Top central bankers from around the world gathered last week in Jackson Hole, Wyoming. No big news came of their regular summer meeting in the Tetons, other than a hard look at each nation’s latest strategy for job growth. Yet a certain trend has emerged among these powerful managers of the world’s money supply. They may be more sensitive to how their domestic decisions, such as raising interest rates, influence other nations.
This mutual empathy for “spillover” effects could be a good result of the 2007-09 financial crisis. That crisis compelled the big nations to coordinate economic policy in order to prevent a global depression and a rise in trade protectionism. Since then, governments have also come up with a few global remedies, such as requiring big banks to keep more cash on hand.
Such strong unity of purpose and careful listening beyond one’s borders was only last seen in the years right after World War II, when a system of global economic governance was set up under American leadership. As other nations have caught up with the United States, policy coordination has become more complex – and more necessary. One reason: Over the last century, there have been more financial crises than major wars between big powers.
In the 1970s, the G-7 group of nations tried to coordinate economic policy with mixed effect. Later a large grouping, the G-20, sprung up. Two years ago, the International Monetary Fund set up a surveillance system to track decisions by big economies for their potential global impact.
“If policies are viewed only from a national perspective,” said IMF Managing Director Christine Lagarde, “we may end up in a world of ad hoc intervention, less rebalancing, and the potential to export financial instability.”
In July, the new head of the US Federal Reserve, Janet Yellen, said that the Fed would “make sure” that its expected raising of interest rates would go “smoothly” for other nations. China, too, has shown some sensitivity to global opinion by lessening government control over its currency rate.
This ability by more nations to see the other’s good before taking action is just one way to head off another shock to the world economy. Each nation must also improve its economic fundamentals.
Nations are no longer economic islands unto themselves, nor can they ignore the waves they might create.