Editor's note: This is the first of a two-part series. Part I examines the need for a global economic grand bargain. Part II, which will appear tomorrow, will examine what such an economic grand bargain might look like.
BEIJING -- When the global financial crisis broke in 2008, rather than allow economic forces to run their course, policymakers intervened to set the unholy precedent of nationalizing financial market risks. Moreover, this was done without addressing the structural imbalances behind the boom and bust. Events of the last three weeks have demonstrated the fundamental ineffectiveness of previous interventions and underscored the case for an economic grand bargain to restructure and reinvigorate the global economy.
Nearly three years after Lehman Brothers collapsed, it is becoming clear that hastily planned, unconditional bailouts for financial markets were among the worst possible courses of action. The bailouts were originally sold as exceptional measures for exceptional times. Yet, we now face the possibility of the U.S. Federal Reserve embarking on a third round of quantitative easing. Meanwhile in Europe, despite repeated interventions from the European Central Bank (ECB) and others, the continent's growth prospects look bleak, and major restructuring of the eurozone seems more inevitable than previously. Rounding out the bleak picture, China's 2009 economic stimulus has further reduced the quality of its economic growth, and we have since seen an acceleration in the pace of its foreign exchange holdings, often cited as a root cause of global imbalances.