Ken Rogoff asks, “Has the moment come to replace the dollar?” His answer is: “Maybe not quite yet….but soon.” (His article, which I came across on Real Clear Markets, is for Project Syndicate, but it seems to have been posted in the The Daily Star of Lebanon, of all places, before it is available there.)

At current market exchange rates, the European Union is now larger economically than the US. New central and eastern European members are bringing enormous dynamism and flexibility. At the same time, the European Central Bank has gained considerable credibility from its handling of the global credit crisis. Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world’s two premier financial centers (London), the euro might start to look like a viable alternative to the dollar.

In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that “the dollar is our currency, but your problem.” And the dollar’s exalted global status has survived ever since, despite many episodes of neglect and abuse.

World currency standards have enormous inertia. The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars. But it could happen a lot faster this time. As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug.

I did a piece on the same subject for The Atlantic last May. The article goes into some of the advantages that the US has derived from the dollar’s reserve-currency status, and what is at stake if that should change.

The dollar’s status as the global currency confers more advantages on the United States and its citizens than you might think—advantages far beyond convenience for international travelers (though let us not underestimate that). The dollar’s popularity has moved real resources from the rest of the world to the United States. And on a much larger scale, through an economic sleight of hand in global financial markets, it has allowed the country to sustain an otherwise impossible standard of living. These wonderful tricks, unfortunately, may not work much longer. When they start to fail, as they eventually must, the dollar’s peculiar global role will suddenly become a focus of attention. You don’t know what you’ve got till it’s gone.

When the crisis in US and global financial markets started to unfold, so began the incantation of two default opinions. One: regulation is the answer and we must have more. Two: regulation is the problem and more would be worse. With all that chanting to be getting on with, neither choir has time to look at what has happened. Which is as well: the details might call for some thought.

I am a pro-market type, whose stock-in-trade is to warn of the unintended consequences of hasty or excessive regulation. In the present case, however, we are badly served by our usual catechism. This time, elements of large-scale regulatory failure are indisputably at the centre of what has happened. If, for the sake of leaving our prejudices in peace, we deny the obvious, we bring our regard for markets into disrepute and have nothing to offer by way of an intelligent policy response.

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Struck by the near unanimity of the view that the Paulson blueprint is beside the point–something that Paul Krugman and the Wall Street Journal, for heaven’s sake, have been able to agree on–I attempt a limited defence in this column for National Journal (the link expires in a week). The document is not a waste of time, and I do not see it as a cynical political manoeuvre. Most of what the Treasury proposes actually makes sense, and it would be good to see the plan acted on. The problem is that the blueprint fails to ask the most pressing and important questions. As I noted two posts ago, it is more about form than content.

In 2005, my friend Moises Naim, the editor of Foreign Policy, published “Illicit: How Smugglers, Traffickers, and Copycats are Hijacking the Global Economy“–a unique and fascinating study of illicit trade in the new age of globalisation. National Geographic has made a TV documentary based on the book, and on Tuesday night it showed a preview in Washington. The film has some gripping footage. It is well done and I recommend you watch it. But television has a limited attention span and not much taste for complications, and I have to say I did not find the movie as stimulating as the book.

It does successfully dramatise some of the key ideas. The scale of illicit trade–which encompasses, to name a few, counterfeiting, money-laundering, illegal drugs, fake medicines, loose nukes, and illegal immigrants–is huge. The pattern of trade is complex, organised and extended. Traders large and small have been much faster and more adept at developing their networks than governments have been in interrupting them: borders empower the criminals, and disempower the authorities. Also, this is a story about disturbing synergies. Once you have a supply chain for counterfeit handbags, or bogus pharmaceuticals, you can use it for other things too. In that sense, at least, illicit globalisation is akin to a single multinational industry.

But there, I think, is where the film goes wrong. You can push that insight too far, and elide the differences between different kinds of illicit activity. The book is careful not to do that. The film, in contrast, develops this idea as its principal theme. It wants you to think that protecting intellectual property is almost a national security issue–that buying a fake Ralph Lauren shirt is only one step removed from facilitating nuclear terrorism. This is a view that the US Chamber of Commerce (which supported the production) doubtless finds to its liking, but it is not the right way to think about the issue.

In the Q&A after the showing, Moises said (as he emphasises in the book) that governments need to prioritise if they are to get a grip on the problem. For instance, he favours, as I do, drug legalisation. The film does not go there. It never really gets beyond the idea that illegal drugs equals counterfeit handbags equals loose nukes equals poisons in medicine bottles.

As I watched the movie I found myself thinking along these lines: suppose, just for the sake of argument, that the world had liberal trade, an enlightened policy of decriminalisation of illicit drugs, and an equitable dispensation on global intellectual property rights. What kind of inroads against illicit trade would you make, merely by doing the right things in those areas? And think of the resources those changes would free up to address the issues–loose nukes, among them–that remained.

The new Treasury blueprint for reforming financial regulation is not really a blueprint at all. (The full document is here; or see a Treasury summary of it here.) It says some sensible things and has some good ideas, but for the most part it is an agenda for discussion rather than a detailed plan. Given that the Treasury has been working on this thing at least since March 2007, it is surprisingly thin.

Moreover, it is concerned exclusively with the structure of the regulatory system. I think that getting this right is more important than Paul Krugman does—he calls this the Dilbert strategy—but Paul is surely right to complain that a better structure will get you only so far. It is a question of form and content. What the rules say matters more than which regulators are responsible for enforcing them, and the so-called blueprint does not go into that.

For instance, the document calls in the short term for the Federal Reserve to “continue to write regulations implementing national mortgage lending laws”. It also “recommends clarification and enhancement of the enforcement authority over these laws”. Fine. But what should these laws actually say? We are told only that they “should ensure adequate consumer protections”. No doubt; so far as I am aware, nobody is calling for inadequate protections. The question is, what does “adequate” demand. Up to now, the Fed has presumably judged the existing standards—embodied mainly in the Truth in Lending Act—to be all right. (When he was Fed chairman, Alan Greenspan applauded the explosion of subprime mortgage lending, saying it let people buy a home who would otherwise have been unable to.)

In the long term, the report envisages a structure based on what it calls an objective-based approach. This means dividing up the regulatory workload by broad tasks, rather by types of institutions covered. Today’s approach segregates banking, insurance, securities and futures under different (overlapping and cross-cutting) systems of regulation—an idea that last made sense decades ago. The Treasury urges instead a three-part division of responsibilities. There would be a “market stability regulator”—the Fed—whose job would be to gather information and monitor risks across the whole financial system. There would also be a single “prudential regulator”, concerned with capital adequacy, investment limits, and risk management—with a remit confined to firms with explicit federal guarantees. Finally there would be a “business conduct regulator”, operating across all types of financial firms (and absorbing the SEC), to protect consumers and investors.

This basic structure makes much more sense than the present chaotic array of industry-focused regulators. But one big gap—even at this level of generality—is obvious. On my reading of this document, the Fed is seen mainly as a system-wide information gatherer, not a rule writer or rule enforcer. True, it would have “the responsibility and authority to…take corrective actions when necessary”. But what does that mean? I think it means, provide liquidity at times of stress—which it does already. The document does not explicitly entertain the idea that the Fed would write and enforce new rules to make stability easier to achieve. The prudential regulator would do that, you might argue–but only for firms with federal guarantees. That narrow remit would have excluded Bear Stearns, for instance. Investment banks and hedge funds will not be covered. And the business conduct regulator does not fill this gap either: it is concerned with consumer and investor protection, not financial safety and soundness.

It seems to me obvious that prudential regulation ought to extend beyond firms with “explicit government guarantees”. At the very least, delete “explicit”. We are witnessing right now how the collapse of firms without explicit guarantees may nonetheless pose a threat to the integrity of the whole financial system. Evidently, it is a threat that the Fed and the Treasury have recognized—and that is why the umbrella of implicit guarantees continues to expand. There must be a regulatory quid pro quo for that, just as for the explicit kind.

Last week I berated the presidential candidates for ignoring the US financial meltdown. I withdraw that charge: all three have now given speeches on the subject. Whether they have advanced the discussion is another matter.

As always, Barack Obama and Hillary Clinton are saying much the same thing and quarrelling over little differences. Both blame deregulation for the mess and call vaguely for it to be reversed. Both seek mortgage restructurings through persuasion and subsidies. Mrs Clinton gestured towards a bolder approach by saying the Federal Housing Administration should “stand ready” to buy and write down bad mortgages – but stopped short of calling for that right now, saying an expert working group should think about it first.

John McCain, also conforming to type, said it is not the job of government to bail out the imprudent, whether banks or borrowers. He too is for voluntary restructurings. He rightly says banks need more capital, but proposes to achieve this not with stronger regulation but “by removing regulatory, accounting and tax impediments”. Even Mr McCain, though, is not opposed to all new regulation: he proposes closer supervision of mortgage originators, for instance.

The remainder of this column can be read here. Please post comments below.