The System Worked_How the World Stopped Another Great Depression

by Daniel W. Drezner

  46. “Declaration of the Summit on Financial Markets and the World Economy,” Washington, DC, November 15, 2008, University of Toronto G20 Information Centre, http://www.g20.utoronto.ca/2008/2008declaration1115.html, accessed January 2013.

  47. See, for example, “Global Plan Annex: Declaration on Strengthening the Financial System,” London, UK, April 2, 2009. Accessed at the University of Toronto’s G20 Information Centre, http://www.g20.utoronto.ca/2009/2009ifi.html, July 2013.

  48. Paulson 2010, p. 451.

  49. Basel Committee on Banking Supervision 2009a.

  50. “G20 Leaders Statement: The Pittsburgh Summit,” Pittsburgh, PA, September 25, 2009. Accessed at the University of Toronto’s G20 Informaton Centre, http://www.g20.utoronto.ca/2009/2009communique0925.html, July 2013. For the BIS press release see http://www.bis.org/press/p090907.htm. For a chronology of key moments in Basel III negotiations, see Bair 2012 and Wilf 2013.

  51. Basel Committee on Banking Supervision 2009b, p. 1.

  52. Ibid.

  53. Baker 2013a, 2013b; Lyngen 2012, p. 527.

  54. Young 2013, table 2.

  55. All comments can be accessed at the BIS website, http://www.bis.org/publ/bcbs165/cacomments.htm.

  56. Lall 2012, pp. 628–29; Chris Bryant and Brooke Masters, “Bankers Fear Effect of Basel Rules,” Financial Times, June 10, 2010.

  57. Quoted in Binyamin Appelbaum, “Regulators Push for Global Rule on Bank Capital,” New York Times, May 25, 2010.

  58. Although the IIF was the principal lobbying group for banks, it was far from the only one. Other groupings, such as the Financial Services Roundtable and the European Financial Services Roundtable (EFSR), also weighed in on Basel III. See, for example, their responses to the draft Basel III accord at http://www.bis.org/publ/bcbs165/fsrl.pdf and http://www.bis.org/publ/bcbs165/efsr.pdf.

  59. “Basel 3: The Banks Battle Back,” Economist, May 27, 2010.

  60. Bair 2012, p. 259.

  61. Sara Schaefer Munoz,“Capital Idea, Say Regulators,” Wall Street Journal, October 11, 2011.

  62. Institute for International Finance 2010.

  63. Elliot 2010, p. 11.

  64. KPMG 2010, p. 3.

  65. For an excellent primer on terms and terminology, see Auer and von Pfoesti 2012.

  66. Lyngen 2012, p. 520.

  67. See Jean Eagelsham and Chris Giles, “UK Change of Heart on Banking Tax Plan,” Financial Times, November 8, 2009.

  68. See the IIF’s December 2010 assessments at http://www.iif.com/regulatory/article+936.php.

  69. Felix Salmon, “The Quiet Victory of Basel III” (blog), Reuters.com September 14, 2010, http://blogs.reuters.com/felix-salmon/2010/09/14/the-quiet-victory-of-basel-iii/.

  70. Schaefer Munoz, “Capital Idea.”

  71. See, for example, Credit Suisse equity research note, “Basel 3,” September 13, 2010, accessed at https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=860213341&serialid=5TD%2BZIhEE1vif6r0IyrWYDDQOt1dSKPlTfrmZDpg8B4%3D.

  72. Chinn and Frieden 2011, p. 214; Véron 2012.

  73. Wilf 2013, p. 29.

  74. See Bach and Newman 2007 on this causal mechanism.

  75. Elliott 2010, p. 11.

  76. Basel Committee on Banking Supervision 2011.

  77. Interviews with Basel Committee on Banking Supervision officials, Basel, Switzerland, February 2011.

  78. Young 2013.

  79. Trichet 2010, p. 1.

  80. Freeland 2012, pp. 252–55.

  81. Rachelle Youngrai and Philipp Halstrick, “Aggressive Style of JP Morgan Boss May Hurt Bank Cause,” September 29, 2011, Reuters.com, http://www.reuters.com/article/2011/09/29/financial-regulation-dimon-idUSS1E78S1MW20110929,

  82. Young 2012, p. 682.

  83. Bair 2012, p. 260.

  84. Interviews with BCBS officials, February 2011. On press coverage, see Felix Salmon, “The Politics of Basel III” (blog), Reuters.com, April 3, 2010, http://blogs.reuters.com/felix-salmon/2010/04/03/the-politics-of-basel-iii/, and Brooke Masters, “Fears for German banks Under New Rules,” Financial Times, September 9, 2010.

  85. Interviews with BCBS officials.

  86. On the significance of banks in determining varieties of capitalism, see Soskice and Hall 2001.

  87. Blyth 2013, pp. 82–83.

  88. Oatley and Nabors 1998.

  89. Lall 2012. It is true that US banks protested the increases in capital adequacy less vehemently than they protested the introduction of liquidity and leverage ratios. Still, this is very weak support for this hypothesis.

  90. Tom Braithwaite and Patrick Jenkins, “JPMorgan Chief Says Bank Rules ‘Anti-US,’” Financial Times, September 12, 2011. See also Freeland 2012, p. 253.

  91. Wilf 2013.

  92. Young 2013, p. 13.

  93. Baker 2010; Culpepper 2010.

  94. Interviews with BCBS officials, February 2011; Bair 2012.

  95. See, for example, Brooke Masters, “US Banks Call for Easing of Basel III,” Financial Times, December 16, 2012.

  96. It should be noted that only 15 percent of the Level 2 assets could be held in equities or mortgage-backed securities. See Annex 1 at http://www.bis.org/press/p130106a.pdf.

  97. Brooke Masters, “Banks Win More Flexible Basel Rules,” Financial Times, January 6, 2013.

  98. Bair 2012.

  99. See, for example, Felix Salmon, “Why the Basel Change Was a Bad Idea” (blog), Reuters.com, January 9, 2013, http://blogs.reuters.com/felix-salmon/2013/01/09/why-the-basel-change-was-a-bad-idea/; and Howard Schneider and Danielle Douglas, “Post-Lehman, the Push for Global Financial Protections Stalls,” Washington Post, January 29, 2013.

  100. Simon Johnson, “Betrayed by Basel,” Economix (blog), New York Times, January 10, 2013, http://economix.blogs.nytimes.com/2013/01/10/betrayed-by-basel/.

  101. Interviews with BCBS officials, February 2011.

  102. Brooke Masters, “Basel Tries Fluid Position on Liquidity,” Financial Times, January 7, 2013.

  103. Quoted in Baker 2013a, p. 129.

  104. Young 2012. See Milner 1997 for the general argument about the role interest groups play in the provision of information.

  105. van Rixtel and Vause 2012, p. 11.

  106. An additional assumption that proved to be wrong was that the European economy would be in better shape by January 2013. See Salmon, “Why the Basel Change Was a Bad Idea.”

  107. Ralph Atkins and Keith Fray, “Global Pool of Triple A Status Shrinks 60%,” Financial Times, March 26, 2013. See, more generally, Ralph Atkins, Philip Stafford, and Brooke Masters, “Regulation: Collateral Damage,” Financial Times, October 24, 2012.

  108. International Monetary Fund 2012, chapter 3. See also Davies and Ng 2011.

  109. Andrews and Ng 2011; see also Liam Vaughn and Gavin Finch, “Basel Rules Face Change with No-Risk Sovereign Debt a Focus,” Business Week, December 7, 2011.

  110. International Monetary Fund 2012a, pp. 83 and 101.

  111. Quoted in Andrew Ross Sorkin, “Easing of Rules for Banks Acknowledges Reality,” Dealbook, New York Times, January 7, 2013, http://dealbook.nytimes.com/2013/01/07/easing-of-rules-for-banks-acknowledges-reality/. See also Masters, “Basel Tries Fluid Position.”

  112. Basel Committee on Banking Supervision 2013.

  113. European Banking Authority 2013; Masters, “US Banks Call for Easing.” For a cautionary tale about the numbers produced by banks, however, see Frank Portnoy and Jesse Eisinger, “What’s Inside America’s Banks?” Atlantic, January/February 2013.

  114. Jenkins and Shäfer, “Europe’s Banks Turn to Capital Raising to Meet Basel III,” Financial Times, May 13, 2013.

  115. The banks built up these capital reserves largely through the accumulation of retained earnings. See Cohen 2013.

  116. Baker 2010.

  117. Peter Evans, “Big Banks, Flooded in Profits, Fear Flurry of New Safeguards,” New York Times, July 19, 2013.

  118. Kr
asner 1991; Drezner 2007b.

  119. See, for example, Chwieroth 2009.

  120. Stiglitz 2002.

  121. Ostry et al. 2010.

  122. Dani Rodrik, “The End of an Era in Finance,” Project Syndicate, March 10, 2010, http://www.project-syndicate.org/commentary/the-end-of-an-era-in-finance#dkuJB92AvW6Fckoy.99.

  123. International Monetary Fund 2012b, p. 1.

  124. Baker 2012, p. 131. It should be noted that BCBS officials did not endorse the linkage between macroprudential supervision and capital controls.

  125. Ip 2013, p. 10.

  126. Rodrik, “End of an Era in Finance.”

  Chapter 5

  1. Indeed, as the New York Times noted at the time, “The measures did little to overcome widespread doubts that they—or even the additional steps pledged by American and European officials—would accomplish the Council’s long-standing goal: halting Iran’s production of nuclear fuel.” Neil MacFarquhar, “U.N. Approves New Sanctions to Deter Iran,” New York Times, June 9, 2010.

  2. Quoted in Maloney 2010, p. 142.

  3. See Tehran Bureau, “China Floods Iran with Cheap Consumer Goods in Exchange for Oil,” Guardian, February 20, 2013.

  4. US Government Accountability Office 2013.

  5. See, for example, Thomas Erdbrink, “Iran Staggers as Sanctions Hit Economy,” New York Times, September 30, 2013.

  6. Gourevitch 1986, p. 17.

  7. Kindleberger 1973; Krasner 1976; Gilpin 1975, 1981; Lake 1993; Ikenberry 2000; Norrlof 2010; Keohane 2012.

  8. McKeown 1983; Keohane 1984, 2012; Axelrod and Keohane 1985; Snidal 1985.

  9. Lake 1983; Stein 1984; Eichengreen 1989; Lazer 1999; Nye 2007; Mastanduno 2009.

  10. Lazer 1999; Hafner-Burton and Montgomery 2009.

  11. Ibid.

  12. Mastanduno 2009.

  13. Krasner 1976; Lake 1983; Stein 1984; Mansfield 1992, 1994.

  14. Krasner’s initial periodization was 1820–1879 (rising UK hegemony, more openness); 1880–1900 (fading UK hegemony, modest closure); 1900–1913 (fading UK hegemony, modest opening); 1919–1939 (US hegemony, closure); 1945–1960 (US hegemony, openness); and 1960–1975 (fading US hegemony, openness). Forty years later, the natural periodization would be identical to Krasner’s for the first four, but the last three would be 1945–1971 (US hegemony, openness); 1971–1991 (fading US hegemony, modest closure); and 1991–2008 (US hegemony, strong opening). Hegemonic stability theory would only fail to explain the pre–World War I and interwar eras.

  15. For “k-group,” see Snidal 1985 and Lake 1993. For “hegemonic coalition,” see Foot and Walter 2011.

  16. Snidal 1985; Lake 1993.

  17. Drezner 2007b.

  18. Morrow 1994.

  19. Axelrod and Keohane 1985; Koremenos, Lipson, and Snidal 2001; Drezner 2007b.

  20. Nye 2006; Drezner 2007b; McNamara 2008.

  21. Wilson and Purushothaman 2003; Bergheim 2005; Zakaria 2008; Khanna 2009; Alexandroff and Cooper 2010.

  22. Eichengreen 2011b, pp. 142–45.

  23. See Khanna 2009 for the Second World; Alexandroff and Cooper 2010 for BRICSAM; and Buiter and Rahbari 2011 on Global Growth Generators.

  24. National Intelligence Council 2010.

  25. Subramanian 2011.

  26. Fogel 2010; Dadush and Stancil 2010.

  27. Reilly 2012.

  28. Drezner 2009.

  29. Burrows and Harris 2009, p. 30.

  30. On Clinton’s remarks, see Ewen MacAskill, “Hillary Clinton’s Question: How Can We Stand Up to Beijing?” Guardian, December 4, 2010. More generally, see Evan Osnos, “China and the State of the Union,” New Yorker, January 25, 2012.

  31. Wang 2012, p. 11.

  32. Pew Research Center, “America’s Global Image Remains More Positive than China’s,” Pew Research Global Attitudes Project, July 18, 2013, http://www.pewglobal.org/2013/07/18/americas-global-image-remains-more-positive-than-chinas/.

  33. The UN Human Development Index indicators can be accessed at the UN Development Programme’s Human Development Reports website, http://hdr.undp.org/en/. The Legatum Prosperity Index can be accessed at the Legatum Institute’s website: http://www.prosperity.com/Ranking.aspx.

  34. Eichengreen, Park, and Shin 2011; Pettis 2013.

  35. Lasswell and Kaplan 1950; Dahl 1957; Bachrach and Baratz 1962; Lukes 1974; Baldwin 1979; Baldwin 1989; Cohen 2008; Grewal 2008; Nye 2011.

  36. Gilpin 1981.

  37. Strange 1987. See also Schwartz 2009.

  38. Nye 1990, 2004, 2011.

  39. Nadelmann 1990 is an early example. See Barnett and Duvall 2005 for a more recent discussion.

  40. Kahler 2009. See also Grewal 2008; Slaughter 2009.

  41. Schweller 2011; Jentleson 2012; Naim 2013.

  42. Drezner 2007b.

  43. Bach and Newman 2007; Newman and Posner 2011.

  44. Wohlforth, 1999, pp. 32–34; Callen 2007; Brooks and Wohlforth 2008, pp. 40–42; Lieber 2011.

  45. See, for example, Moravcsik 2009; Nye 2011, chapter 6.

  46. A time series of the past decade would show the exact same distribution.

  47. Older data is not usable because of the complications of excluding intra-European trade.

  48. Drezner 1999, 2007.

  49. Cao 2012, pp. 379–80; Gray and Potter 2012, p. 796.

  50. Because possessing a common medium of exchange matters in assessing the size of capital markets, I have disaggregated EU financial markets by currency.

  51. Oatley, Winecoff, Pennock, and Danzmann 2013, p. 148.

  52. Rey 2013.

  53. All data accessed from http://stats.oecd.org/Index. aspx?DataSetCode=TIVA_OECD_WTO, July 2013. No other BRIC economy approaches these actors. Japan does somewhat better, but is still responsible for only 6.2 percent of global value-added exports.

  54. Quotations from Starrs 2013, p. 2, data from p. 9.

  55. For firms, see Vitali, Glattfelder, and Battiston 2011; Nolan 2012. For private wealth, see Schwartz 2009; Davies, Sandström, Shorrocks, and Wolff 2011.

  56. For concerns, see Helleiner and Kirshner 2009. For claims, see World Bank 2011 and Subramanian 2011. For both, see Kirshner 2013, 2014.

  57. Data from Cohen and Benney 2014; and Jeffrey Frankel, “The Dollar and Its Rivals,” Project Syndicate, November 21, 2013, http://www.project-syndicate.org/commentary/jeffrey-frankel-argues-that-the-dollar-s-status-as-the-world-s-top-international-currency-is-not-in-jeopardy. The percentages are out of a possible 200 percent.

  58. Cohen and Benney 2014. See also Bracke and Bunda 2011; Stokes 2014.

  59. See Drezner 2010; McNally 2012; and Eichengreen 2013b on the difficulties China will have trying to internationalize its currency. For more positive assessments of Chinese efforts to “internationalize” the renminbi, see Subramanian 2001 and Kirshner 2013, 2014.

  60. Stokes 2014, p. 11 (italics in the original). See also Drezner 2010; Cohen and Benney 2014; Eichengreen 2013b; Prasad 2014.

  61. Goldberg 2010, p. 7. More generally on the structural significance of the dollar’s reserve currency status, see Strange 1987; and Schwartz 2009.

  62. See Norrlof 2010; Brooks, Ikenberry, and Wohlforth 2012; and Drezner 2013b for the contours of this debate.

  63. Strange 1987; Ikenberry 2011, p. 57.

  64. Stockholm International Peace Research Institute data from Sam Perlo-Freeman, Elisabeth Sköns, Carina Somilrano and Helén Wilandh, “Trends in World Military Expenditure, 2012,” SIPRI Fact Sheet, April 2013, http://books.sipri.org/files/FS/SIPRIFS1304.pdf, accessed April 15, 2013.

  65. Brooks and Wohforth 2008, p. 30; Ikenberry 2011, p. 42.

  66. Nye 2011, p. 189.

  67. Layne 2012, p. 210.

  68. Simon Rabinovitch, “China’s Forex Reserves Reach $3.4tn,” Financial Times, April 11, 2013. These figures likely understate the size of China’s reserve assets, because of the PRC’s efforts to conceal the magnitude of its foreign reserve position.

  69. Data from IMF, “Data
Template on International Reserves and Foreign Currency Liquidity,” July 2013, http://www.imf.org/external/np/sta/ir/IRProcessWeb/colist.aspx.

  70. See Drezner 2009, pp. 42–43.

  71. Geoff Dyer, Jamil Anderlini, and Henny Sender, “China’s Lending Hits New Heights,” Financial Times, January 17, 2011.

  72. “Chinese Loans to Latin America Top World Bank, IDB Combined,” Bloomberg News, February 17, 2012, http://www.bloomberg.com/news/2012-02-17/chinese-loans-to-latin-america-top-world-bank-idb-combined.html.

  73. Drezner 2009.

  74. Tony Capaccio and Daniel Kruger, “China’s U.S. Debt Holdings Aren’t Threat, Pentagon Says,” Bloomberg, September 10, 2012, http://www.bloomberg.com/news/2012-09-11/china-s-u-s-debt-holdings-aren-t-threat-pentagon-says.html.

  75. See United Nations Conference on Trade and Development 2013 for further discussion.

  76. William Wan, “China’s Economic Data Draw Sharp Scrutiny from Experts Analyzing Global Trends,” Washington Post, February 4, 2013. See also Wallace 2011 and IMF 2012b.

  77. Standard and Poor’s, “United States of America Long-Term Rating Lowered to ‘AA+’ Due to Political Risks, Rising Debt Burden; Outlook Negative, August 5, 2011, http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563.

  78. Porter and Rivkin 2012.

  79. Mike Dorning, John Detrixhe, and Ian Katz, “Downgrade Anniversary Shows Investors Gained Buying U.S.” Bloomberg, July 16, 2012, http://www.bloomberg.com/news/2012-07-16/downgrade-anniversary-shows-investors-gained-buying-u-s-.html.

  80. See also Carvalho, Eusepi, and Grisse 2012.

  81. Roxburgh et al. 2012; Brown et al. 2013; Gillian Tett, “Europe and US Lines Cross on Household Debt Ratio,” Financial Times, May 9, 2013.

  82. Congressional Budget Office 2013.

  83. Standard and Poor’s, “United States of America ‘AA+/A-1+’ Ratings Affirmed; Outlook Revised to Stable on Receding Fiscal Risks,” June 10, 2013, https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1142712&SctArtId=161026&from=CM&nsl_code=LIME.

  84. A. T. Kearney 2013.

  85. Kupchan 2002; Leonard 2005; Chinn and Frankel 2007; McNamara 2008.

  86. For an intriguing exception, see Moravcsik 2009.

  87. Cohen and Benney 2014; Stokes 2014; Prasad 2014.