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Global Imbalances and Liquidity-Induced Bubbles:

The Need for International Monetary Reform
Juscelino F. Colares
"Our diagnosis of the crises that ail us . . . depends in part on the
theoretical tools through which we define them and the vocabularies
through which we narrate their possible solutions." 1
Economic analyses vary with respect to the extent to which deregulation
contributed to the financial crisis of 2008-2009, but coalesce on one major
cause: excessive leverage and risk-taking. Yet, excessive risk-taking was
nearly ubiquitous and occurred despite different levels of regulatory
stringency across nations, suggesting that regulatory failure, though a
contributing factor, ought not to be singled out as the sole cause of the
current crisis. This commentary discusses how some features of the
international trade and monetary regime have played a major role in
producing the recent crisis. It maintains that persistent underlying global
imbalances in exchange rates, trade, savings and consumption create the
liquidity conditions ideal for the development of bubbles in several
countries. Because the existing WTO/IMF legal infrastructure was
designed to address balance-of-payment crises in narrow contexts, only a
set of cooperative, multinational exchange rate adjustments would prevent
the destabilizing effect that accumulation of massive currency reserves can
have on world trade flows and national economies. Such global
macroeconomic coordination would require surplus and deficit countries to
accept monetary, budgetary and geopolitical trade-offs if they wish to
forestall the rise of protectionism and promote a stable international

economic environment. (JEL: F 13, F 21, F 41, F 53)

INTRODUCTION
Economic and financial commentators agree that the domestic
financial system is broken. Their diagnoses may vary with respect to

Associate Professor of Law, Syracuse University College of Law.

The author thanks David Zaring for his insightful comments on an earlier

draft.
1. Jacqueline Best, Hollowing out Keynesian Norms: How the Search for a
Technical Fix Undermined the Bretton Woods Regime, 30 REV. INT'L STUD. 383,
385 (2004).

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the extent to which deregulation contributed to the financial crisis of

2008-2009, but they seem to coalesce on one major cause: excessive
leverage and risk-taking in new collateralized debt instruments and
derivatives. Due to the role excessive risk-taking played in this
crisis, proposals for regulatory reform have so far focused,
understandably, on measures that would promote better risk
management. Yet, excessive risk-taking was nearly ubiquitous and
occurred despite different levels of regulatory stringency across
nations, suggesting that regulatory failure, though a contributing
factor, ought not to be singled out as the sole cause of such
widespread damage.
One example illustrates the point: the
immediate effects of the financial crisis of 2008 were initially
transmitted to European banks due to their large holdings of U.S.
corporate securities. 2 Clearly, these banks were subject to regulatory
regimes with varying and, in some cases, stronger leverage
requirements than those imposed on U.S. banks. However, the
sudden severe deterioration in their balance sheets reflected not only
the unraveling of their U.S.-based debt positions, but also their
enormous foreign currency exposure. They held massive stocks of
fast-tumbling dollar-denominated assets. This demonstrates that net
flows and major gross positions in foreign currencies can have quite
a destabilizing power in the international financial system and, thus,
require serious consideration. Significantly, it demonstrates why
regulatory reform that focuses on reducing excessive risk-taking in
debt markets, though desirable, would not be effective in checking
the non-debt related causes of the last financial crisis.
This article goes beyond the traditional focus on financial risk
and leverage regulation to discuss how some essential features of the
current international trade and monetary regime have played a major
role in producing the recent financial crisis. Specifically, the author
posits that persistent underlying global imbalances in exchange rates,
trade, savings and consumption contributed to the pre-crisis
expansion in credit and liquidity in a number of countries, leading to
the formation of bubbles, as financial institutions (investment banks,
insurance companies, etc.), commercial concerns and private
households were allowed to take excessive risks.

2. Olivier Blanchard & Gian Maria Milesi-Ferretti, Global Imbalances: In

Midstream? 6 (Int'l Monetary Fund Staff Position Note SPN/09/29, 2009),
available at http://www.imf.org/external/pubs/ft/spn/2009/spn0929.pdf.
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Part I briefly describes the crash of 2008 and the initial U.S. and
G-20 coordinated responses. Part II then develops a sketch of the
global imbalances that create the liquidity conditions ideal for the
development of bubbles, and Part III explains how the current
international economic architecture is responsible for these
imbalances. By explaining (a) that structural imbalances in exchange
rates, trade, savings and consumption are a result of the current
structure of the international economic system; and (b) that they
contribute to excessive liquidity, which, in turn, fuels the formation
of bubbles through financial markets, the author posits that localized
regulatory fixes to risk-taking are not likely to avoid future bubbles.
Therefore, Part IV proposes a set of cooperative comprehensive
exchange rate adjustments that would limit the destabilizing effect
that accumulation of massive reserves in one currency has produced.
These adjustments could be achieved through different cooperative
mechanisms, which the author discusses. By reducing the incentives
for the formation of massive currency reserves, this change would
reduce the likelihood of excessive pools of liquidity, which, through
the operation of the international financial system, have been the
cause of worldwide economic instability. This article concludes by
highlighting that such reform can be attained only via global
macroeconomic coordination, requiring different countries to accept
certain short-term monetary, budgetary and geopolitical trade-offs if
they wish to forestall the rise of protectionism and promote a stable
international economic environment in the long run.
I. THE CRASH OF 2008 AND THE EARLY RESPONSE
The last financial crisis is American-born in more ways than one
can imagine. It was in the United States that flawed regulatory
structures, poor risk-management and innovations in securitization
(i.e., the repackaging of collateralized debt, such as mortgages,
corporate loans, credit card receivables among other financial assets
into presumably liquid securities then sold to investors throughout
the world) and derivatives (i.e., the creation of "synthetic" credit
default swaps, insurance-like contracts issued by and traded among
financial institutions containing promises to pay in the event of a
counterparty default) combined to channel easy money to the various
sectors of the economy. Residential households, commercial
businesses, consumers and, of course, financial institutions were all
participants in a bubble the likes of which we had last seen prior to
the Crash of 1929. Once expectations of ever rising real estate prices
collapsed and the crisis arrived, policy response was strong, initially
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counting on a certain bipartisan support, to wit the Bush and Obama

Administrations' Troubled Asset Relief Program (TARP) and the
successive rounds of Federal Reserve agency debt purchases that
began in the fall of 2008. Together with a zero-interest policy, this is
now the biggest liquidity injection in modern history.
The severity and scope of the crisis required a remarkable shift
in economic policy: macroeconomic tools were deployed worldwide
to counteract the effects of a strong downturn in global private-sector
demand. While these changes also took place during a period of
domestic political transition of remarkable significance to the United
States, they occurred foremost in response to new geopolitical
realities. In this broader sense, the rise of the G-20 was remarkable.
The London and Pittsburgh meetings among leaders of the world's
twenty greatest economies marked the transition from a G-8 to a G20 format, which reflected a greater appreciation of cross-border
spillovers in a globalized world and a major political rebalancing
between the developed world and the large and rapidly growing
economies of the developing world. This timely update in the power
structure of an increasingly interdependent global economy gave
macroeconomic policy the necessary scope to effectively attenuate
the effects of the financial crisis.
Notwithstanding lingering problems with unemployment (in the
United States and other high-income countries) and excess capacity
(worldwide), this policy has so far been a qualified success: forecast
growth for 2010 for the largest economies in the world is higher than
it was a year ago (see chart below).

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Indeed, the United States and the world economy have managed
to escape from another Great Depression, but unemployment rates
are not likely to rebound even in the medium term. Congressional
Budget Office unemployment forecasts for 2010 actually went up
from 6.1% in September 2009 to 9.0% in January 2009, a remarkable
sign of a protracted, if not fickle, economic recovery.4
Remarkably, from California to New York, from Ireland to
Spain, and from Dubai to Abu-Dhabi, the combination of free
flowing capital, financial deregulation, excessive risk-taking and now
G-20-orchestrated government bailouts has created the mother of all
moral hazards: bankers throughout the world are rewarded when
their bets are right while governments (i.e., taxpayers) absorb their
losses when they are wrong (even while they keep their bonuses).
Indeed, in the case of the United States, the current crisis is only the
last in a series of financial earthquakes where government
3. Martin Wolf, What the World Must Do to Sustain Its Convalescence, FIN.
TIMES, Feb. 2, 2010, at 13.
4. See CONG. BUDGET OFFICE, THE BUDGET AND ECONOMIC OUTLOOK:
FISCAL YEARS 2009 TO 2019, 11 (2009),
http://www.cbo.gov/ftpdocs/99xx/doc9957/MainText.3.1.shtml.
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intervention occurred to avoid or mitigate the economic effects of a

market crash, thus further creating perverse incentives to taxpayersubsidized risk-taking. To name only the most recent interventions,
recall the Long Term Capital Management shock of 1998 (Fedcoordinated suspension on collection of hedges from an
overleveraged fund and lowering the Federal Funds Rate three times
in the following three months) and the post-NASDAQ bubble bailout
(2000-2001) (dropping the Federal Funds Rate to below two percent)
to name only the most recent interventions. Indeed, scholarly focus
on moral hazard and the design of prophylactic public policy is of
crucial importance. However, reducing moral hazard in finance is
but one of the more pressing questions facing policymakers.
II. STRUCTURAL CAUSES AND CONSEQUENCES OF EXCESS LIQUIDITY
IN GLOBAL FINANCE
One must not ignore that liquidity/excess risk-taking-induced
crises have also occurred in other countries (e.g., the Japanese real
estate crisis and protracted banking bailout in the 1990s, the Mexican
sovereign bond crisis and bailout of Wall Street investors in 1995)
and even entire regions (e.g., the Latin American debt crisis of 1982
and the Asian crisis of 1998). True, each crisis had its peculiarities.
Yet, in all, a similar mechanism seemed to be in operation:
substantial capital inflows came to less than ideally regulated (one
might suggest "poorly regulated") domestic financial markets,
causing internal bubbles in stock markets (Korea and Japan), real
estate (Japan), bond markets (Mexico) or exchange rate markets
(Asia and Brazil), which eventually crashed, each bringing about
economic slumps and some kind of government or IMF-managed
bailout.
With moral hazard lurking everywhere, mainstream orthodoxy
invariably suggested voluntary or IMF-imposed reforms based on
some version of "The Washington Consensus," a recipe calling for
further financial and trade liberalization in combination with fiscal
austerity measures on the part of governments, never mind the
profound economic damage that reductions in government spending
during profound economic downturns would cause. This neoliberal
consensus was largely premised on the notion that the everexpanding pool of savings available in international markets
presented nations and private concerns with greater opportunities
(e.g., greater access to global finance, lower though variable interest
rates, etc.) as well as risks (e.g., sudden capital outflows, market,
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interest rate and currency volatility, etc.). Nations had to maintain

constant fiscal discipline and healthy economic indicators so as to
keep the status of good debtors, thereby securing themselves access
to international financing opportunities.
Participants in the new world financial order took sudden
exchange rate reversals very seriously. On one side, borrowers
feared, and therefore attempted to avoid, exchange rate volatility due
to its destructive effect, although contagion due to deteriorating
regional conditions sometimes did not spare even those otherwise
regarded as in "good" behavior (South Korea in 1998 is a classic
case). On the other, world financiers perceived exchange rate
declines both as a reaction to deteriorating economic indicators and,
of course, as one more opportunity to profit from launching
speculative attacks against the currencies of "bad" debtor nations.
The traditional rhetoric of big finance remained unaltered until quite
recently, when, in a classic display of situational ethics, the AngloAmerican hegemonic discourse underwent a quick transformation:
from heralding the virtues of strict adherence to market discipline to
pleading "too-big-to-fail" when the twin effects of overleveraging
and counterparty exposure brought the financial system to the brink
of collapse.
While the quick unraveling of the last bubble caused the most
sophisticated financiers to suspend their reliance on market
orthodoxy even if momentarily (and opportunistically), the
unquestionable steadiness of the dollar's status as the world's reserve
currency has allowed the United States to maintain a constant, selfinterested, although not self-reflecting, free-market discourse during
every crisis. Indeed, from the perspective of the United States, a
major borrower nation, it has been easy to say "do as we say, not as
we do," regardless of macroeconomic conditions. Due to the dollar's
perennial reserve currency status, U.S. foreign debt is dollardenominated, so any sudden plunge in the dollar (in the unlikely
event of a currency attack) would not bring about an explosion in
debt. Furthermore, under the currently operating international
monetary system, should an interruption in the flow of foreign
private finance occur, foreign central banks would still be buying
dollars, as some seek protection from currency attacks by
accumulating substantial dollar reserves, 5 while others, also adept to
5. Blanchard & Milesi-Ferretti, supra note 3, at 5, 10 (describing the
"insurance" rationale for dollar accumulation and suggesting that the "overall
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export-oriented growth, feel compelled to sterilize the inflow of

dollars from their trade surpluses by buying U.S. treasury bills. 6
Thus, so long as the United States is willing to accept trade deficits
resulting from export-dependent growth strategies, these imbalances
are likely to continue.
Accordingly, it is this willingness to take on trade deficits that
explains the dominance of the dollar in reserve accumulation. Of
course, this willingness is based on the United States' ability to
continue running large deficits and adding to its debt. As this debt
grows and reaches unprecedented levels in the next few years, this
situation is likely to change as foreign central banks reduce their
dollar exposure and the dollar will lose its status as the single
dominant currency for reserve accumulation. In this sense, the
impact of the latest financial crisis cannot be overstated. It did bring
us closer to the inevitable currency realignment because the U.S.
government's rescue of the financial system and dealing with the
consequences of an economic slump greatly added to its debt. Yet,
other noneconomic factors may also contribute to this
transformation. For instance, the political implications of a long,
drawn out U.S. jobless recovery appear to have aggravated
simmering trade and exchange-rate tensions between the United
States and China, which might accelerate the pace of international
currency reform.
III. PERSISTING GLOBAL IMBALANCES IN THE INTERNATIONAL
MONETARY SYSTEM
Even as United States and global economic recovery takes
place, persistent exchange rate and trade imbalances between surplus
countries (China, Germany, Japan and many other East Asian
economies) and deficit countries (Australia, Spain, United States,
United Kingdom, etc.) will contribute to continued, though slowerpaced, accumulation of dollar reserves by surplus countries. Seeking
to avoid currency appreciation, China and East Asian economies are
likely to carry on investing their reserves abroad thus dumping
excess liquidity on world financial markets. Because these persistent
trade surpluses vastly expand liquidity in international financial
amount of reserve accumulation is difficult to justify [solely] on the basis of
insurance motives").
6. Paul Krugman, Op-Ed., Chinese New Year, N.Y. TIMES, Jan. 1, 2010, at
A29.
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markets, they contribute to asset and capacity bubbles by enhancing

the conditions for excessive leverage and risk-taking. This linkage
between exchange rates, international trade and the international
monetary system must be understood if one wants to reduce the
likelihood of more international finance-induced boom and bust
cycles. Until a rebalancing of the global monetary regime takes
place, this linkage will continue to play a major role in the formation
of asset and capacity bubbles.
The recognition that persistent trade surpluses and deficits are
not sustainable and that reform is due in the international trade and
monetary system also has important and timely analytical
implications. It focuses attention on the notion that, at least in
principle, both surplus and deficit countries share an interest in
reform, even if the path to such reform might be a difficult one. This
shared interest arises from the realization that the economies of each
(surplus and deficit countries) are exposed to detrimental effects of
liquidity-induced bubbles, even if the legal and economic
infrastructure through which liquidity connects with excessive risktaking in their economies might differ. Yet, as countries with fiscal
and budgetary discipline and high savings-to-gross domestic product
(GDP) ratios, surplus countries might have a harder time
understanding how they are not immune to the risks that persistent,
large currency reserves impose. In fact, although the idea that
massive currency hoards guarantees economic stability may seem
intuitive, strong anecdotal historical evidence would suggest that
protection from external debt and currency crises in no way protects
a country from the risks of excessive domestic liquidity. For
example, the Japanese high trade surpluses of the 1980s fueled a
domestic real estate bubble whose bursting resulted in a profound
debt recession that eventually led to the "Lost Decade." 7 Going back
in time, the United States' massive accumulation of reserves in the
1920s (five percent to six percent of global GDP by some estimates),
resulted in a capacity and stock market bubble that eventually
produced the Great Depression. 8 In the current world awash with
cheap money, some experts have suggested that China is currently

7. See Rebalancing the World Economy: Japan, ECONOMIST, Aug. 13, 2009,
at 65.
8. See Never Short a Country with $2 Trillion in Reserves?,
http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves (Feb.
2, 2010).
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experiencing a real estate and capacity bubble, 9 despite parking high

foreign-currency reserves abroad (estimates vary from 2.3 to 3
trillion dollars, 10 or about four percent to five percent of global
GDP 11 ) and imposing restrictions in foreign capital inflows. 12 As its
large developing economy experiences rapid urbanization and
growth in labor productivity, it is not surprising that China would
attract massive capital inflows, tighter regulatory controls
notwithstanding.
If excess liquidity fed the growth of major bubbles in Japan and
currently feeds one in Chinadespite the strong anti-consumption
bias resulting from Chinese trade, exchange rate and capital inflow
management policiesthe environment for asset bubbles (stocks,
commodities, real estate, etc.) to develop in deficit countries is even
more favorable. First, the legal and economic framework that
connects domestic and international finance is much less restricted in
these countries.
Second, deficit countries impose very few
restrictions on consumer demand.
Third, these countries
characteristically have low import tariffs. Thus, the combination of a
sophisticated consumer credit industry, free-floating currencies and
free trade policies feed a pattern of high consumption that has led to
major asset bubbles in stocks and commercial and residential real
estate. Indeed, the high consumption pattern that fed and reflected
these asset bubbles in the "model" deficit country is captured in the
current account deficits it accumulated in recent years: from 2005-

9. See David Barboza, Shorting China: The Man Who Predicted Enron's Fall
Sees a Bigger Collapse Ahead, N.Y. TIMES, Jan. 8, 2010, at B1, B4, (quoting
James S. Chanos's view that China's real estate sector looks like "Dubai times
1,000or worse.").
10. Compare Bloomberg News, China's Foreign-Exchange Reserves Surge,
Exceeding $2 Trillion, BLOOMBERG.COM, July 15, 2009,
http://www.bloomberg.com/apps/news?pid=20601087&sid=alZgI4B1lt3s, with
Sara Haimowitz, China's Record Reserves, TRADEREFORM.ORG, Jan. 27, 2010,
http://www.tradereform.org/content/view/2319/52.
11. World Bank, Key Development Data & Statistics,
http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,content
MDK:20535285~menuPK:1192694~pagePK:64133150~piPK:64133175~theSiteP
K:239419,00.html (reporting global GDP at $60,587 billion in current US dollars).
12. See Eswar Prasad & Isaac Sorkin, Brookings Inst., Sky's the Limit?:
National and Global Implications of China's Reserve Accumulation, BROOKINGS,
July 29, 2009,
http://www.brookings.edu/articles/2009/0721_chinas_reserve_prasad.aspx#table1.
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2008, the U.S. current account deficit averaged 1.4% of global

GDP. 13
Viewed in combination, these trends mean that the world
economy faces a conundrum: jump-starting global demand is
essential to any sustainable economic recovery, but after a decade
that saw the largest stock market bubble and the biggest credit-fueled
commercial and residential real estate bubble in the United States,
there is little doubt that the United States alone could provide the
cure for the global decline in demand by taking on increasingly
higher trade deficits. Nor can the world rely solely on other deficit
countries to do the job since high unemployment and precarious
economic conditions have drained political support for free trade.
IV. THE WAY FORWARD: REBALANCING THE GLOBAL ECONOMY
Rebalancing trade and financial flows could occur either by a
series of coordinated national policy changes achieved through
consultations among major economic players, or by pursuing a more
ambitious approach through the negotiation of a new multilateral
currency regime in the form of an international agreement.
Regardless of the means employed, rebalancing would depend on
two critical questions: (i) whether surplus countries are willing to
provide the necessary expansion in global demand by reorienting
their economic development strategies to domestic consumption
instead of free-riding on other countries' economic stimulus plans
largely the option China, East Asian countries and Germany have
taken so farand (ii) whether the United States is prepared to live
with the geopolitical implications resulting from the dollar's loss of
its status as the primary reserve currencya topic conveniently
avoided by U.S. officials who, so far, seem inclined to focus only on
renminbi appreciation, while eschewing discussion of its own freerider problem.
A. Rebalancing Through Coordinated Adjustments in National and
Regional Policies
In the case of China and East Asian countriesGermany's
autonomy in exchange rate policy is more constrained due to its
participation in the euro, which is itself already overvalued vis--vis
the dollarthis would require their governments to allow their
currencies to naturally appreciate against the dollar. This would
13. Blanchard & Milesi-Ferretti, supra note 3, at 7 tbl. 1.
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reduce their exports and trade surpluses and force their industry to
focus on higher value added production, a transition that Japan and
South Korea successfully underwent in the past.
A recent
econometric analysis suggests that an across-the-board currency
appreciation in China and East Asia would reduce processed exports
by ten percent, which would "switch [global] expenditures towards
US and European goods," and thus rebalance world trade. 14 To
offset falling foreign demand, these countries would have to
rebalance their growth strategies towards more reliance on domestic
demand, which would obviously come at the cost of a reduction in
their current accounts.
A similar refocusing on domestic consumption must occur in
Germany and other European surplus nations. Because currency
appreciation cannot be prescribed to these countries, only an
expansionary fiscal policy would contribute to regional and global
rebalancing by stimulating domestic employment and consumption.
At the regional level, any European Union-wide effort to cure its
deficit countries' economic slump through trade surpluses would be
viewed as a "beggar-thy-neighbor" policy, leading to trade friction
with its global partners and threatening global macroeconomic
coordination at a critical time. Therefore, policies that stimulate
eurozone surplus countries' domestic demand must be coupled with a
region-wide expansionary monetary policy so that a resurgence in
debt-financed growth reduces eurozone deficit countries' large
external and fiscal deficits. Absent such coordinated response,
demand weakness will persist, the slump in the entire eurozone will
be long-lasting and political crises will likely occur. 15
From the United States' perspective, the rebalancing of the
dollar vis--vis other world currencies would increase its saving-toGDP. ratio, make its exports more competitive and reduce its trade
deficit. While this would be welcome news for U.S. competitiveness
and employment, such change would not come without a cost. The
decline of the dollar in world trade and finance would not only be a
14. Willem Thorbecke & Gordon Smith, How Would an Appreciation of the
Renminbi and Other East Asian Currencies Affect China's Exports?, 18 REV. INT'L
ECON. 95, 106 (2010).
15. See Matthew Saltmarsh, Europe's Recovery Comes to Near Halt, N.Y.
TIMES, Feb. 13, 2010, at B7 ("The Federal Statistics Agency in Germany said that
the 'only positive contribution [in the fourth quarter of 2009] was made by foreign
trade,'" while stating that German GDP was flat in the fourth quarter of 2009, with
domestic consumption and investment declining.).
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symbolic loss of geopolitical power, but it would also have profound

international and domestic consequences. Once trade and capital
flows occur in a basket of world currenciesin which the dollar
would still be important, though not as predominantany further
downward slide in the dollar relative to other currencies would
increase the United States' international debt. Because this debt
would in turn need to be financed in a new, less dollar-dominated
currency, the budgetary flexibility of the old system would be gone,
and the United States, like any other country, would have to accept
the fiscal and budgetary discipline it used to prescribe to other
countries. Yet, the transition to a new international monetary regime
would not imply that the United States would face higher interest
rates in the futurethat would depend on post-Great Recession U.S.
fiscal deficit and private saving trends.
One of these fundamental adjustments is already taking place:
U.S. private saving rates have increased since the onslaught of the
current crisis. Personal saving is now 4.8% of disposable personal
income, a major improvement if one considers the zero or negative
savings before the crisis. 16 This explains the reduction in the U.S.
current account deficit and provides a glimpse of the path for further
rebalancing. 17 Although the improvement in the savings statistics
has occurred largely as a response to the greater uncertainty in the
economy, it demonstrates how responsive domestic savings rates are
to changes in domestic and international economic conditions.
Unavoidably, under the new rules, the U.S. government would have
less budgetary and fiscal discretion than it currently enjoys, but, as
discussed, the present rules, too, have their own costs. One thing is
certain: the new world would be quite different from the one in
which Democratic and Republican administrations of the past forty
years lived.

16. Compare News Release, Bureau of Econ. Analysis, U.S. Dep't of

Commerce, Personal Income and Outlays: December 2009 (Jan. 31, 2008),
http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm, with News
Release, Bureau of Econ. Analysis, U.S. Dep't of Commerce, Personal Income and
Outlays: December 2007 (Feb. 1, 2010),
http://www.bea.gov/newsreleases/national/pi/2008/pi1207.htm.
17. See Blanchard & Milesi-Ferretti, supra note 3, at 12 tbl. 2 (forecasting
that the U.S. current account deficit will decline to an average -0.6% of world
G.D.P. in the 2010-14 period).
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B. Rebalancing Through Changing the International Monetary

System
Despite the G-20 contribution in engineering the economic
rescue during the worst days of the crisis, the global imbalances that
contributed to it persist.
They do so because multilateral
macroeconomic coordination ceased to operate once the worst of the
crisis passed. Post-crisis policy response continues to be made at the
individual country level or, at most, at the regional level, with
questionable efficacy due to lack of multilateral policy
coordination. 18 While rebalancing could occur through the series of
coordinated actions discussed above, that is hardly the only method
to achieve that end.
A multilateral international monetary agreement that creates a
new forum for macroeconomic coordination with some enforcement
mechanism would be an alternative to the current rhetoric-based
method of discussing currency adjustments. For example, the
current bilateral approach to "talking currency" between the United
States and Chinathey hold meetings every six months to discuss
currency and other economic mattershas not produced results.19 A
new multilateral agreement could, for example, bestow the authority
to recommend adjustments in the exchange value of national
currencies on a new or existing multilateral institution. In cases of
persistent trade imbalances, this international monetary authority
could tax a portion of a country's excess reserves (held in deposit) so
as to provide incentives for countries not to run trade surpluses for a
number of years. Such a mechanism would promote a perennial state
of international trade balance, characterized by smoother fluctuations
in global liquidity conditions, resulting in a "less interesting" (some
would say less innovating) financial world. More importantly, it
would be a welcome departure from an as-yet ineffective bilateral
system that produces little result and creates trade tensions and
resentment on both sides. This institution could also serve as a
permanent forum for negotiations concerning future global
macroeconomic issues requiring multinational coordination.
18. See, e.g., Wolf supra note 4, at 13 (pointing out China's continued reliance
on export-led growth); Saltmarsh, supra note 16, at B7 (discussing the current
effects of Germany's reliance on exports).
19. See, e.g., Paul Krugman, Op-Ed., Taking on China, N.Y. TIMES, Mar. 14,
2010, at A23 (arguing that despite six years of semiannual discussions between
U.S. and Chinese authorities, China has adopted "the most distortionary exchange
rate policy any major nation has ever followed").
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While the scope of this article does not allow a detailed

elaboration on the major contours of this new arrangementan
updated version of Keynes's International Clearing Union would be a
starting pointthis new authority could spring forth from different
existing multilateral institutions (e.g., the IMF or the G-20) or could
be created anew. 20 Some might feel skeptical about the possibility of
such an institution ever coming to fruitionafter all, the IMF has
never won such powers. Indeed, the only existing multilateral
framework requiring countries to consult with the IMF on "problems
concerning monetary reserves, balances of payments or foreign
exchange arrangements" occurs within the WTO trade system and
has a very limited scope. 21 It is largely a mechanism for addressing
trade frictions that arise when countries with low standards of living
and in the early stages of development adopt quantitative restrictions
or foreign exchange controls to reduce imports, generally with a
focus on securing a safe balance-of-payments position. 22
Accordingly, WTO members will have a difficult time relying on
these provisions if they decide to take legal action in hopes of
addressing the current global imbalances and their associated
currency causes. To be any help, a new international institution
ought to have broader powers than the IMF currently has in this
restricted trade context.
Furthermore, past is not necessarily prologue, especially when,
the costs of perennial currency misalignments have become clearer
and a continuously operating organism with some deliberative and
enforcement powers would offer some clear benefits. Indeed, such
an institution would improve information exchange among members
and would more likely produce outcomes that are within the
tolerance of different members, most of which would favor
multilateralism (even if it came with weighted voting, the current
deliberative method within the IMF) over (often) asymmetric
bilateralism. Whether or not a new international institution is
20. See generally British Gov't, Proposals for an International Clearing Union
(April 1943) (The Keynes Plan), reprinted in 3 THE INTERNATIONAL MONETARY
FUND 1945-1965: TWENTY YEARS OF INTERNATIONAL MONETARY COOPERATION
19-36 (J. Keith Horsefield ed. 1969).
21. See General Agreement on Tariffs and Trade art. XV, para. 2, Oct. 30,
1947, 61 Stat. 3, 55 U.N.T.S. 194.
22. See id. art. XII, paras. 1-2, art. XVII, paras. 4, 9.
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created, the fact remains that global rebalancing can only come as a
result of multilateral cooperation; short-term nationally or even
regionally-focused fixes are too limited in scope and can be quite
divisive.
CONCLUSION
If an international monetary system awash with liquidity has
been a major conduit to bubbles, crashes and bailouts, the transition
to a new, more stable system, would require major changes to the
status quo and thus constitutes a daunting challenge. Certainly,
global macroeconomic coordination will not be easy whichever form
it takes. However, such transition is absolutely inevitable in an
increasingly interdependent international system plagued by major
imbalances that call for greater macroeconomic coordination and
flexibility. Failure on the part of policymakers to grasp the scope
and transnational causes of the financial crisis and the Great
Recession of 2008-2009 would not bode well for the future of the
global economic system. The stakes could not be higher as failure to
restore the world to a sounder, more balanced footing could produce
major disruptions and a resurgence of protectionism.

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