Robert Zoellick and the return of the Washington Consensus

September 29, 2009

If World Bank President Robert Zoellick were running a stealth campaign to become the next Republican Treasury Secretary, he might have given a speech very much like the one he just gave at Johns Hopkins University.

In it, Zoellick, who was nominated by President George W. Bush in 2007, advocated policies to reinforce the dollar, warned about rising protectionism and told the Obama administration that the core of its financial regulatory reform effort was wrongheaded.

Then again, we’re a mere nine months into the current U.S. presidential administration. So it is probably safer to assume that Zoellick was merely doing his part to provide a useful blueprint for how the world’s largest and most important economy should best operate.

And a smart and savvy blueprint it is. Probably the piece getting the most attention is Zoellick’s skepticism about the White House plan for making the Federal Reserve the regulator of systemically important financial institutions.
“In the United States, it will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority,” he said.

Difficult, at least, if you value keeping the Fed independent from political meddling, which Zoellick certainly does. He would prefer the Treasury gain an expanded regulatory role, with the Fed focusing on monetary policy and perhaps monitoring markets for systemic risk and financial bubbles.

Of course, this is exactly the opposite of the reform being pushed by the Obama administration, where Treasury would head a systemic risk monitoring council with the Fed keeping watch on the actual firms.

Zoellick also outlined the challenges to the dollar. Yes, he acknowledged, America is entering a multipolar financial reality where the euro, yen and yuan will be increasingly viable currency options. There is nothing to be done about that. In fact, it is good news to the extent that it reflects the success of capitalism in Asia.

What the United States does need to do is get control of its fiscal deficit and take measures to speed the “return of a dynamic, innovative private sector economy.”

A strong economy will result in a strong and stable dollar. Zoellick certainly gave no indication that he agreed with the Obama policy of benign neglect in order to help exports and de-emphasize the long-term role of the U.S. consumer in global growth.

But perhaps Zoellick’s most important comments were those warning the United States and other advanced economies that if they don’t keep pushing forward on trade, the forces of protectionism — such as those encouraging tire tariffs today and carbon tariffs tomorrow — will fill the policy void.

“Given the local pulls of protectionist producers in most countries, the only way to counter their gravitational force is by forging forward with a liberalizing trade agenda,” he said.

But trade hasn’t been a priority with the Obama administration. C. Fred Bergsten, director of the Peterson Institute for International Economics, speculates that this disinterest is a result of a) Democrats being split on the issue and b) an overstuffed policy agenda.

But maybe Zoellick’s word can serve as a nudge in the right direction for Washington, as well as London, Berlin, Paris, Tokyo and Beijing.

His speech served as a great reminder that fiscal discipline, independent central banks, free trade and the leading role of the private sector — the tenets that used to be called the Washington Consensus — will continue to be important in creating global economic growth and prosperity in the future.

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