http://www.un.org/apps/news/story.asp?NewsID=29140&Cr=doha&Cr1=

Oh and by the way this study is written by the same people who predicted the global financial crisis.

Anyway I support the Amero. The Dollar is ugly, all the bills are green, and they're all the same size. Even when they started to add color to the new ones they still looked ugly.

Finally, globalism Rulezz!!!

You’re right that the Fed is subject to political pressure as well. I didn’t mean to imply that it was completely independent. However, it is subject to only one political master (or at most a few, say the Pres, Treasure Sec’y, and the chairmen of the Finance and Banking committees in Congress). If different parties control the executive and legislative branches then you could arguably get into paralysis as well.

Nevertheless, it’s possible to get all the players together in one room and hash out something fairly quickly. Witness the astonishing speed in which Bear Stearns was bailed out, the collateral accepted was broadened and the discount window opened to IBs. The greatest change in Fed policy since the Great Depression all happened in about a week! Of course much of this was influenced by politics (Paulson is from GS; Schumer is Sen. from NY and sits on the Finance cmte; Dodd is Sen. from CT, home of many hedge funds and banks, and is chairman of the Banking cmte). But the point was that it was carried out with astonishing speed.

Does the ECB have the ability to make such radical changes so quickly in response to market conditions (Not being a European, I’m interested in hearing about the political realities that the ECB must work within; it’d be interesting to compare to the U.S.)?

The analogy is imperfect. In Europe, the European parliament is weak but individual states are strong; in the US, by contrast, governors of individual states have no jurisdiction over the Fed but influential Congresspersons certainly do. California certainly could influence the Fed if a committee chair hailed from that state.

It is certainly debatable whether the Fed is any less susceptible to political influence than the ECB. In principle, the ECB has much greater political independence.

The US is fairly fractured politically at this point in time. A modern-day Volcker with a program of sharp short-term pain for long-term gain would not last long in office.

The fact that the ECB has not emulated Bernanke’s energetic slashing of interest rates does not mean that it is paralyzed and ineffectual and answering to too many masters; it just means the ECB has a different policy with regard to the danger of inflation. The ECB is politically able to pursue such a policy; it is debatable whether Bernanke could long resist pressure to lower interest rates if that was not what he wished to do.

Frankel asserts that a significant part of the dollar’s appeal as reserve currency has been the military protection we provide to many of our allies. I agree.

But another part of what makes the dollar a great reserve currency is that the Fed can act in a definitive way because the United States is a politically integrated country. So when the Fed acts, it doesn’t have to consult “member states” like California or NY or Alabama.

As much as “reserve currency” status is about economic strength, it’s also about having the power to implement policy quickly and definitively to deal with rapidly changing financial problems.

Euroland, in contrast, while having a nominally independent ECB, must still bow to the political demands of its member nations. Currently, since global monetary policy is set by the Fed, with other central banks essentially reacting to Fed moves, there hasn’t been much dissension among EU members. Essentially, they just have to react to the leader’s moves.

But in a new economic world where the Fed no longer leads and Europe has newfound powers to effect global monetary policy, I suspect we’ll see a lot more infighting among member countries.

While there is currently debate between fast and slow growing countries about balancing inflation vs. growth via interest rates, I suspect the debates will become much broader. For example, will Austrian-style free market dominant countries clash with socialist countries about the use of the Euro to achieve political goals such as redistributing wealth, advancing Eastern/Western European integration, or even helping the third world? Will the traditional Franco/German rivalry lead to paralysis at the ECB as each side jockeys for control of an institution made much more powerful by the euro’s reserve currency status?

Until the EU becomes more politically integrated, the ECB may find that its power is constrained by the difficulty of serving many masters. And the rest of the world may still follow the Fed simply because it’s the only institution able to act quickly and definitively. After all, it’s highly unlikely that Bernanke goes to sleep at night worrying about California trying to get him replaced because he’s spending too much time bailing out NY bankers rather than CA homeowners. Does the ECB head have the same luxury?