The US may need a financial hegemon. But the US is not the world.

Canadians are federalists by instinct, so my reaction to Dani Rodrik's recommendation to resist the imposition of a global financial regulator with a Procrustean mandate is to nod my head in approval. In the current context, the proper Canadian reaction to such a proposal would be to wonder why on earth ceding authority to a US-dominated - does anyone believe that it would be anything else? - financial regulator would be a good idea.

Brad DeLong may be quite right to think that a global authority might have a better chance of keeping the US in check. But for the rest of us, it looks like a way for the US to drag everyone else down with them.

Unless the US is willing to truly abandon its sovereignty in this matter - and there is nothing in its history to suggest that it would - then this project is doomed to failure.

Comments

[calmo]

Hi Stephen...have I tole you lately how much I enjoy your posts lately? Hate to muck them up just to say so...
I shall keep it short: we have before us the specter of a transnational investment community, yes? This body has no particular allegiance to a country ("the proper Canadian response") and that body also contains your major media since it can entertain Wagoner without a breath of criticism for building GM Asia Div while shutting down GM US Div. This is not incompetence, but transnational execution...for profits and shareholder interests...people will retrain...they bounce...not like dead cats...or unemployed cats ...or old cats (are you an old cat, Stephen?)
Global Financial Regulator, a name tag for a US-dominated global authority? I think specifying the nation subtracts from the reality, unless you can sketch the role that US military capacity has in it for me...as under-reported as what is GWB doin now.
Why don't we all surrender our national identities and pretend we are no different than Wagoner? (Why do most people immigrate?)
The rise of the city-state and the transformation to nations and now to globalists...minnows tryin to avoid the Big Shark.

[bob]

I'm torn on this question.

On one side, I feel that Canada would be "better off alone". When everyone else seems to be looking out for their own interests rather than abiding by global WTO standards, it seems like Canada is being played for a fool. We go out ahead of the pack, and establish a floating exchange rate, and if everyone followed suit we would all be better off, but large portions of the world refuse to give up their mercantilism for the greater good. In terms of free trade, we play mostly by the rules, only to get burned when the US decides that they don't like the outcome of the rules. I'd say that I'm pretty disenchanted with supposedly cooperative global initiatives that end up being coopted or trampled by other more selfish regimes. A lot of policies that might help Canadians are hampered by our obligations under international agreements, agreements that are skewed to the benefit of other more powerful countries. I think that the purely self-interested answer is that we don't need or want an international regulator, because Canada does a better job than the vast majority of nations.

On the other hand, I think you are forgetting about the internationalist tradition of Canadians like Lester B. Pearson. I think that this is more of a moral argument than a pragmatic one, or at least the pragmatism is very long-run. If we refuse to take part in drafting and supporting an international regulator, all of the less developed countries will lose our input on how to structure financial regulation, and our support vs. the hegemonic interests. We may get dragged down by an international standard, but a lot of countries will get pulled up, and if our input isn't there, the bar may be set a lot lower or not get set at all. I guess a parallel to our experiences with international trade would be our role in the UN. AFAIK we approach the UN in good faith, and fulfill our duties under it, but other nations are constantly pursuing narrow self-interested agendas and ignore the rules when it doesn't suit them. At the end of the day though, I think we are internationalists and we shouldn't stoop to petty nationalism.

I think we all agree that a cooperative international system of law and governance (and even currency) is the optimal solution to global issues. I favor truly free trade and truly floating exchange rates, but I am getting awfully sick of other people gaming the system and breaking the rules. I think it is like a global version of the prisoners dilemma. Canada keeps making the correct choices, and advocating that everyone else follow suit, and the other countries agree in theory, or at least pay lip service, but then break the agreements afterwards, resulting in a worse net outcome for everybody and especially Canada.

As I said, I'm torn on this question. We forgo the exercise of our sovereignty on a regular basis, because it is both the morally and economically right thing to do, but other countries don't let go of their sovereign interests and continue to game the system. I'm not sure whether the best course of action is to say "enough is enough" and avoid any more international initiatives, or if we should redouble our efforts to make those initiatives stronger, fairer and more fully enforced.

[westslope]

There are all kinds of central bank, financial sector and tax reforms the USA could undertake domestically without involving the international community.

Maybe some actors in the USA want the international community to help the USA overcome their own domestic political challenges?

[calmo]

The perception is that this "international community" is separate from the business communities in those nations...but anyone with a portfolio knows this is not the case. Your financial security relies on investments in opportunities that present themselves in other countries...and to disturb this structure by legislation as westslope suggests as an option, is to disturb the legislators and the political forces (not to be confused with the electorate) behind them. The current retreat of US manufacturing in general should underline just how powerful these forces are, yes?
bob, I hear that shortie is at a private speaking engagement in Calgary tomorrow which some people tell me has more US citizens in it than any other Can city...but that could be ancient data. I bet you have to be invited. And loaded. But not with any weapons. Or extra shoes, say. shortie is not going to goose his version of The Legacy without inviting the press.
Would you say that fx pretty much melts "the exercise of our sovereignty"? While we are on the fx topic, do you have an explanation for the ~Dec 07 US/Can$ that does not demonstrate out-sized international interests?

[alex]

Great post and some interesting comments. I am beginning to wonder myself if Canada should take a different course.

My perspective: I spent some time in the US tech industry after the dot-com bust, and for a number of reasons, some "nationalistic" (I feel a duty to the country that educated me) I relocated back to Toronto last year and began running a small technology consultancy of myself and a few free agents. Most of my clients are in the US and work is sourced here, but I hope to diversify my client base as I rebuild my network back home.

While I always recognized that as a Canadian company I was exposed to exchange risk given that a lot of my work comes from the US, the events of Q32008 were an absolute terror for me. During September I felt more like a currency day trader than a technology consultant -- I worried endlessly about an imminent USD collapse (how laughable that seems now) and not being able to pay my Canadian suppliers.

Of course the "flight to safety" devaluation of our currency has been a boon for me, but an unearned one that has complicated matters with my suppliers and raised costs elsewhere. It seems that virtually everything is indirectly priced in USD, from my flights to California to computer parts. At least I can still buy bread for $2.50CAD. I'm even considering paying my suppliers in the currency of origin for the contract.

Perhaps my case is not typical, but as a small "international" company, the exchange rate fluctuations are having a far greater impact on me and my mental health than a 25 basis point change in our central bank rate. As with many tech startups, I am financed with private capital (i.e. my own and other's savings) and earnings, and if I ever do wish to expand, I will have many options for financing inside and outside of Canada.

From my selfish, heretical perspective, it would seem easier if Canada adopted the EUR or USD so as to be sheltered from these fluctuations and letting people like me worry about business and not FX. Of course we lose control of monetary policy, but are we potentially at a point where currency instability is harming our economic prospects more than the benefit of having an independent currency? In this age of quantitative easing and zero interest rates, how relevant is monetary policy anyway?

This may not be as crazy as it sounds. I fear especially for RIM, our only remaining major tech company. I know personally two highly-skilled engineers, with RIM for many years, that were poached by Apple recently. RIM pays well, but with 1.30 USDCAD, it will not be long before many of RIM's best people start getting 1.5-2.5x pay raise (in CAD terms) offers with a mild Silicon Valley winter as a bonus.

FX is not entirely to blame, but in the last 15 years we have had some great, innovative tech companies like Nortel, ATI, Alias|Wavefront, Corel fall by the wayside or swallowed by the likes of Cisco, AMD, nVidia, Autodesk, Microsoft while these same companies pluck many of our best students. I'm sure you can count the number of Stanford graduates working in Waterloo on one hand. Good luck counting the potential of all the Waterloo grads that are in H1-B serfdom in the US.

[reason]

I think we need new rules for INTERNATIONAL financial relations and a policeman to enforce them (in particular we need some anti-dote to neo-mercantilism - it not only caused this crisis but the Japanese one as well). This is not the same thing as saying that this agency should stick its nose into domestic prudential rules.

Given that, I'm not sure whether I agree or disagree with you.

[Phillip Huggan]

"I fear especially for RIM, our only remaining major tech company."

By market cap. I love Lazaridis's Perimeter Instititute $100M gift. It will single-handedly prevent quantum encryption from being the exclusive domain of a sometimes Republican agenda-ed NSA. But Blackberries are on par with the utility of CHC's helicopter simulations or MDS's medical equipment. I'm more afraid of small cap medical equipment makers like Imris that would be big if they can make it in a decade, but will be wiped out.
Rather than give up Sovereignty something like a temporary tax-break for tech or R+D intensive firms, as a response to this temporary weird flight to USD, would be simpler. The flip-side is when times are booming you need to extract the revenue you gave away, ideally first. But we subsidize oil sands for energy instead of using the remaining two decades of natural gas supplies for fertilizer in this country anyway.

The flight to quality is perverse and demands a novel policy response here before it ends (for instance you don't want to de facto encourage low dollar long-term industries if you believe it is temporary).