Why US multilateral leadership was key to the global financial crisis response
By Douglas A. Rediker
Ten years after the onset of the global financial crisis, one of its most under-appreciated legacies is the strong U.S. embrace of multilateralism to address growing financial interlinkages around the world. U.S. leadership and engagement at international meetings like the G-20 and at institutions like the IMF proved crucial in crisis response ten years ago. While current “ten years later” pieces are largely focused on the domestic legislative and regulatory response, the crucial role played by U.S. multilateral leadership and engagement should not be forgotten. As the Trump administration considers how to balance its America First doctrine with continued global engagement, it is worth remembering the events of 2008-2009 and its lessons.
As the crisis quickly spread across the globe, it became increasingly clear that any one country’s domestic response, including the U.S., would be insufficient to stop the contagion throughout the financial system. A coherent multilateral approach was required. But it was far from clear that the U.S. would embrace, much less lead, such an approach, or that others would be amenable and willing to follow.
Successive U.S. administrations, first reluctantly under George W. Bush, and then more assertively under Barack Obama, demonstrated a willingness to engage in multilateralism to restore global confidence. That engagement, as much as any specific deliverable, proved that world leaders could work together in a crisis, and helped staunch the bleeding at a time when there were serious risks that a global recession could turn into something far worse.
Ten years later, as the current U.S. president expresses an overt disdain for multilateralism, it is worth examining and emphasizing why responsible U.S. multilateral leadership, not just engagement, is so crucial to preserving global stability, especially, but not only, in the face of looming crises.
A quick bit of history
At the onset of the crisis, the 2008 presidential election was in full swing, leading most U.S. politicians to remain focused on the immediate political aspects of the crisis. Likewise, officials in the Bush administration kept their immediate focus on the continued functioning of institutions crucial to the U.S. economy and trying to re-establish a baseline of financial stability. Initially, at least, there were few who saw either the direct or indirect international linkages of what was about to become the global financial crisis.
Over the previous decade, U.S. economic growth had become increasingly dependent on its financial sector, which was itself increasingly dependent on complex financially engineered instruments. Seeking to emulate the U.S.’ strong economic performance, several other global financial center challengers sprung up, in London, Hong Kong, Singapore, Dubai, and elsewhere—some by advocating ever so slightly looser financial regulatory regimes to attract a greater share of the financial sector’s golden goose. Few focused on the growing disconnect between capital flows that were increasingly complex and global, and regulation that was exclusively domestic.
Once global spillovers from the crisis became clear, the dearth of international tools to coordinate, much less combat them, did as well. The previously arcane G-20 finance minister level meeting in October 2008 became an immediate focus. But its finance minister level mandate was too limited to take on the unfolding global financial crisis. Instead, they agreed to call a new G-20 leaders level summit meeting in Washington in November.
The agenda for this unprecedented meeting of the leaders of the world’s 20 leading economies was ambitious. In order to allay fears of a global meltdown, everything was put on the table, including a re-think of the entire Anglo-Saxon capitalist market model. German Chancellor Angela Merkel said that the meeting would seek “genuine, all-encompassing reform of the international financial system… [The G-20 would be] about no less and no more than the creation of a new financial constitution [for the world].”
The meeting did not deliver. U.S. engagement with the international community was already strained on the back of perceived unilateralism by the administration of George W. Bush in Iraq and elsewhere, and at the time of the meeting, Bush was a lame duck. Obama, though elected, had not yet taken office. While the U.S. engaged, it did not lead. With the U.S. unable and unwilling to drive any concrete outcomes, the greatest deliverable became the establishment of the G-20 Leaders Summit itself, with U.S. participation. That was still significant. The G-20, unlike most other international gatherings or institutions, was comprised of countries representing the vast majority of the world’s economic output. For the first time, major economic issues would be discussed at the highest level, with leaders of the most significant emerging markets in the room, not simply on the receiving end.
The next G-20 summit was London in April 2009, by which time President Obama had taken over the White House. The crisis had spread and there was fear that the U.S. would resist acceptance of at least some responsibility for causing the crisis and stand apart from its global counterparts; some warned of the G-20 becoming the G-19 plus one. But Obama not only actively engaged with his new G-20 counterparts, he deftly balanced U.S. leadership with global consensus building, aligning with U.K. Prime Minister Gordon Brown to deliver tangible financial support, acknowledging some element of U.S. responsibility for the origins of the crisis, while deflecting pressure for the type of wholesale re-think that Merkel, French President Nicolas Sarkozy, and some others were seeking.
The London G-20 was a stunning success, delivering a globally coherent and robust response, including commitments to boost spending and to reinforce the global financial safety net by roughly $1.1 trillion and demonstrating collective action that had been sorely lacking. The world exhaled.
The IMF launches back into significance
Central to the financial commitments made at the London and subsequent Pittsburgh G-20 summit in 2009, was a significant increase of the financial resources available to countries in distress through the International Monetary Fund (IMF), as well as increased commitments to provide trade finance support through multilateral development banks. But it was the IMF, in particular, that was the biggest beneficiary of G-20 stimulus: receiving or providing $750 billion of that $1.1 trillion. IMF lending commitment capacities increased by $500 billion and its proprietary quasi-currency, the Special Drawing Right (SDR), was the tool by which country reserves were effectively increased by $250 billion overnight.
Moreover, the task of realizing many of the longer term structural commitments made by the G-20, (which was an ad hoc gathering of national leaders with neither financial nor technical resources of its own), was delegated to the IMF. These included the creation of semi-annual “early warning exercises” (EWE) and ongoing macroeconomic monitoring through a new tool called the Mutual Assessment Process (MAP), among others.
Before the crisis vaulted the IMF back to centrality, it had been seen by some as increasingly irrelevant to an otherwise “Goldilocks” global economy. Once the crisis hit, governments sought not only a well resourced lender of last resort, but one with the experience, capacity, and international legitimacy to spearhead crisis response. The U.S., which was both the IMF’s largest shareholder and one of its more skeptical members, found itself committing to provide $100 billion, while heaping upon it additional responsibility and resources. By so doing, the G-20 and the U.S. led an effort that provided the resources that became crucial in addressing the next phase of the crisis: the Euro crisis. Less than six months after the Pittsburgh summit, the IMF began an engagement with Europe that resulted in its central role in providing high profile financial program support to Greece, Portugal, Ireland, and Cyprus, and technical support for Spain, among others.
In the decade since the crisis spurred renewed U.S. support for multilateralism, the effectiveness of the G-20 has declined and U.S. support for the IMF has become less assured. In the case of the G-20, leader level summits continue, but with each successive country’s annual presidency, agendas have expanded and the forum itself has been largely diluted, reaching a nadir of hypocrisy when the 2013 Russian presidency announced that its signature focus would be on “anti-corruption”. At this point, the G-20’s most significant purpose may be less in delivering substantive forward progress on issues of common concern and more as a forum for world leaders to develop personal relationships and engage in sideline meetings that would otherwise be more problematic to organize bilaterally.
Ten years on, the IMF remains a central player in providing financial and technical support for economically troubled countries. The IMF is currently engaged in its largest program in history, in Argentina, and there are concerns that it will be increasingly called upon in coming years to provide similar support for countries who have borrowed beyond their means during the past decade’s “hunt for yield,” and may run into problems, given an expected reversal of fortunes (and investor capital flows).
The IMF, especially under the politically astute leadership of Christine Lagarde, continues to play a leading role in steering a global policy agenda. (For example, emphasizing gender equality as a driver of growth and taking anti-corruption efforts far more seriously than did the Russian-led G-20 effort.) IMF annual country surveillance reports remain the gold standard of economic health checks, and its multilateral surveillance reports greatly enhance policymakers’ and markets’ understanding of spillovers, spill backs and other contagion risks of economic decisions made in one country with impacts that could rapidly cross borders to others.
But U.S. support for the IMF has become less clear. U.S. approval of crucial governance reforms has lagged and is increasingly seen by other countries as an arrogant and tone deaf abuse of U.S. veto power at the IMF, and at worst, an outright assault on China and other emerging markets whose voice and vote at the IMF remains less than many believe would appropriately reflect their true economic weight. Perhaps more troubling, the U.S. Congress has legislated a likely withdrawal (in 2022) of much of the additional U.S. funding provided to the IMF post-crisis.
U.S. embrace of multilateralism at the height of the global financial crisis represented a necessary and crucial vote of support for collective action to both restore confidence and provide financial resources when global risks were most acute. Only the U.S. could deliver the necessary leadership to deliver a comprehensive outcome and President Obama did so. That episode should not be overlooked in this week’s post-crisis assessments. As would be expected, some of the tools utilized in a crisis may become rusty over time, especially when the global mood today is one of nationalism far more than of collective action, where in any case, today’s momentum is more towards regional, not global, responses.
U.S. multilateral engagement had its costs and its detractors. There are those who argue that in doing so, the U.S. provided too easy a means by which other countries could get away with bad behavior by directing challenges away from bilateral direct pressure and instead through cumbersome bureaucratic processes that ensure least common denominator outcomes. For example, China was able to accelerate its economic and political rise, in part because the U.S. took complaints against the country for currency manipulation and unfair trade practices down the multilateral route, rather than via President Trump’s more blunt, forceful action.
There is some truth to the notion that the U.S., under President Obama, may have gone too far in its embrace of multilateralism, well after the acute phase of the global financial crisis had passed. However, I would argue that it was not the embrace of multilateralism that was the problem, but rather the ceding of responsible leadership.
As the global financial crisis unfolded, American engagement at the G-20, IMF, and in other key multilateral forums played a key role in restoring confidence and financial stability. However, in a well-intentioned effort to ensure continued support for the legitimacy of such multilateralism, U.S. engagement may have become too passive, deferring leadership to too wide a group and to institutional rules and processes that risked losing sight of outcome-driven decisionmaking.
Perhaps the lesson from U.S. engagement in multilateral institutions is not only that we need to be engaged, but we need to deftly balance such engagement with continued U.S. leadership. It remains to be seen if this country’s current political leadership, and the world, will take away a different lesson.