Can You Manage A Global Economy One Nation At A Time?

I started this discussion yesterday with my observation that Obama ended his weekly address with the point that "in this nation we rise and fall as one nation, one people." But that doesn’t ring true to me. I think we are well past that point. I think we are so intertwined with the rest of the world, that we rise and fall as one world, one people. This picture I posted a month or so ago on this blog tells the story. It’s a chart of the dow, ftse, hang seng, and nikkei in sept and oct.


Tom Friedman makes the same point today in his opinion piece in the Times:

a world economy that is so much more intertwined than people realized,
which is exemplified by British police departments that are financially
strapped today because they put their savings in online Icelandic banks
— to get a little better yield — that have gone bust

And yet, our government is fighting the idea of cross border regulatory authority. Today’s NY Times has a story about the G20 meeting that took place this weekend in DC. Here’s a quote from that article:

There is also a more basic philosophical divide across the Atlantic:
Europeans in general favor more state control over markets, even to the
point of granting regulators cross-border authority, while the United
States stresses the primacy of national regulators.

That’s understandable. This country has a long history of not wanting anyone to tell us what to do or how to do it. But I wonder if this position is tenable when it comes to the global economy.

I do not believe we can regulate markets on a nation by nation basis. They are simply too intertwined these days. If we want to figure out how to stabilize the financial markets this time, I think it’s going to take a global approach, global coordination, and yes, global regulation.

#Politics#stocks#VC & Technology

Comments (Archived):

  1. danrua

    After reading your summation “I think it’s going to take … global regulation” (assuming you mean regulation designed/enforced by the global community, of which the US is a minority), I’m curious what the “or, else” extension is to that thought.What do you fear happens if different nations/markets must compete for customers/investment based upon the quality of their chosen regulations & regulators? I agree a global approach and coordination is valuable, but why is global regulation (and, presumably, enforcement by some global entity) necessary for US citizens to prosper?

  2. Druce

    If the SEC and the Fed are good ideas or necessities… it would seem to follow that in a globalized economy so would common global regulations and a lender of last resort.The alternative could be chronic financial crisis and capital controls even in advanced economies.Pretty good read on Iceland, whose banks borrowed many times the country’s GDP……if markets let things like this happen, hard to see how you prevent it without everyone agreeing on common regulations on things like leverage ratios. (I wonder where was Basel in all this.)of course before 1929 everyone said you could never have another panic because now you had the Fed… after they said it couldn’t happen again because you had the Fed and the SEC, etc., etc.

    1. Druce

      (you could even say this country was founded on the idea of not wanting foreigners to tell us what to do or how to do it)

  3. Terry Heaton

    Kind of like asking all the TV stations in a market to work together to assure they have a future.

  4. Guest

    Fred,I meant to say this the first time you posted the graph: I am afraid that the correlation only holds over the short-time frame of this financial crisis, and then structural differences will manifest in divergence.Think about it this way: we have the equivalent of hurricane-strength wind blowing over a meadow. All the plants and flowers are bended to the ground. However, once the wind blows over, some plants rise back and some are irreparably crushed.From an economic perspective, Australia (where I live) has been as hard hit as the rest of the world. However, we have budget surplus, no federal debt and high interest rates. Our central bank and government have a full arsenal of both monetary and fiscal weapons to use. Thus IMF is projecting a slowdown to 2% GDP growth, as opposed to negative growth in America.Cheers,

    1. fredwilson

      Sounds like its time to buy AustraliaHow would you best do that?

      1. andyswan

        AUS Dollar vs US dollar. 45% off sale ends soon!

      2. Guest

        Ha!How bad are things on Wall Street?So bad that professional venture capitalists seek investment advice from blog commenters.:)))There are various ways, however, as Andy said, the currency offers a very compelling trade. It’s been killed because of the flight to yen and USD, however the fundamentals do not support this rate.I personally do not trade, however, liquidated all my US assets and moved to AUD in the past month…

  5. slowblogger

    Can You Manage A Global Economy One Nation At A Time? Maybe not. But that does not mean a centralized global regulation. I used to have the same idea, but changed my mind. If a perfect global regulatory body can be set up, which will have very little regulation, I would like it. But everyone has a different ‘perfect’ regulation from mine, and so the result will be a compromised and averaged regulation, which will be a lot more than my ideal.So, realistically I prefer some countries having more freedom than others. A more diversified countries from regulation points of views. Centralization almost always reduces choice.

  6. sanjay mehra

    Fred,A global regulatory system sounds like a grand idea, but it would turn out to be like the EU, an authority without the necessary checks and balances of responsibility. That in the long run is not such a great idea.Maybe a unified approach without the creation of a global institution would probably work better in the long run. Dont forget, this recession and turmoil is only going to last a maximum of 18-24 months. What after that?

    1. jonathan

      Not that a global regulatory scheme isn’t a good idea, it simply isn’t achievable. Remember the old joke about a camel being a horse designed by a committee? That is what global regulation would end up being. I would have two (perhaps) more modest objectives. If you look at the UK financial regulations, the FSA emphasizes function over form. US regulation goes the other way, allowing all sorts of games to be played. Neither system is perfect, but function over form is more transparent. Maybe we could all get going the same direction with the simple motto, “if it walks and talks like a duck, it is a duck”. A consistent function over form approach on a global basis would reduce (the opportunity to create) opacity. Second, international accounting standards should be imposed. If you can’t compare the numbers, they are useless.

      1. fredwilson

        Great points and great comment. Thanks

  7. andyswan

    The world, and especially the USA need less regulation, not more. We need out of the United Nations, not to enter a financial version of the same failed concept.Free market policies, free trade and feverish competition will continue to produce world-wide economic gains…and yes, the occasional nasty downturn that always brings out the drumbeat for more central planning. Apparently there are a few really smart people out there that could run the economy better than free markets can….we just haven’t found them yet.

    1. fredwilson

      I’m not with you on this one andyThe free market brought a lot of what we are facing onEven a casino has rules

      1. andyswan

        Yes, and the only one that wins is the rule-maker.Let’s hope Putin, Chavez, Jintao and the rest of the world leaders have our best interest at heart when they are setting up these global rules.”First order of business….this global financial enforcer is going to need some revenues to be able to properly enforce our rules. I suggest a ‘tax’ on member nations. Now….what would be FAIR?”

      2. Andy Freeman

        > The free market brought a lot of what we are facing onFannie and Freddie were “free market”? Punishing banks that didn’t do subprime loans is “free market”?The problem with financial regulation is that it concentrates risk. While there may be some reduction in the rate of failure, there’s a larger increase in the cost of failure. Since the “expected value” is the product, and that increases, that’s a bad thing. Moreover, even if the expected value went down somewhat, there’s a threshold effect where larger costs are simply unacceptable. (Going through 0 is bad.)We’re much better off with pretty much continuous small failures. Think a gaggle of unreliable machines vs a small number of “highly reliable” ones.

      3. slowblogger

        I believe you mean the current (past?) free market is not perfect and should be made better, which I agree.The free market made it possible for you (and the entrepreneurs that you have invested in) to have your business success. That is the essence, not the big bureaucratic companies.

    2. Guest

      Wait… “regulating” the economy and “running” it are two different things… You need rules that encourage productive behaviour and discourage parasitism, that’s for sure. Within these rules, let the market be free and the most productive win, and keep the governing body out of it. An example of “running” the economy is when the governing body starts picking winners, and that is scary, indeed…

  8. Steven Kane

    you make total senseand like a true member of the far center (aka extreme moderates), just when you are veering hard left, you veer hard rightprotectionism has been and is a left-ish view, and a core principle of the democratic party (other than President Clintons bipartian selling of NAFTA)sure enough during the primary, all the democrats inclkduing president-elect obama tlked big about undoing free trde and multi-nationmal regulatory agreements and replacing them with protectionism (heck, obama and clinton even threatened canada!)any case, with all this in mind, where do you come out on saving or not saving detroit?if the usa saves detroit, won’t all other nations protect their own homegrown industries no matter how deletrious the effect is on the world economy (e.g. agricultuiral subsifdies, fixed currency rates and all)?but if we don’t save detroit, aren’t we making such a huge sacrifice for the larger common good that we risk irreparably harming ourselves?given the tenor of the times, while philosphically i favor the former, as a practical matter, today, i favor the ltter. save detroit.your thoughts?

    1. slowblogger

      My order of preference, if this was the case in Korea:1. Let the market take care. Either some buyers will acquire the auto companies and make it better. Or the market may decide to divide the company and sell the assets (people seem to call this liquidate).2. Leave the failing businesses fail, but help directly the people who become financially in trouble. You don’t have to pretend that the sick businesses are healthy, to help the people (if that is your true goal).3. Bail out.

    2. fredwilson

      I don’t want to save detroitI want to save our car manufacturing capabilities thoughI think we should bust up detroit, make it smaller, leaner, sell off theparts to PE or other car companiesBasically a managed bankrutpcy/sale/reorg process

      1. Noah David Simon…. if GM goes under that we lose some great American “Research and Development” to another country. I hope they can pass legislation that allows the dead structure to fall without taking down a bigger structure with it. When the world trade center fell… it didn’t take down a lot of buildings with it. I hope the good stuff can be salvaged in America. What frightens me is the media (aka those NYTIMES dudes that elected Obama) seem to be in league with Toyoto and Volkeswagon. They want GM badly… and we should take care to insure that the jem of Lithium Ion batteries doesn’t get outside our borders or we will be at ground zero

  9. matthewklein

    Hey, great idea! We have lots of examples of government and bureaucracies doing excellent jobs when they are unaccountable to the people they regulate. So why not create an even bigger supra-national regulator which is beholden to “everyone” in the entire world (meaning no one in particular) and which has the authority to regulate Americans, while we Americans simultaneously decline the protection of our country’s norms, laws, courts, and rights.The power of governments are massive and terrifying enough — why would we want to create one over which we have no veto, and one from which we have no escape?

  10. Steven Kane

    interesting NYTimes piece today on Google in Europe that illustrates some of the challenges of multi-national regulation — basically that different countries have different concerns and ideals that are baked pretty deeply into their cultures, e.g. privacy

    1. Noah David Simon

      my main argument with the left is that regulation can not contain business in a global economy. I would be all for it on an international level as long as (a) it were truly international and not something like Kyoto that left out developing countries. (b) did not effect territorial disputes that should not be policed by larger bodies causing the tyranny that the people who set up our Republican American values warned us about. you remember the founding fathers? they were terrified of a centralized global infrastructure. I would be for standardizing health care on a global level however. That makes sense and would not effect negotiating capitalism.

      1. Noah David Simon

        Kyoto Treaty not Oslo Treaty… yikes! I had to edit the above paragraph. It didn’t make sense before. I was wondering why I didn’t get any feedback