When Money Talks, Governments Listen

Article excerpt

WASHINGTON _ Think about the meaning of these numbers: The global currency markets trade about $1 trillion worth of dollars each day.

When the world's 17 largest central banks, led by the Federal Reserve, intervened last month to try to prop up the dollar, they dug deep into their pockets and came up with about $5 billion and change, which they threw into the market in an effort to bid up the value of the American currency.

No wonder they had little effect on the dollar. The central banks were like a zoo keeper trying to calm a starved gorilla by offering it a raisin for lunch.

It really wasn't the fault of the governments, though. Raisins, it seems, are all they have sometimes, compared with the assets of the huge capital, currency and bond markets they are trying to influence. Whose world is this anyway?

The answer is that it is increasingly Adam Smith's world _ a world in which the balance of power between global financial markets and governments is tilting toward markets. When it comes to global markets these days, the motto of governments is: "There they go, I must catch up, for I am their leader."

Twenty-two-year-old bond traders with ice water for blood tyrannize the president, passing judgment on his economic performance by raising or lowering interest rates; the markets devour central bank cash with nary a burp, and the portfolio managers, playing global Monopoly, move cash from country to country, deciding which governments deserve to "Pass Go" and collect $200 billion and which should go directly to jail and be starved of the capital to raise living standards.

This shift in power is driven by a combination of factors. The revolution in telecommunications and data transmission has knit Tokyo, Frankfurt, London and New York in a seamless web of financial interactions that operates at a speed, and in volumes, beyond the grasp of any single government.

This technical revolution, though, has been accompanied and fueled by a political revolution. Over the past decade there has been a widening acknowledgment, from Albania to Alabama, that when it comes to allocating resources, markets work better than governments, whether the issue is providing telephone service or investment capital.

"Basically, governments have consented to a regime that allows markets to boss them around," said Stanford University economist Paul Krugman, "because the conventional wisdom, fed by experience, says that to throw up barriers to these market forces is to invite economic stagnation, if not disaster."

From the State of South Carolina to the government of Brazil, leaders believe that a central role of government is serving as a broker _ a broker between their constituents and the global markets.

As more countries have gone capitalist, there is a huge global competition for cash and investors, so that governments can build the roads, power stations and telephone systems that are the foundation for higher living standards.

Governments used to do that with their own cash _ as the Marshall Plan rebuilt much of Europe after World War II _ but they don't have it anymore.

So the role of governments now is increasingly to entice private investment _ to get BMW to build a plant in Mississippi, or to get portfolio managers to invest in the Shanghai stock market _ by assuring stable currencies and sound economic fundamentals.

"During the cold war," said Labor Secretary Robert Reich, "we used the Soviet threat to get the public to accept certain changes and to build certain institutions, from the national highway system to the space program. …