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Paul Volcker was in London a couple of weeks ago speaking at a conference organised by Lombard Street Research, the theme of which was to look at what had happened in crises of the past to see if there were lessons to be learned today. In particular, the former US Federal Reserve chairman and other economic leaders of the time talked about the problems of the 1980s, when imbalances between the trading nations of Japan, Germany and the United States brought exchange rate instability, banking crises and all manner of economic disruption.
The result was not encouraging. The lesson which came through loud and clear was that countries with a strong export position and a buoyant balance of payments surplus are reluctant in the extreme to change their exchange rate policies to reduce their surpluses. They expect the importing nations to take all the pain of adjustment.
Attitudes do not seem to have changed much in 25 years. Germany, still the world's leading exporter and one of the biggest surplus nations, is under pressure to change its fiscal policy to encourage domestic consumption, but is deeply divided internally about whether this is desirable. German economic policy is rooted in fiscal rectitude and the avoidance at all costs of inflation.
China, which to some extent has replaced Japan as the major surplus nation in Asia, is courting controversy, if not fury, in the US by providing aid to its severely hit exporters, not least by nudging its exchange rate lower. Again this is unlikely to change. It is reported that two-thirds of China's toy exporters have gone out of business this year and there are reports of serious social unrest because of unpaid wages.
Thus for powerful domestic reasons neither of the major surplus countries seems willing to encourage a switch from exports to domestic consumption as their contribution to reducing global imbalances.
This matters because there are two essential issues which need to be tackled if the global economic crisis is to be resolved. The first is that banks have to clean out their balance sheets by writing off all their toxic assets, as indeed does everyone else - people with too-high mortgages and companies with too much debt taken on for acquisitions of dubious value. It may sound odd to say so when the pain of the credit crunch becomes ever more obvious, but it is part of the solution, not the problem.
The write-offs will establish a floor for asset prices which people will trust and that will allow scope for recovery. It will convince outside investors that the banks are finally clean and this will pave the way for new private-sector injections of capital so that they can be restored to health and begin to behave like banks again. Then the economy can begin to function normally.
We are still unfortunately a long way off that point, particularly in the US, where policy seems more designed to shore up asset values and prevent the necessary adjustment from taking place. There are indications of that here too, though to nothing like the same extent, possibly because the Bank of England has always insisted that deleverage has to be allowed to happen.
However, sorting out the banks is only half the problem. The other is sorting out the imbalances because it is those that destabilised the economy in the first place. The imbalances created the wall of money that was the fuel for the credit boom and bubble, and unless they are addressed the same thing could happen again, or generate a different but equally damaging form of instability and volatility.
It is a depressing thought but, difficult though the credit crunch is to handle, it may be the easy part. Sorting out the imbalances to put global trade on a more-stable long-term footing may well be much the tougher problem.
Individuals key to City success
The City has never worked out how to market itself internationally, and there is a long tradition of people who said it was a mistake to try.
Notable among these was Lord George, who in his time as Governor of the Bank of England poured cold water on a variety of initiatives - some coming from figures as distinguished as Lord Hurd, a heavyweight in the Thatcher government.
His argument was that there was not enough in common with insurance, commodities, banking, English law, securities trading and real estate to present a coherent message, and indeed the diversity of specialist skills that was the City's strength would risk being lost in the blanket message.
Mayor Boris Johnson today unveiled what was billed as a landmark report on London's competitiveness as a financial centre, authored by Merrill Lynch's Bob Wigley. It contains some sensible suggestions on streamlining and improving what is in place at the moment.
But ultimately people should be in no doubt. The continued success of the City depends on the efforts of the individual participants.
