new “G-1” summit in Beijing.

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