On September 22, the Wall Street Journal editorial page started apportioning blame for the still unfolding bloodbath on Wall Street. It connected some of the dots that we did on our previous posting ("From Mercantilism to the Meltdown," September 21).
In particular, the Journal lashed out at the Federal Reserve. After questioning the validity of the "savings glut" theory of the US trade deficit, the editorial commented: "The savings glut was in large part a creation of the Fed, which flooded the world with too many dollars that often found their way into housing markets in the U.S., the U.K. and elsewhere."
Fair enough. There's no question that the world is awash in dollars. But the Fed didn't decide who would get how many of the excess dollars. That decision was left to oil exporters who fix the price of petroleum and the mercantilists who fix the price of their currencies. In effect, the US policy of malign neglect allowed the modern mercantilists to decide how much to take.
But enough of the blame game. What can be done to stop the mercantilist madness before it consumes us? Here's a simple four-part strategy, the first three steps being matters of urgency:
First, enact legislation to make prolonged currency misalignment actionable under U.S. trade laws. Bipartisan bills have been languishing in each house: H.R. 2942 introduced by Reps. Tim Ryan and Duncan Hunter and S. 796, introduced by Senators Bunning, Stabenow and Bayh. Merge them, pass them and challenge the mercantilists to cease and desist.
Second, armed with the leverage of potential trade law remedies, the Treasury should screw up its courage and, for the first time since 1994, name a country for currency manipulation. In fact, it should name them all -- China, Japan, Korea, Taiwan, Malaysia, Singapore and any others who are piling up massive foreign currency reserves through undervaluation of their currencies.
Third, convene a meeting of all those countries in an undisclosed location and don't come out until a series of coordinated currency corrections has been agreed. This will help restore sanity and confidence to the world financial system and give harried policymakers in the U.S. and elsewhere time to develop thoughtful, workable responses to the meltdown.
Fourth, the next administration should begin planning now to ensure that the global monetary system gets a long overdue and thorough overhaul. The IMF needs to be given the tools it needs to maintain discipline among its members. Moral suasion obviously is no match for mercantilism. For the sake of all its members, the IMF needs to be equipped to play a meaningful role in curbing exchange rate abuses and the excessive expansion of credit by any of its members, regardless of their size. In addition, we need to face up to the fact that neither the United States nor any other single country can afford to run trade surpluses indefinitely. The world needs another, more sustainable source of liquidity to complement the role played for so long by the American dollar. It's not by any means premature to start laying the groundwork for a new reserve currency -- perhaps the long neglected SDRs (special drawing rights) that almost 40 years ago were touted for that role and still exist in limited amounts.
Also 40 years ago, Robert Kennedy would conclude his campaign stump speech with this thought: "Some see things as they are and ask, why? I dream of things that never were and ask, why not?" Given the mess of things as they are, isn't it time for us all to ask, why not?