Did World Bank president Robert Zoellick really call for a Facebook approach to financial global governance?

Iceland’s exchange rate has plunged by more than 60%. Yesterday it tried pegging its currency and today it abandoned the peg.

Barry Eichengreen agrees with Ken Rogoff:

The dollar’s strength reflects the knee-jerk reaction of investors rushing into US treasuries as a safe haven. It is worth remembering that the same thing happened in August 2007, when the sub-prime crisis erupted. But once investors realized the extent of US financial problems, the rush into treasuries subsided, and the dollar resumed its decline. Now, as investors recall the extent of US financial problems, we will again see the dollar resume its decline.

Hat tip to Thoma.

Ken Rogoff says that the dollar should be diving during this financial turmoil.

But can this extraordinary vote of confidence in the dollar last? Perhaps, but as investors step back and look at the deep wounds of America’s flagship financial sector, the public and private sector’s massive borrowing needs, and the looming uncertainty of the November presidential elections, it is hard to believe that the dollar will continue to stand its ground as the crisis continues to deepen and unfold.

Seriously, how did we go from $2/£1 at the end of July to $1.75/£1 last week?

As production comes to depend more on intangible productive assets, the location of production by multinational firms becomes increasingly ambiguous. The reason is that, within the firm, these assets have no clear geographical location, but only a nominal location determined by the firm’s tax or legal strategies.

The effects of these location ambiguities, and the resulting distortions for tax reasons of the location of production, are described and it is estimated that for U.S. firms’ affiliates in a few tax havens alone, the exaggeration of value added in those locations amounted, in 2005, to about 4 percent of worldwide affiliate sales, and the exaggeration of sales to about 10 percent of worldwide affiliate sales.

Robert Lipsey – Measuring the Location of Production in a World of Intangible Productive Assets, FDI, and Intrafirm Trade NBER WP 14121

“Reports of the dollar’s death are greatly exaggerated.” — Barry Eichengreen and Marc Flandreau

“Reports of the dollar’s death are greatly exaggerated.” — Barry Eichengreen and Marc Flandreau

Dani Rodrik and Arvind Subramanian want to stem financial globalization:

If the risk-taking behaviour of financial intermediaries cannot be regulated perfectly, we need to find ways of reducing the volume of transactions. Otherwise we commit the same fallacy as gun control opponents who argue that “guns do not kill people, people do”. As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly.

What this means is that financial capital should be flowing across borders in smaller quantities, so that finance is “primarily national”, as John Maynard Keynes advised. If downhill and uphill flows are both problematic, capital flows should be more level.

But how is such a levelling-off of flows to be achieved? In the current context, the source of liquidity is large current account surpluses in the oil-exporting countries and east Asia, especially China. Reducing these should be a high policy priority for the international community. Two concrete actions – one for each source of liquidity – suggest themselves.

First, some variant of petrol tax in the main oil-importing countries (including the US, China and India) is essential to cut demand and reduce oil prices and hence the current account surpluses of oil exporters. That such measures should be taken for environmental reasons or that they would reduce the size of sovereign wealth funds only adds to their attractiveness. Second, some appreciation of east Asian currencies is necessary to reduce their surpluses. Even though undervaluation is a potent instrument for promoting growth in low-income countries in general, at this juncture self-interest on both sides calls for an orderly unwinding of current account imbalances…

Financial globalisation has not generated increased investment or higher growth in emerging markets. Countries that have grown most rapidly have been those that rely least on capital inflows. Nor has financial globalisation led to better smoothing of consumption or reduced volatility. If you want to make an evidence-based case for financial globalisation today, you are forced to resort to indirect and speculative arguments.

It is time for a new model of financial globalisation, one that recognises that more is not necessarily better. As long as the world economy remains politically divided among different sovereign and regulatory authorities, global finance is condemned to suffer deformations far worse than those of domestic finance. Depending on context, the appropriate role of policy will be as often to stem the tide of capital flows as to encourage them. Policymakers who view their challenges exclusively from the latter perspective will get it badly wrong.

Mark Thoma has Frederic Mishkin’s contrary view.

Addendum: See the discussion at Martin Wolf’s forum. William Easterly says “To say that there are crises because of international capital flows is not very meaningful; it is like saying there are recessions because of GDP.” Emmanuel argues that “the genie of freer capital flows escaped from the bottle after the collapse of the Bretton Woods system and cannot be put back.”

10 countries that benefit from the falling dollar. Some of the arguments are spin (I’m skeptical that de-dollarising Afghanistan necessarily helps Afghans), but someone has to cheer for the correction of global imbalances.