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liquidity. This has made it necessary for European officials, caps in hands, to
seek swap arrangements with the Federal Reserve to acquire dollars to re-lend to
their national champions.
Recent enthusiasm in Europe for fundamental reform of the international monetary
system finds its roots, in part, in this resentment. They do not want our dollar
to be their problem, and they want to erode some of that privilege. Put it those
terms, however, it seems clear that this will mostly be a one-way conversation. US
officials must recognise that their nation’s funding advantage rests on the unrivalled,
for now, position of US government securities in global financial markets.
Thus, they will listen and agree to work-streams for groups to report back in the
future. But whether it is this Administration or the next, advantages to the US,
unfair as that may seem as viewed from abroad, will seem worth preserving.
An exorbitant privilege that comes with a cost and a responsibility
These advantages come with a cost and a responsibility. Open access to markets
probably allowed US officials to drift in their response to the financial crisis. They
initially mistook a solvency problem for a liquidity one. When action was
ultimately forthcoming, Treasury officials failed to articulate a clear sense of prin-
106 The First Global Financial Crisis of the 21st Century Part II
4 Dooley, Folkerts-Landau, and Garber (2004) have dubbed this latest period Bretton Woods II, in part exactly
because of the role of foreign official purchases in facilitating US current account deficits. They pose plausible
reasons why it might be in the self-interest of foreign officials to do so. Another possibility, as discussed earlier, is
that existing portfolio holdings are so large that officials are in a self-fulfilling trap.
ciples and priorities for intervention. This ad hoc improvisation has probably
stretched out and intensified the crisis. In a crisis in an emerging market economy,
the sudden stop of credit to the government forces painful adjustment to be
done quickly.5 These adjustments may have been painful, but a quick response
tends to reduce the overall bail-out cost.
As for responsibility, officials must recognise that investors have granted the US
its reserve-currency status for reasons. Size matters, but other reasons include a
respect for the rule of law and for contract enforcement and the predictability and
transparency of the policy process.
When US officials move to the next stage of the crisis – the search for legislative
protections to prevent a recurrence – it will be important to preserve these
attractive aspects of US markets.
Michael P. Dooley , David Folkerts-Landau, Peter Garber, ‘The revived Bretton
Woods system,’ International Journal of Finance & Economics Volume 9 Issue

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