Acclaimed author and journalist Paul Blustein addresses his audience at CIGI Signature Lecture. (Lisa Malleck/CIGI)
Acclaimed author and journalist Paul Blustein addresses his audience at CIGI Signature Lecture. (Lisa Malleck/CIGI)

A picture of flying pigs was the image used by award-winning author and esteemed journalist Paul Blustein to denote the likelihood of the “radical change in IMF governance” that he called for in his CIGI Signature Lecture entitled, “Off-Balance: International Institutions and the Global Financial Crisis.” 

Borrowing snippets of off-the-record interviews and close-door meeting notes from his new book, similarly titled Off Balance: The Travails of the Institutions that Govern the Global Financial System, Blustein skillfully narrated the story of two governing financial institutions – the Financial Stability Forum (FSF) and International Monetary Fund (IMF) – in the months leading up to the Global Financial Crisis of 2008. His research and arguments provided feasible support for his pessimistic prediction. Although cautious to defend the intelligence and intentions of the members of these governing bodies, Blustein’s lecture identified major limitations and failures of the institutions’ governing structures and accountability.

Blustein began with a description of the FSF and its “soft-law” mandate. He described the forum as a “little known” and “highly secretive” organization with vague responsibilities and highly protected meetings and members. He suggested that the body as a whole was “defensive” and excessively polite, limiting members propensity to offer constructive criticisms or suggestions. In support of this point, Blustein described the “soothing” words of a governor of the Federal Reserve board in response to a report on the US housing market strain. The governor’s optimism received no objections from the rest of the FSF caucus, evidencing members’ bent toward protecting themselves from contestation by abstaining from contesting others.

Blustein also identified the forum’s inability to fathom catastrophe as a limitation to its effectiveness. Despite gloomy reports, he noted that the forum was not able to foresee the scale of the crisis they faced. As a result, it were not able – despite good intentions – to “discern where and how crises [were] likely to arise, or pinpoint the most dangerous vulnerabilities.” The FSF also lacked the power to deter countries from pursing threatening financial policies, again, weakening its effectiveness.

Turning his attention to the IMF, Blustein went on to chronicle “a flop and a debacle.” The “flop” referred to the multilateral consultations, which suffered from a similar “soft law” approach and “defensive” and “excessively polite” group dynamic as the FSF meetings described earlier. These multilateral consultations failed to result in any kind of reform; rather, Blustein described their meetings as, “akin to Kumbaya in five-part harmony.”

Surpassing the failure of the “flop” in scale, Blustein carried on describing the “debacle” of the harder law initiative on “fundamental misalignment.” The Fund created a plan aimed specifically at putting pressure on China to correct the undervalued renminbi. However, the plan was never implemented since the target of the intervention shifted, for various reasons, from the USA, to the Republic of the Maldives, and then finally to China. Before action could be taken against China in September 2008, the climax of the financial crisis hit the USA, requiring Paulson to beg China to bail out Morgan Stanley.

Reviewing Blustein’s accounts of the FSF and IMF, there are three areas of limitation and failure: the “soft law” mandates of some institutions, the defensiveness and “excessive politeness” that defined their meetings, and the inability to cooperate at an international level. Although Blustein recognized that positive changes occurred in both organizations following the crisis, he offered one radical solution to address the remaining points of weakness: “the adoption of WTO-style dispute settlement.” He argued that until real, symmetrical judgments could be made by independent experts to maintain accountability within these bodies, the tradition of ineffective, soft-law would continue to “govern” with the same level of effectiveness.

During the questions from the audience, Blustein continued to reiterate the need for new forms of accountability for institutions such as the FSF (now renamed the Financial Stability Board) and IMF, as well as at key governance related conferences, namely the G20 Summit, to ensure the effectiveness of these efforts. Blustein called for think tanks, like CIGI, and news media to work together to address major gaps and inconsistencies in governance and push the issue into public discourse to bring about needed change – before swine hit the skies.

HAVE YOUR SAY: If you attended this lecture, caught the webcast or watched the archived video, we would love to hear your thoughts on Paul Blustein’s presentation. Start a dialogue by adding your comments below.

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