U.S. Department Of The Treasury: Remarks By Under Secretary For International Affairs Lael Brainard Before The Women's Foreign Policy Group

Thank you for your kind introduction, Chrystia.  Thank you for hosting me today, Maxine and Patricia.  It is a great honor to be here with such an outstanding group of women and men.
 
Financial Diplomacy
There are many aspects of my experience that I did not fully anticipate when I took office in the early days of 2009. I expected the US financial crisis to be the one big financial crisis that would confront the President during his first term.  I did not anticipate it would take thirteen months to schedule a confirmation vote.  And I was surprised to discover that my position would regularly be described as a financial diplomat. 
 
The word diplomat evokes images of Henry Kissinger’s secret mission to China with the diversionary theater of the stop off in Pakistan in 1971. In classic diplomacy, foreign ministries engage in negotiations to shape other countries’ foreign policies through international treaties and agreements and thereby shape the international order to their advantage.  
 
Diplomacy is the stuff of legend and lore.  Not so much finance ministries. But 3 ½ years into my tenure, I have come to think that the term financial diplomacy, while obscure, is apt.
 
Financial diplomacy is predominantly about shaping the domestic economic policies of other countries when they matter to us and to the world.
 
We work on financial and economic diplomacy because some economic decisions made in one country have an outsized impact on jobs and growth here in the United States and around the world.  As transmission channels proliferate, policies designed for domestic circumstances can matter as much or more to other countries as any international treaty. 
 
In contrast to the passionate interest provoked by foreign policy, financial policy is as local as it is prosaic; by determining whether currencies and stock markets plunge or stabilize, it can make the difference in whether families can afford to send their children to college, buy a home, or retire comfortably. Convincing leaders of other countries to change their domestic economic policies can be challenging and intensely political, yet it is essential when it has an economic impact on our shores. 
 
International financial diplomacy can be subtle or intrusive, delicate or heavy handed, and it puts us to the greatest test when funding is not the answer.
 
The intensity of financial diplomacy is proportional to the degree that those policy choices spill over across borders or into other issues that matter.   The greatest hits and the best known duds of financial diplomacy occur at moments when leaders come together in moments of crisis and take collective actions, as they did in 2009, and famously failed to do in 1930. More often than not, crisis is the crucible that forges the innovations with the most lasting impact.
 
Not surprisingly, financial diplomacy has become more intense as financial markets and economies have become more interconnected and higher frequency.  It is remarkable to read accounts of Norman Montagu setting off on a lengthy ocean voyage to consult with his international colleagues only to arrive home and discover sterling had gone off gold.  In May 2010, faced with rising levels of financial stress, Euro Area and G7 officials had only a brief 50 hour interlude between 4:00 pm on Friday when New York closed and 6:30 pm on Sunday when New Zealand opened to craft the introduction of the European Financial Stability Facility, or “EFSF,” and the Securities Markets Program, or “SMP,” to soothe markets.
 
The G20 Summit in London in 2009 agreed to massive changes to international financial resources and institutions within a matter of hours.  By contrast, John Maynard Keynes and then Secretary of the Treasury Henry Morgenthau and Harry Dexter White were holed up with their international counterparts for a full month in July 1944 negotiating the creation of the Bretton Woods institutions.
 
You can imagine the negotiators awaiting instruction via telegraph and sitting down with their counterparts over a succession of leisurely meals. Today you can sense the electrons zinging around the negotiating room and across the globe as negotiators text home and each other to probe for bottom lines and redlines, working against deadlines imposed by the news cycle and markets.
 
And while classic diplomacy moves through the synapses of foreign ministries, financial diplomacy navigates through finance ministries and central banks, directly connecting the decision makers that determine tax and fiscal policies, financial regulations, and monetary policies and the officials linked to the markets through open market operations, reserve management, and debt issuance. Through frequent interactions and similar responsibilities, financial diplomats develop a common set of tools, analytics, and language.  Cultivating this common ground is especially critical when financial diplomats are called on to tackle today’s complex challenges under the glare of a global 24/7 business news cycle. 
 
The United States plays an outsized role in this system. That is true for some obvious reasons.  We have the largest economy, the deepest and most liquid financial markets, and the world's reserve currency.
 
But it is also true that the United States has the capacity to exert influence that goes beyond its size and is unrelated to assistance. As one scholar has noted, the United States is “the usual source of initiative." When we lead, our influence derives from our initiative, our intensity, and our ideas.
 
Crisis Response: 2009
 
In the early days of 2009, with the US at the center of the crisis, President Obama, Secretary Geithner and Chairman Bernanke, working with the UK and others, took initiative. With collapsing global demand, trade flows seizing up, and confidence badly eroded, an acute sense of crisis helped propel changes that would have been unimaginable in calmer times.  A whopping $1 trillion was mobilized in and through the Bretton Woods Institutions.
 
Recognizing that the institutions of financial diplomacy had not evolved to reflect the profound shift in the locus of global economic weight, in short order, we supported elevating the G20 to become the premier forum, standing up the Financial Stability Board, and shifting decision making power within the Bretton Woods Institutions to reflect the greater weight of emerging markets. 
 
Perhaps least noted but no less notable, we used the G20 and the FSB to agree to a sweeping set of new standards that would apply uniformly across advanced economies and emerging markets – extending the perimeter of regulation, ensuring the capacity to resolve even the largest most complex institutions, compelling banks to hold thicker capital buffers against risks, and bringing the vast world of over-the-counter derivatives out of the shadows.
 
Euro Area
 
Due to these strong actions at home and around the world, our banking system is considerably more resilient, household and business balance sheets are healthier, and our economy has gained strength.  But too many Americans remain out of work and our economy has been buffeted by recurring bouts of financial stress from Europe.
 
Navigating the turbulence faced by the Euro Area has presented a particularly compelling and complex challenge of financial diplomacy.  Europe’s economy matters greatly to us and the world. When growth slows in Europe, it affects jobs here at home.  European banks are a major source of financing for many emerging economies. When financial stress rises in Europe, it damages confidence globally. In addition, the United States has a long history of supporting European unification.
 
So it should be no surprise that the President and his economic team have weighed in early, frequently, and with intensity to offer ideas and support to our European friends, who have in turn substantially evolved their policy response.
 
At the recent G20 meetings in Los Cabos, the serious challenges facing Europe were at the center of our discussions.
 
Our European colleagues grasp the seriousness of the situation and are moving with a heightened sense of urgency.  They have committed to take all necessary measures to safeguard the integrity and stability of the Euro Area, to improve the functioning of the financial markets, and to break the feedback loop between banks and sovereigns.
 
In the days and weeks ahead it will be critical to see actions to address near term stresses while laying a path to greater financial and fiscal union, necessary complements to monetary union.
 
The Euro Area is weighing proposals to build a more centralized financial architecture.  More centralized authority for supervision and resolution will be necessary to enable greater risk sharing on recapitalization and deposit insurance.
 
In the near term, Spain is moving ahead with Euro Area partners to finalize the terms of the support to the financial restructuring authority to strengthen Spain’s banking system.
 
Euro Area authorities are continuing to make their financial backstops credible and effective in the face of market pressures. It is important that countries, such as Spain and Italy, have sustainable borrowing costs as they undertake ambitious fiscal and structural reforms over several years.
 
There is a renewed focus on supporting demand.  There is growing recognition that structural reforms to strengthen competitiveness in deficit countries must be paired with policies to promote demand in surplus countries.  There may be greater willingness to stretch out fiscal adjustment over a more appropriate time frame, recognizing the dangers posed to both growth and fiscal performance of contracting too sharply into a downturn.
 
And the new government in Greece and the troika have stated their intention to work out a path to reform and sustainability within the Euro Area.
 
The decisions that lie ahead for the leaders of Euro Area member states will have a profound impact not only on their economies but also on their political future.  These are decisions that are fundamentally theirs to make. But these decisions also matter profoundly to us and the world. That is why we will remain intensely engaged – it is too important not to do so.
 
China
 
This reflection on financial diplomacy would not be complete without a brief discussion on China.
 
In recognition that its rise has presented a unique set of opportunities and challenges to the international financial system, we have engaged in intensive and unprecedented financial diplomacy with China. Through intensive engagement by President Obama, Vice President Biden and Secretary Geithner in the U.S.-China Strategic and Economic Dialogue, we have sought to shape the policy choices facing Chinese financial authorities to increase their consistency with international standards and norms and to create a more level playing field.
 
With demand expected to be weak in advanced economies for some time, it had become increasingly clear that China’s growth model was no longer sustainable, with its lopsided reliance on massive investments in resource intensive export industries, weak intellectual property protections and undervalued exchange rate. Just as we are reorienting the US economy to be more competitive and boost export performance, we have worked to encourage complementary changes in China. And we have seen some progress.  China has reduced its current account surplus from 9 percent of GDP in 2009 to 3 percent today, due in part to an appreciation of its currency by 12 percent in inflation adjusted terms against the dollar.
 
In the weeks ahead, China will be considering further measures to sustain Chinese domestic growth and create a more level playing field.  As agreed in the S&ED, China’s commitments to cut tariffs and consumption taxes and reduce taxes on services will boost the buying power of Chinese consumers and also create opportunities for U.S. companies. 
 
We will continue our financial diplomacy with China in the days and years ahead, recognizing we have a growing stake in each other’s economic choices and in working together to strengthen the system.
 
Conclusion
 
Given the very special audience here today with your outsized ability to mentor and inspire talented women– I would like to make one special observation:  the world of financial diplomacy could use a few more good women.
 
Looking around the room at the G20, it is remarkable that women now account for 4 of the 20 heads of state and foreign ministers.  By contrast, it is hard to find a single woman among the finance ministers, and Argentina’s recent appointment of a woman to head their central bank marks the first in this group. 
 
The picture is no different at my level. After about two years on the job and innumerable meetings, I was asked to join my colleagues for a “family photo” of the G20 Deputies from finance ministries and central banks.  Copies of the photo were distributed at our seats as we resumed discussions. One of my European colleagues glanced at the photo and then took a second long look at it before remarking with considerable astonishment “I just realized you are the only woman in the room!”
 
With your help, we can change that.  I am pleased to note that this has been a priority at Treasury under the leadership of President Obama and Secretary Geithner.  
 
When we engage in financial diplomacy, our power is not primarily from our purse but from our ideas, our intensity, and our initiative.  We succeed when we bring smart ideas to the table; when we take initiative; when we insist on policy solutions that will make a difference in people’s lives.  We lead best when we lead on the power of our ideas and our ideals.