Krugman

HE ETERNAL TRIANGLE

Explaining international financial perplexity

Anyone who has attended recent meetings of central bankers and finance officials, and who has enough cynicism to see through the mask of judicious confidence that is an essential part of such officials' wardrobe, has surely been struck by the air of unreality that pervades all discussions. On one side, nobody really believes that the rescue programs already in place or about to be put into effect will do more than stave off imminent currency crisis; prospects for a real recovery remain remote. Yet none of the proposals currently receiving serious discussion offers any realistic hope of changing the situation materially. Another $18 billion for the IMF? That wouldn't be enough to cope with an attack by a single hedge fund, let alone the massive capital flows that can result when not only hedge funds but domestic investors speculate against a currency. Credit lines for countries not yet under attack? The same. Voluntary standstill agreements by creditors, or even Chapter 11-type proceedings for countries? As I pointed out in an earlier note , these too are likely to be ineffective. Even Chilean-type restrictions on capital inflow - aside from being a conspicuous locking of the barn door long after the horse has gone - are not likely to do much to prevent future crises.

Why has international monetary discussion become such a matter of euphemisms, evasions, and well-meaning but ineffectual gestures? The deep answer, I believe, lies in the difficulty most officials and even private economists have in facing up to the unpleasant dilemma that is really involved in choosing an international financial "architecture". This dilemma is not new; on the contrary, the basic story has been the same for at least a century. But for a while a combination of good luck and special circumstances allowed us to forget about such unpleasantness. Now it's back, and leaders will either have to make hard choices, or find...