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Lost in
the financial panic spreading across the globe is an
obvious question: Where is the Group of Seven?
It’s not
that members of the once-mighty grouping are ignoring
the dollar’s plunge and the yen’s surge. It’s more that
there’s little that even the most powerful authorities
can do about today’s turmoil. That makes it all the
scarier.
In a
delicious bit of serendipity, New York’s Plaza Hotel,
the site of the 1985 Plaza Accord, just reopened after
years of renovations. The Plaza Accord weakened the
dollar versus the yen, a situation we now have perhaps
too much of. In a perfect world, finance ministers would
be booking a Plaza conference room to work on a new
currency agreement. They aren’t—just yet.
You can
almost feel a collective sense of dread in the air in
Tokyo as the yen trades at 12-year highs. Even though
Japan
is perilously close to recession, the yen is soaring.
Welcome
to the financial “Alice in Wonderland” that
Japan
can often be. Instead of conventional financial
realities, policymakers in Tokyo face a
through-the-looking-glass world in which the yen rises
when stocks are falling. That’s not how it normally
works.
Japan
isn’t alone tumbling down the rabbit hole and grappling
to make heads or tails out of the global events. For
many, the implosion of Bear Stearns Cos. was as
disorienting as things get. The failure of hedge fund
Long-Term Capital Management a decade ago was one thing;
watching Wall Street’s fifth-largest securities firm go
down is quite another.
Go ask
Alice
Adding
to the sense that the surreal has replaced the normal,
the Federal Reserve effectively bought Bear Stearns for
JPMorgan Chase & Co. Lewis Carroll wasn’t writing about
finance in 1865 when Alice’s Adventures in Wonderland
was published, yet he easily could have been.
As the
G-7 observes this unprecedented turmoil, the question is
what to do. Sure, officials from
Canada,
France, Germany, Italy, Japan, the United Kingdom and
the United States could step into markets in an attempt
to restore calm. They could buy dollars and sell yen in
a coordinated way, or threaten to do so.
This may
still happen in the days ahead or when the G-7 meets in
Washington on April 11. “The April G-7 meeting could be
a watershed event for the dollar,” says Simon Grose-Hodge,
an investment strategist at LGT Group in Singapore.
Complex
problems
The
pressure for currency intervention is growing in Tokyo,
where executives fret the yen’s ascent will devastate
exports. The trouble is, it may not work, and G-7
bigwigs probably know it. Also, Grose-Hodge adds, after
years of telling China not to support growth with a
lower currency, it’s hard for the G-7 to help Japan do
just that.
Reasons
for G-7 impotence include the complex nature of this
crisis. Some of the economies doing the most to
influence today’s markets—like China and India—don’t
have a seat at the G-7’s table. The biggest reason may
be how much the world has changed.
Last
summer, as the subprime-loan meltdown heated up, Wall
Street’s smartest reassured us things were
“containable.” Six months ago, when credit markets were
seizing up, they said the worst was over. The downfall
of a household name like Bear Stearns should send a
message to the stubborn bulls out there.
This
crisis involves everything from derivatives to home
mortgages to municipal bonds to untold amounts of yen
borrowings invested around the globe. The
interconnectedness of a global system with so many
moving and disparate parts is boggling even the greatest
minds. Can we really expect traditional tools like
cutting interest rates to save the day?
‘The
dollar crisis’
Predictions made by Richard Duncan in his 2005 book
The Dollar Crisis are starting to have a
discomforting ring of truth: a property crash meets a
financial sector that’s shakier than expected, requiring
unorthodox policy responses, such as bailouts from the
Fed and sovereign-wealth funds.
Hopes
for high-level cooperation are belied by the
every-man-for-himself dynamic that seems to have
overtaken the G-7’s we-are-the-world vibe. Cooperation
was the theme as Asia and Russia melted down in the late
1990s.
These
days, the
United States
seems content watching the dollar slide, perhaps to
stimulate growth and reduce its trade imbalances. The
Fed seems keen to oblige and emulate the Bank of Japan’s
penchant for protecting executives from losses.
Chinese
officials must be watching the dollar’s drop with
interest. Until recently, US President George W. Bush’s
people couldn’t talk enough about how China’s currency
policy imperiled prosperity. It wasn’t the yuan at all.
The problem was bad US lending and regulators asleep at
the wheel.
One
wonders if
China
will begin calling on the United States to strengthen
its currency. As Asia’s post-crisis recovery showed, the
quickest way to dig out of a recession is a weak
exchange rate. It’s the kind of beggar-thy-neighbor
approach the G-7 tends to abhor.
G-7
officials can go ahead and book space at the Plaza to
discuss markets. It is anyone’s guess what difference it
will make. |
