our newest council special report, which is about the connection between the balance of payments imbalances in theworld, and the financial crisis, and what might be done to reduce those imbalances, which is one issue I think for theG-20 which has been something that should be on the agenda, didn't seem to be so much on the radar screen but hasbecome I think newly topical with the comments today -- or the article published today by Central Bank governorZhou in China. So we'll get to that in a minute.I've also got with me Matthew Slaughter, who's a professor at Dartmouth at Tuck Business School, as well as being anadjunct senior fellow with us. And Matt is one of the prime movers in a group called the Squam Lake Group, which isa group of financial academic economists that have come together to brainstorm about reform of the regulations of finance. And so that is another issue which is sort of on the G-20 agenda and which Matt Slaughter can address. Youcan read the first Squam Lake paper on the systemic risk regulator, which I think is what Tim Geithner was asking forwhen he went to the House just today, and which Barney Frank is keen to give him, sort of the economic logic behindthe systemic risk regulator is described very well in the first Squam Lake paper, which you can find on our website,cfr.org/cgs for Center for Geoeconomic studies. And that's also where you can find Steve Dunaway's council specialreport on global imbalances.So to get to the G-20, it seems like the immediate issues are stimulus, fiscal stimulus; secondly, sort of the immediateefforts to fix the banking system so it can carry on lending; and thirdly, the debate over IMF enlargement. We'rehappy to go into those issues, if you'd like, in the Q&A, which we'll get to without too much Fidel Castro-stylefilibustering. But in the beginning of this, I want to focus on the two sort of areas of expertise of the speakers I havewith me, starting with Steve Dunaway.Steve, you know, you've written this report on how global imbalances lay behind the financial crisis, and now you havethe Chinese themselves who have traditionally thought to be the ones who didn't want to bring this issue up, and in ableak way, kind of making reference to the unhappiness with a system in which the dollar is at the core of the paymentsystem internationally. And you highlight that in your report as well as the contributing factors behind theimbalances. Could you just elaborate on that and tell us what you think of the Chinese idea?STEVEN DUNAWAY: Certainly, Sebastian. You know, in looking at the imbalances, you know, there's a lot of analysis that has been done. And I guess one thing I tried to highlight was a question of how did the imbalances growand persist as long as they did. And there are three features in the international financial system, which contributed tothat, and the first one being the role of the reserve currency, and particularly the dollar as the key reserve currency inthe system, and how that then favors the United States in terms of making it a bit easier and a bit cheaper to finance itscurrent account deficits.A second feature is an asymmetry in adjustment that countries that face upward pressure on their exchange rates don'tface the same kind of pressure to adjust their balance of payments positions. And this is something the Chinese havecertainly taken advantage of in terms of the way they have managed their exchange rate, and it explains the very largebuildup in reserves.Now, the third feature relates more to floating exchange rates and how at times they can provide a kind of shelteringeffect that will delay structural reforms. But, you know, in this question with the Chinese new proposal, to someextent, the Chinese authorities have made these comments before, and expressed this concern about the dollar's roleas a reserve currency. At the same time, they have strongly resisted the idea that their actions with respect tomanaging the Renminbi have been a major contributor to global imbalances. So from that point of view, it's kind of ironic that they see one side of the question but not the other.MALLABY: You mean, they see this side that says because the dollar is the reserve currency, it enables the U.S. to runa persistent balance-of-payments deficit, so that's what they're acknowledging. What they're not acknowledging istheir own role in contributing to the imbalances.
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