TEXT OF INTERVIEW
Kai Ryssdal: It is the 24th of September today, and that means the two-day G-20 meeting is already practically halfway over. There’s a long list of competing things that various heads of state want to get done. More bank regulations, for one. Limits on executive pay for another. And another one that’s picked up steam the past week or so. Something that’s being described as rebalancing the global economy. That seemed a bigger goal than all the rest. So we’ve called economist Steve Dunaway at the Council on Foreign Relations for an explanation. Mr. Dunaway, good to have you here.
STEVE DUNAWAY: It’s nice to be with you, Kai.
Ryssdal: This concept of rebalancing the global economy. What exactly does that mean?
DUNAWAY: Well, it comes back to a problem that has existed throughout this decade in terms of imbalances in savings and investments among major economies. The U.S. saves too little. And then the East Asian countries save too much, particularly China, owing in large part to various distortions and disincentives that discourage consumption. So these imbalances resulted in the large deficit in the U.S. and the surpluses in Japan and Europe, and particularly the very large surplus in China.
Ryssdal: All right, so help me understand then how those imbalances play into a global summit on fixing the financial crisis. What do those imbalances have to do with causing the financial crisis?
DUNAWAY: Well, the reverse side of these large trade surpluses was that led to very large flows of capital, especially from the East Asian developing countries to the developed countries. And most of this capital ended up in the United States. And this flow of capital, Ben Bernanke referred to it as a glut of savings. And it had the effect of depressing real interest rates worldwide and that’s what lend to the financial engineering, which helped contribute to the crisis.
Ryssdal: Let me make sure I understand that. So people who had the savings, East Asians in most cases, sent their money here. That drove interest rates down, which caused people to go looking for investments that would get them some better returns. And hence we got mortgage-backed securities and all the rest of that.
Ryssdal: All right, that being the case then, here we have this summit of which a lot of the headline talk has been CEO pay and capital ratios and banks and those kinds of things. How is something as fundamental as rebalancing the global economy going to get done in two days in Pittsburgh?
DUNAWAY: Well, it’s not going to get done in two days in Pittsburgh. But the very important thing is that this has been, I thought for a long time, a major item that’s been left off the agenda. So the fact that it’s back on the agenda is very important. That the countries are beginning to talk about it again and coming around to trying to come up with a new mechanism to bolster commitment to the necessary policy changes, and then to provide some type of supervision or peer pressure to see that those policy changes are implemented. That’s an encouraging step.
Ryssdal: What happens, Mr. Dunaway, if as a result of the financial crisis fading into memory, and the global economy eventually recovering — as it will — this rebalancing doesn’t happen?
DUNAWAY: Well, if doesn’t happen then you’re in a situation probably not unlike the 1930s in terms of you have tremendous amount of productive capacity in the world economy, and you just have insufficient demand. Because if the U.S. is not there — providing the ultimate demand for consumer goods — then the world economy just doesn’t grow. Unless other countries step up and take the necessary policy changes to shift more towards, in the case of Japan and Europe, more rapid growth, which would boost demand in those economies. In the case of China, greater reliance on consumption to drive growth.
Ryssdal: Steve Dunaway. He’s a senior fellow in international economics at the Council on Foreign Relations. Mr. Dunaway, thanks so much for your time.
DUNAWAY: Oh, my pleasure.
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