Seven Questions

Seven Questions: Paul Martin

As world leaders gear up for a major financial summit in Washington, Former Canadian Prime Minister Paul Martin explains why his country has weathered the subprime tsunami better than most, how the G-20 can keep the sky from falling, and what Barack Obama needs to do to make globalization work again.

Nearly two months after the financial crisis sent markets around the world reeling, leaders from 20 of the world's top industrial and emerging economies are due to meet in Washington on Saturday, Nov. 15, to discuss how to clean up the mess. So far, European officials have talked of the need for sweeping change, yet have agreed only on the need for improved accounting regulations and an early warning system. Brazilian President Luiz Incio Lula da Silva would like to see a complete overhaul of the global financial system to provide a greater role for new powers such as Brazil, India, and South Africa. In the United States, many question whether any promises from the Bush administration will still hold once President-elect Barack Obama takes office in January.

One man whose advice ought to be taken seriously is Paul Martin, who as prime minister and finance minister of Canada presided over financial and banking reforms that has left the country in far better shape than its southern neighbor. Martin tells Foreign Policy's Elizabeth Dickinson that world leaders top priorities should be creating a more inclusive global system, encouraging dialogue, coordinating regulations, and ensuring that market freedom prevails.

Foreign Policy: As someone who has been at the top of a major economy's financial system, where do you think today's ministers and central bankers went wrong in failing to prevent the global economic crisis?

Paul Martin: There was a clear failure of surveillance and regulation in the United States. That was a domestic failure, coupled with a failure to understand the complete seamlessness of the global financial system. When somebody who cant afford it buys a high-priced home in California and subsequently defaults, a continent away a small municipality in Norway goes broke. [Misunderstanding] that connectedness was a failure on behalf of all of those who were involved, certainly in Europe and the United States.

FP: Canada's banks have since been rated the strongest in the world. What's your secret?

PM: The great wave of deregulation and loosening of the [financial] system occurred in the ongoing rivalry between New York and London over which city was going to be the financial capital of the world. At that time, all the G-7 ministers, of whom I was one, were under great pressure to either loosen [or deregulate]. I refused to do this because in Canada we have only six major banks. It was very clear to the superintendent of insurance and me that we simply couldn't afford the risks if one of our banks defaulted. We resisted the siren call of deregulation and in fact tightened up on loan-loss requirements and reserve requirements.

FP: The upcoming financial summit in Washington came at the urging of French President Nicolas Sarkozy, someone who has argued that capitalism as we know it needs rethinking. Whats your reaction to that view?

PM: I think that capitalism's greatest strength is its ability to evolve, and I think that must continue. But we have to understand that its greatest weakness is the ability to go a bit too far. The only answer is ongoing dialogue between regulators, constantly trying to stay, if not a step ahead, at least up to speed with the market. After the Asian financial crisis, the United States declared itself an exception, which is why they got in trouble.

The G-20 leaders should use this meeting to begin the reform of other institutions. The fundamental flaw in the G-8 is that it no longer [includes] the major economies: Brazil, India, and China. Brazil and others are not permanent members; they are only guests by sufferance. This makes no sense. Do what you think is necessary with the Bretton Woods institutions, but for heavens sake, stop keeping half the world out of them! My view is that a vibrant G-20 will become the instrument of reform.

FP: If the world financial system must incorporate economies such as China, Brazil, India, and Russia, what role should those countries play in addressing the current crisis?

PM: Right now they are being asked to participate. [U.S. Treasury Secretary] Henry Paulson correctly pointed out that the overly indebted U.S. consumer cannot carry the world as a buyer of last resort any longer. He asked China to stimulate internal demand and revaluate currency upwards. China is a major holder of U.S. debt. How can you ask China to do this while at the same time shutting the country out of the institutions that are supposed to have the global dialogue? China and Brazil participate in the world economy, but there is a Eurocentric view of the world that says that they shouldnt have a proportionate say in institutions that make [that economy] work.

The cross-exposure to risk within the U.S. economy surprised a lot of people, but what truly stunned them was risk beyond the U.S. border. If the U.S. economy can [create such a crisis] with the failure of its banking system, what will happen in five years when there is a major mortgage meltdown in India? When a Chinese bank goes down? When a sovereign wealth fund speculates imprudently? Those problems will not stay in their countries, just as the United States exported its problem. Thats why it is so important that they be at the table now.

FP: What sort of consensus would you hope emerges from the upcoming summit? What needs to happen at this meeting?

PM: The first reform has to be that the membership [of international institutions] has to reflect the reality of the world. Second, there must be a recognition that ongoing dialogue is more important than the creation of new institutions. And because ultimately the regulation that is going to ensure [financial stability] is going to be on a national basis, we have to ensure that the national reforms complement each other. No country is going to submit its banks or its institutions to an international regulator, but the regulatory community has to ensure that national regulations and national transparency conform to an international standard.

FP: How much does this summit matter, given that U.S. President George W. Bush is leaving office in January? How can any decisions be made without knowing whether there will be buy-in from the next administration?

PM: I dont think it will [distract from the summit]. I think everyone will take this very seriously because the problem is very serious. There will be, I'm sure -- either at the table or certainly behind the scenes -- representatives of Obama's potential government. I think it's a very good thing theyre not waiting [to hold the summit].

FP: What advice would you offer President-elect Obama?

PM: He has a number of priorities. First will be fixing the ongoing financial crisis and the lag time that any potential solutions will have. The second thing is a great desire by the rest of the world to see the U.S. president reach out. These two [challenges] come together hand in glove. We're dealing now with a global financial problem that cannot be solved by the United States alone, and I believe that the G-20 can be the linchpin that will make it all happen.

It is very important that we not ask the G-20 to do what it cant do. But what it can do is to include the reality of the world, meaning China, India. Establishing ongoing dialogue, which has been absent, is absolutely essential to making globalization work.


Seven Questions

Seven Questions: Kenneth Duberstein

A veteran White House insider tells Foreign Policy how the next president can hit the ground running.

As Americans go to the polls Tuesday, most everyone can agree on one thing: When the winner wakes up on Wednesday morning, the weight of the world will fall on his shoulders. With an economy in crisis, a military fully engaged in Iraq and Afghanistan, and a political transition looming, the United States is about to enter a vulnerable periodbetween one president and the nextwhen neither will fully hold the reins.

Both candidates have made their cases for a strong and quick start, should they be elected. But to learn the ins and outs of what makes a White House transition run smoothly, Foreign Policy's Elizabeth Dickinson spoke with Kenneth Duberstein, former chief of staff for Ronald Reagan. Duberstein, a longtime Republican who last week endorsed Democrat Barack Obama, warns that, with the world watching anxiously, the next president will have no margin for error.

Foreign Policy: As former chief of staff to President Ronald Reagan toward the end of his administration, what can you tell us about what the transition to George H.W. Bush's administration was like?

Kenneth Duberstein: The transition between Reagan and Bush was fundamentally sure-footed, hand in glove. People knew what was expected of them, and the handoff was smooth. Having said that, friendly takeovers are sometimes more difficult than hostile ones because people [working in the administration] anticipate that if a person of their own party stays as president, they have an inside shot to remaining in their jobs. President Reagan's direction was for me to send a letter to every political appointee asking for their resignation so that they would receive an acceptance letter signed by Reagan. We were sending the message that they were not to plan on staying past Jan. 20 by noon.

In the bigger picture, we appointed a transition team of several people in the White House to meet with senior Bush people 24 or 48 hours after the election. Any issue was overseen by this group, which I chaired, to make sure that everything went as smoothly as possible. The handoff is something that is viewed not just here in America, but throughout the world, so there cannot be any hiccups. It has to be smooth and sure.

During the transition, for example, President Reagan had a famous lunch with Mikhail Gorbachev on Governors Island in New York. We brought with us President-elect George H.W. Bush for a ceremonial passing of the baton. There were seven Americans and seven Soviets at this lunch. Theres a famous picture taken right after the lunch. Standing in front were Gorbachev, President Reagan, and President-elect Bush with the Statue of Liberty in the background, which signaled and symbolized to the world that the torch had been passed from Reagan to Bush even if there were a few weeks left in the Reagan presidency.

FP: With your own experience as a positive example, what stands out to you as an example of an ineffective transition? Why didnt it work?

KD: I think the transition between George H.W. Bush and President-elect Bill Clinton had some stumbles and some question marks raised about staffingpeople were not confirmed, or nominated, and there were major holes in the U.S. government.

What also sticks out is the ascension of Jimmy Carter after Jerry Ford, when Carter got off on such a bad footing with [House] Speaker Tip ONeill [and Carter was] not working closely with the leadership of his own party in Congress. One of the lessons that you take out of this is to smooth things not just within the administration but to plan your initial weeks in office so that the presidency begins the day after the election. You have to do the planning so that you can hit the ground running.

FP: What do you think the top five items on the president-elect's agenda will be during the upcoming transition?

KD: Certainly the president-elect must focus like a laser on an economic recovery package. Recognizing that the economy is the No. 1 issue during the campaign, he has to put together a program focused heavily on the economic package. He needs to do an awful lot of coordination, not just with Democrats but with Republicans.

He needs to put together a governing team that is not necessarily a campaign team, because in government, you make nice with your adversaries and your campaign tries to annihilate them -- different talents. And [he should be] signaling to the rest of the world that this is going to be different for America. We are going to talk to allies and adversaries as well.

But his real job is putting together a government and putting together initial programs that will dominate the initial months [of the presidency], signaling that while [George W.] Bush is still president until January 20, a new day is coming and here's where I view how to do business overseas. For example, the G-20 summit that is taking place in Washington [later this month] -- that is not a place the president-elect will attend because it is a Bush summit. But it is something he should monitor closely.

FP: Some transition teams work closely with the outgoing president's administration. How do you imagine George W. Bush's people will cooperate with the newly elected president?

KD: I think what President Bush has put into place, led by [White House Chief of Staff] Joshua Bolten, is not only forward-looking but calibrated the right way. In the time of transition, a time where America has troops in active combat in Iraq and Afghanistan, where the possibility of terrorist acts are always present, it is absolutely important that this transition be taken without a hitch. It has to be seamless. And while any new president will be tested, this is not a time that America can let down its guard.

I think President Bush and Josh Bolten will bend over backwards to do this right to protect [the United States]. [I would imagine] a transition meeting in the White House with the incoming president-elect hopefully before the end of this week.

FP: This year in particular, both candidates have distanced themselves substantially from President Bush. Is it awkward, in transitions such as these, to work with and ask for help from someone whom you have been criticizing for the last two years?

KD: We believe in peaceful transitions in government all in our history, not only in theory but in practice. We are one America. We only have one president at a time, and how you leave center stage is very important to the ultimate verdict on you.

FP: Last week you endorsed Sen. Barack Obama for the presidency. How have your fellow Republicans reacted to your announcement?

KD: I have been gratified with the overwhelmingly positive response from not simply Democrats but especially from so many Republicans who have shared with me their own personal journey towards deciding to vote for Sen. Obama. It has been a truly unbelievable outpouring. That doesnt mean there haven't been a few outliers, but the vast majority who have e-mailed or called me have said, "Thank you for doing the right thing."

FP: Some people have said that they see similarities in style and message between Sen. Obama and President Reagan. Do you think the two men are alike in any way?

KD: I think Sen. Obama has campaigned on hope, not fear; optimism, not negativity; on [a belief that] America's best days are yet ahead. [The Obama campaign has been] positive, upbeat, looking to the future, not simply the past. I think he has taken a page out of the Reagan campaign playbook.

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