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To: lorne who wrote (50820)	3/29/2000 12:06:00 PM
From: long-gone	Respond to of 116764

Why the manipulation will not long survive?: The Evolving Global Monetary Order by Jerry L. Jordan In a speech at the Cato Institute, Jerry L. Jordan, President and CEO of the Federal Reserve Bank of Cleveland, discussed the forces shaping the emerging global monetary order and offered guidelines for the design of any international organization promoting efficient international financial markets. This Economic Commentary is adapted from his remarks at the Institute?s Seventeenth Annual Monetary Conference on October 21, 1999. This final decade of the millennium has seen considerable financial market turbulence. The old order is evolving. How should we respond to what seems to be emerging in monetary matters? Certainly, it would be a ?fatal conceit?1 to think that a group of economic architects could dream up a monetary structure to house the global financial system for the new millennium. I hasten to add that I do not suggest that we do nothing. Rather, I believe that we should be guided by Karl Brunner?s prescription: the state should be ?an umpire in a positive sum game, not the operator of a negative sum game.?2 I contend that the same should be true of any international organizations created by nation-states. International monetary developments in recent years can be explained in the context of powerful economic forces challenging ossified domestic institutions. By ?institutions? I mean both organizations and sets of rules (such as contract enforcement, labor laws, laws of incorporation, and the judicial system, or various types of economic controls, such as wage, interest-rate, exchange, and capital controls). Some institutions are intended to alter the working of markets because the benefits of intrusion are perceived to be greater than the costs. That is the case when political or social objectives seem to be more important than economic efficiency. Objectives such as income redistribution?a political decision to give priority to sharing wealth, rather than creating wealth?result in institutional arrangements that reduce the efficiency of markets. The study of institutional arrange-ments and their consequences in the second half of the twentieth century has become a matter of learning what will not serve in the future, rather than what will best replace it. We have become informed about the unintended consequences of well-intended efforts by international organizations and various foreign-aid programs. For example, the Bretton Woods System, established in the final days of World War II, had built into it rules for exchange-rate adjustment. Nevertheless, because of the asymmetry in the way the rules worked, there proved to be a rigidity that caused the system to break, rather than bend, in the face of specific economic forces?namely, the debasement of what was intended to be the anchor currency, the U.S. dollar. The ultimate implication of a conflict between powerful economic forces and rigid political institutions is that institutions must change, or they will fail. There must be an effective political and economic regeneration in which various institutional arrangements, especially organizations, are adaptable to a changing environment. The Evolving Nature of Institutions Propelled by technological change and chance economic events, the institutions that define our global economy undergo a continual process of change. Qualities that enhance economic well-being tend to survive, and those that do not eventually disappear. The idea that tangible manufactured goods must compete not only in local shops but also increasingly in the global town square is obvious to everyone. Yet the thought that institutional arrangements are also tested against others in the international arena is not so well understood. Ideas must face competition no less than goods and services. Politicians have long known that they must compete, but their focus was on rivals in their own party or other political parties in their country. What has changed is the competition they face from policies and institutional arrangements in other countries. The voters are not only the citizens at the local ballot box, but also the financial-asset managers in global capital markets. Domestic ballot-box voters respond well to politicians who satisfy their craving for wealth-sharing programs. Capital-market voters survey the world for those who pursue the best wealth-creation policies. Gaining the support of one is almost sure to diminish support from the other. Courts that will not enforce the contracts and protect the property of their own citizens will not be used by foreign trading partners. Banks that engage in unsound local lending practices cannot sustain the risk-adjusted rate of return sought by foreign investors?unless government guarantees transfer risk exposure from banks and investors to the general taxpayer. Governments with unsustainable fiscal policies, such as promising overly generous pensions to citizens, will find it increasingly difficult?or impossible?to raise sufficient taxes or issue new debt to meet their commitments. In the end, just as trade barriers cannot permanently withstand the competition of better goods produced elsewhere, so too exchange and capital controls cannot serve as permanent obstacles to pressure from capital-market voters who constantly search for the best wealth-creating environment.... clev.frb.org