Reserved for China

Cecille Isidro — Wed, 22 Apr 2009 09:08:00 -0400

Since the global financial crisis began, one of the major surprises has been the continued resilience of the U.S. dollar - despite attacks on the "American-style capitalist model," financial sector weakness, and record U.S. government deficit spending. The dollar today represents almost two thirds of the world's official currency reserves. Its holders presumably believe that it will remain highly liquid, relatively stable in value, and supported by prudent economic policies by the U.S. Treasury and Federal Reserve.

Obama Must Lead the Way on Global Financial Reform

Cecille Isidro — Sun, 01 Feb 2009 12:01:00 -0500

The Brave New World of Global Finance

Cecille Isidro — Thu, 15 Jan 2009 10:30:00 -0500

When future historians look back at the major shift in power that came in the fall of 2008, they will focus not just on the election of Barack Obama. Less than two weeks after Obama's historic election, finance ministers and central bank governors from the G-20 nations convened in Washington at the height of a global panic to discuss the future of global finance.

Give Bankers Some of Their Own Medicine

Kate Schuler — Tue, 23 Dec 2008 14:39:00 -0500

You know the financial crisis is bad when investment bankers are grumpy at Christmastime. That's because in investment banking, Christmastime is bonus time, and bonus time is what it's all about.

Bonus time is when all the deals you crafted and all the money you made for the bank gets toted up and you get your fair share.

Usually, in the world of Wall Street and its international counterparts, that "fair share" can reach 10 or 15 times your annual salary. That usually makes year-end a time of great joy in investment banking land.

Capital in the Capitol

Cecille Isidro — Fri, 17 Oct 2008 06:40:00 -0400

If anyone doubts the increasing importance of finance as a tool of foreign policy, one need look no further than Iceland, a NATO member, which this past week announced that it is in negotiations for a 4 billion euro bailout from Russia. Iceland's prime minister was blunt: "We have not received the kind of support that we were requesting from our friends, so in a situation like that one has to look for new friends."

While denied by the Icelandic government, there have been suggestions that one area of discussion is the possible use by Russia of a former--NATO military base on its soil. Others suggest that Iceland may be prone to more favorable consideration of future Russian claims to the resource-rich arctic. Regardless of how this turns out, the use of financial resources to achieve international goals is the latest example of a rising trend that we call the financialization of foreign policy. The United States government is woefully unprepared for this convergence.

Perhaps the current financial crisis could serve as a much needed wake-up call to Washington that it needs to better understand and integrate financial thinking into its overall policymaking apparatus. Current events have already jolted policymakers into acknowledging that the federal government can no longer operate business (or politics) as usual. Treasury's role as a $700 billion portfolio manager is only one aspect of what ought to be a wholesale rethink of our government's understanding of finance. At a minimum, there must be significantly greater cooperation between the Treasury and State Departments, and the national security apparatus. Foreign policy separate from financial policy is no longer an option.

An important lesson learned over the past several weeks is that U.S. strategic thinking about the foreign-policy considerations and consequences of finance and market issues has been inadequate. The current crisis presents an opportunity for the United States to reshape how our government responds to these new economic realities.

Upon taking office, the next president will confront a world far different from that of his predecessors. The new administration will face a more complex global landscape, where American financial pre-eminence is no longer taken for granted and where other nations use their own increased financial resources to further their national interests. The United States will certainly remain a major center of global finance, but has been weakened. The so-called "exorbitant privilege" of the United States to print the world's de facto reserve currency--and thus operate beyond the financial constraints that apply to other nations-- may have become a bit less exorbitant.

Today, the United States is no longer capital rich. Rather, America is a significant international debtor with a sizeable portion of that debt held by central banks in China, Japan, Russia and the Gulf states. This wealth transfer from the United States to other nations is significant and appears likely to continue. The current banking crisis demonstrates that American financial institutions are becoming increasingly dependent on capital from foreign sources, such as central banks and sovereign wealth funds. One of the probable outcomes of the current crisis is the acceleration of the development of alternatives to American financial markets, capital and currency.

While the future course of how these issues will develop remains uncertain, the strategic considerations that they raise are likely to be permanent features of the global political, financial and national security landscape. Earlier this year, for the first time, the director of national intelligence's annual threat assessment included financial issues as one of the leading security threats facing this country. Director McConnell cited "concerns about the financial capabilities of Russia, China, and OPEC countries and the potential use of their market access to exert financial leverage to achieve political ends." That was well before the current financial upheaval.

Issues of this magnitude require more than operational tweaks--they compel a fundamental structural overhaul of the way our government integrates financial issues into its foreign-policy thinking.

The need to modify the organizational structure of the White House and executive branch to integrate financial policy considerations in the shaping of foreign policy has been undertaken at key turning points in the last half-century. In 1945, recognizing that the world had fundamentally changed after the Second World War, the Truman Administration retooled the federal government and created the National Security Council and other new structures to address the challenges of the Soviet Union, the spread of communism, decolonization and the new map of post-war Europe. This period saw the creation of the Bretton Woods system, the Marshall Plan and the establishment of the World Bank and International Monetary Fund.

Similarly, following the collapse of the Soviet Union and the onset of globalization, the Clinton Administration established the National Economic Council (NEC) as a counterpart to the National Security Council. The creation of the NEC was a positive step. But it has not proven able to confront the economic issues facing our country today.

The government must undertake a realistic appraisal of the global economy, noting the strengths and weaknesses of America's role in that economy and how other nations may seek to gain advantage through the financial tools increasingly at their disposal. In our relationships with international allies, competitors and potential adversaries, financial and economic components must be an integral part of our strategic and conceptual thinking.

To that end, we believe that the State Department and National Security Council need to be far more engaged in the world of international finance and economics--a competence which has, until now, been ancillary to its core capability. But, perhaps equally important is an enhanced strategic role for the Treasury Department.

At the State Department, the Office of Policy Planning (OPP) reserves a hallowed space where policymakers from across disciplines come together to "anticipate the emerging form of things to come, to reappraise policies which had acquired their own momentum and went on after the reasons for them had ceased, and to stimulate and, when necessary, to devise basic policies crucial to the conduct of our foreign affairs." Members of the OPP act as a liaison with those outside of the government.

The Treasury Department has no such space. Treasury's OPP, which currently functions as part of its office of communications, should be upgraded, refocused and should engage in a formal working relationship with the State Department's OPP to provide input on the long-term strategic implications of shifts in power in the world's financial system. The office should be structured to reach beyond Washington to serve as a liaison with market participants in the global financial system on matters relevant to U.S. foreign and domestic policy, including other states' use of capital to achieve political goals, the dollar's strategic role as a reserve currency and the America's role in the international financial system.

For the two departments to operate more cooperatively, it is important that each have the requisite level of cross-disciplinary expertise to pursue new avenues in international affairs. To that end, senior officials should have experience and training in both foreign policy and finance.

Twenty-five years ago, trade in goods and services accounted for roughly 90 percent of all cross border financial activity. Things have changed. Today, financial flows unrelated to trade now account for over 90 percent of cross-border activity--an astounding inversion. Investment flows not only dwarf trade flows--they continue to grow almost twice as fast. While trade remains a significant component of the world's financial system, international investment is much more substantial. For example, in 2006 foreign purchases of long-term securities from American residents totaled $52 trillion compared to $3.6 trillion in U.S. exports of goods and services.

Given the enormity of this shift, hiring individuals with solely trade, as contrasted with broader financial, backgrounds is not ideal. For example, three out of four national security advisers for international economic affairs in the current administration were previously trade lawyers. In the next administration, relevant positions should be filled by individuals with not just trade experience, but with international investment or economics experience as well.

Specific recommendations for bureaucratic reform are only meaningful if there is a broader commitment and investment in the underlying framework behind it. U.S. financial dominance was a key aspect of the global balance of power until just a few years ago. The shift of global capital away from its dependence on the United States has already altered the position of the United States vis-à-vis allies and adversaries. The current financial crisis has only accelerated this trend. Some of these shifts may be zero-sum, but others are not. Unless the organizational structures and the placement of key officials and advisers are both reconfigured, these questions are not likely to be properly addressed and policy will suffer as result. From crisis, we must seek opportunity. Today's financial upheaval provides an opportunity for the next administration to use innovation and creativity to think anew about structures and systems that have been in place for more than sixty years.

Global Strategic Finance Initiative: Latest Articles

Reserved for China

Obama Must Lead the Way on Global Financial Reform

The Brave New World of Global Finance

Give Bankers Some of Their Own Medicine

Capital in the Capitol