The Confidence Game by Kenneth Rogoff

Description

So what is the game plan now?  There is talk of regulating the financial sector, but governments are afraid to shake confidence.  There is recognition that the housing bubble collapse has to be absorbed, but no stomach for acknowledging the years of slow growth in consumption that this will imply. 

There is acknowledgement that the US China trade relationship needs to be rebalanced, but little imagination on how to proceed.  Deep down, our leaders and policymakers have convinced themselves that for all its flaws, the old system was better than anything we are going to think of, and that simply restoring confidence will fix everything, at least for as long as they remain in office.

The right lesson from Lehman should be that the global financial system needs major changes in regulation and governance. The current safety net approach may work in the short term but will ultimately lead to ballooning and unsustainable government debts, particularly in the US and Europe. 

Asia may be willing to sponsor the west for now, but not in perpetuity.  Eventually Asia will find alternatives in part by deepening its own debt markets.  Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.  As painful as it may seem, it would be far better to start bringing fundamentals in line now.  Restoring confidence has been helpful and important. But ultimately we need a system of global financial regulation and governance that merits our faith.

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http://www.project-syndicate.org/commentary/rogoff59

http://www.project-syndicate.org/commentary/rogoff59