10.19.08
Wanted: a new financial order
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Globe and Mail October 18, 2008
Wanted: a new financial order
Those rescuing the system had role in its collapse
Doug Saunders
Brussels — A week ago, French President Nicolas Sarkozy and German
Chancellor Angela Merkel found themselves strolling together through the
cobble-stoned streets of Colombey-les-Deux-Églises, a tiny village in the
northeast of France, where they were attending a war-memorial ceremony.
The town is known as a place where French leaders, from the time of Charles
de Gaulle, have gone to escape the world and restore their energy. There was
much retreating and restoring to be done last Saturday: The previous day,
their finance ministers had rushed home early from a Washington crisis
meeting after stock markets had crashed dramatically and expensive national
schemes to restore the credit system had failed.
None of the patchwork of plans appeared to work and the world economy was
threatening to seize up. A few hours earlier, the head of the International
Monetary Fund — a Frenchman — had declared that the world financial system
was “on the brink of systemic meltdown.” Both leaders had been on the phone
with British Prime Minister Gordon Brown, and they had agreed to follow his
plan for governments to purchase major stakes in their countries’ failing
banks, at huge expense. With that done, anything seemed possible.
It was during their stroll, and over lunch afterward, that these two
often-feuding leaders arrived at another conclusion: Nothing would be truly
fixed, they believed, until there was a new world financial system in place,
a new economic watchdog supervising the world’s economies.
Enlarge Image
A picture from the U.S. National Archives released by the International
Monetary Fund show U.S. Secretary of the Treasury Henry Morgenthau welcoming
delegates during the opening meeting of the Bretton Woods Conference. (U.S.
National Archives/AFP/Getty Images)
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That was a view that had been pushed strongly by Mr. Brown, in a memo that
he had begun circulating among associates and leaders, and it agreed, on the
surface, with something similar to what Mr. Sarkozy had been saying for
weeks: That this was an unprecedented global crisis, beyond the scope or
powers of any national government.
The next step, they agreed, would have to involve the whole world, and would
require rewriting the rulebook of global capitalism.
With that lunch, Europe had reached a consensus, at least superficially, on
a solution that had not been attempted in 64 years: a major global meeting
that would attempt to redesign the world-finance system. It was an
acknowledgment, at a high level, that with the current crisis, the entire
postwar economic system may have come to an end. What comes next will be a
matter of heated disagreement.
By Tuesday morning, the Americans were on board, at least as far as
attending the proposed meeting — expected to be held in New York shortly
after the Nov. 4 presidential election. Prime Minister Stephen Harper, fresh
from his re-election, said Friday he also supports holding the meeting. All
the G8 industrialized nations have agreed to attend, at least on paper, and
it is expected that China, Brazil and India will take part.
While there’s no consensus on what the new financial order should be and
there are signs of deeply divergent views, these countries appear at least
willing to talk about a new international order at a meeting the three
European leaders are calling Bretton Woods II, after the 1944 meeting that
started it all.
“Merkel became convinced at Colombey that Brown and Sarkozy were correct
that the whole postwar system of finance does not work any more, and
something new will have to take its place,” said a European Union official
involved with the talks.
Saturday morning, the Europeans will try to take Washington a step further.
Leaving early from the Montreal summit with the Canadian government, Mr.
Sarkozy and European Union Commission president José Manuel Barroso will fly
to Camp David to sit down with President George W. Bush and try to persuade
him to support Mr. Brown’s proposals to create a new set of international
institutions.
What they will be trying to sell is a seven-page document that Mr. Brown
first made public on Wednesday morning. It proposes a set of organizations —
a “new international financial architecture for the global age” — that will
monitor risks in the financial system and provide an early-warning system;
determine global standards of regulation; supervise international
corporations in their cross-border activities, protect markets from
excessive activities of speculators; stamp out major conflicts of interest
and set standards for pay and bonuses; internationalize accounting
standards, and provide transparency in complex financial transactions.
Given these sizable goals, the encounter with Mr. Bush may be the Europeans’
least victorious moment: Aides to Mr. Bush said last night that he is not
interested in a new international organization, would prefer to have debt
and finance overseen by national bodies, and does not even want to fix a
date for the meeting. Other Americans, notably Treasury Secretary Henry
Paulson, are said to be more receptive: After all, it was Gordon Brown’s
bank-buying scheme that tamed the market crash after Mr. Paulson adopted it
in the U.S. on Tuesday, at a cost of $250-billion.
“There’s generally agreement that the rules used worldwide in the banking
and financial system have probably to be changed,” says Philippe Waechter, a
world-finance expert who is head of research for the French firm Natixis
Asset Management.
What exactly has to be changed, though, is a hugely contentious matter.
In 1944, while tens of thousands of soldiers were still dying in Europe’s
forests and villages, another era came to an end. Since the beginning of the
First World War, the world’s economy, which previously had been fluid, open
and international, had become divided and segregated along national lines.
This nationalism, protectionism and currency isolation had deepened with the
1930s Depression, and leaders of Britain and the United States feared that
this would prove economically fatal in the postwar years.
John Maynard Keynes, the British economist, called for a major meeting of
world leaders — to be held a few days after the D-Day landings — at the
Mount Washington resort hotel in the mountain ski resort of Bretton Woods,
N.H. The gathering was known as the United Nations Monetary and Financial
Conference, although the United Nations did not yet exist.
Representatives of Winston Churchill, Franklin Roosevelt, Joseph Stalin,
along with Mr. Keynes and 700 officials from 44 nations, gathered in
Atlantic City, N.J. on June 15 and then took the train to New Hampshire and
met for 22 days — a far more leisurely pace than anything that will be held
this year.
They were there to address a burning problem raised by Mr. Keynes: If, when
the war ended, European recovery and rebuilding was to happen in any
meaningful way, there would have to be free flows of capital and investment
between borders, and currencies would have to be able to be exchanged for
one another. No longer could nations act on their own; they would have to be
sending capital across borders, often large amounts of it.
Over cocktails and steak dinners, the leaders built the architecture of the
modern financial world: the International Monetary Fund, which provides
loans to rescue countries in financial trouble; the body known as the World
Bank, which finances the rebuilding of troubled economies, and the
institution that became the World Trade Organization, designed to open
borders and break down trade barriers.
Bretton Woods began a six-decade process of the de-politicization of money:
In ever more dramatic ways, government and finance became separate spheres,
and banking became a self-contained, increasingly unregulated world of its
own. A flood of savings from the developing world provided banks with huge
pools of money they could use to devise new profit-making instruments, free
from interference.
Until this week, that is, when government and money came crashing back into
one another. Suddenly, governments are the major providers of loans, and the
major shareholders in banks, and the ability to keep the money flowing is
beyond the authority of any one country. The idea that central banks can
quietly stick to keeping inflation at bay is gone. Once again, we are aiming
for the prevention of catastrophes.
On Monday, Mr. Brown arrived at a meeting of the 15 countries that have the
euro as their currency and laid out, behind closed doors, that vague but
sweeping set of proposals he would make public two days later.
“We now have global financial markets, global corporations, global financial
flows,” he told them. “But what we do not have is anything other than
national and regional regulation and supervision. We need a global way of
supervising our financial system.”
The idea became surprisingly popular in Brussels on that day, partly because
Mr. Brown’s vagueness turned his seven-page plan into something of a
Rorschach test on which could be projected each country’s economic
fantasies. Italian President Silvio Berlusconi talked about a world without
the dollar, where the euro might become the reserve currency.
The otherwise conservative Mr. Sarkozy declared in a grandiose speech that
“we need to found a new capitalism, based on values that put finance at the
service of companies and citizens, and not the reverse.” Such lines play
very well in France, but are not likely to win any high-fives from Mr. Bush
this morning in Washington.
Before a meeting date could even be set, the leaders squabbled over who had
invented the idea. Mr. Sarkozy, through his aides, make it known that he had
been proposing since Sept. 23 that a new global regulatory system be built.
Mr. Brown, in turn, had his aides point out that in January of 2007 he had
argued that international finance regulation was “urgently in need of
modernization and reform.”
All of this sounded a bit rich to a community that had watched these
European leaders, notably Mr. Brown as Britain’s finance minister in the
late 1990s, participate in a deregulation and neglect of the financial
system that had allowed the complex network of mortgage-backed debt
instruments to spiral out of control and destroy the debt-burdened banking
system.