Seeking international coordination of debt crisis policies is a mistake

A carnival float in Patras depicts Greek anger at eurozone austerity demand (Photo: Reuters)

Over the past couple of weeks we have had David Cameron, Tim Geithner and a round-robin letter of international leaders all demanding international coordination of policy responses to the Eurozone crisis and the threats of double dip recession in the US and slowdown in China. Columnist after columnist and economist after economist have called for an internationally coordinated effort – sometimes even a "shock and awe" approach. But we neither need nor want international coordination at this point, for several reasons.

First, there's only any point in coordinating policy when we have a pretty good idea what the best thing to do is.  If we really don't have a clue – if we admit we are in "uncharted waters" and four years of endless policy initiatives has been making things worse rather than better, demonstrating (in case there was any doubt) that we really don't know what the best thing to do is – then coordination is a device for everyone getting things wrong in the same way. Given that the plans for international coordination appear to be for even more bank bailouts of the rich by the poor, even more aggressive "no-creditor-shall-lose" doctrines – Tim Geithner suggesting that the whole concept of a "cascading default" must be "taken off the table" – and even more fiscal stimulus – a three-part package that has failed about as epically as it is possible to imagine, inducing multiple sovereign defaults - we can be pretty confident that "international coordination" means "finding the very worst things one can do and then doing them everywhere".

Second, international coordination has itself been a source of systemic risk, an important driver of the crisis.  When we replace caveat emptor and the reliance upon diversified individual risk analysis with an overall regulatory badge saying that financial institutions are sound, then when the regulator gets it wrong, it gets it wrong for everyone at once – error is systemically coordinated. And when we internationally coordinate regulations, we end up not only with error coordinated across the market within one country, but also coordinated internationally. It was not a coincidence that the most internationally coordinated banking crisis in history occurred at the historical peak of international banking regulation, with the introduction of the Basel II rules. If we force all solutions to be coordinated now, we will increase coordination of tomorrow's crisis. The belief in international coordination is fundamentally the belief of the collectivist writ internationally. Those that believe in competition and the value of each of us trying out what seems best to us at the individual or firm level will be naturally sceptical of the merit of One World Government – which is what the logic of international coordination implies is the policy-making utopia.

Third, different countries have different needs and different interests. It simply isn't true that all our interests are aligned.  Some countries will benefit more than others if there are defaults, for example, wiping out companies (even entire industries) that compete with their domestic firms.

Better, when you don't know what to do, would be for each of us to try our own thing. Then we can look around at what others have tried and what seems to be working better or worse, and gradually iterate towards some kind of solution. It's obviously politically attractive to all herd together – that way who can blame you if you get it wrong? Herding is what everyone tends to do in conditions of great uncertainty – we see it in wild stock market fluctuations, in the lending policies of banks, in business decisions in the wider economy. But we should not let our politicians get away with that.  Herding is nothing more than political cover. It isn't a constructive policy.