An epitaph for Bretton Woods

More than 300 economists, policymakers and academics, and a smattering of the politicians who presided over the events leading to the great crash of 2007-8, met up over the weekend at an historic location.

The conference was sponsored by the Institute for New Economic Thinking, which was set up in 2009, by George Soros one of the world’s most notorious speculators.

In 1944, at the same Mount Washington Resort in Bretton Woods, the world’s financial leaders thrashed out the architecture of a new order for the world economy to replace the one shattered by the Great Depression and World War II.

They succeeded in creating monetary agreements between nations and organisational arrangements to handle emergency funding that would enable capitalism to set out on the growth path once again.

Last weekend’s aim was to consider whether the international order remained fit for purpose ahead of the annual spring meetings of the International Monetary Fund (IMF) – one of the world level agencies set up following the 1944 gathering.

In summing up the results, Prof Justin O’Brien, director of the Centre for Law, Markets and Regulation at the University of New South Wales, asked the key question, and answered it:

Following the catastrophic losses associated with the global financial crisis, do policymakers have either the vision or the tools to manage the politics of austerity? The unambiguous answer was no.

The problem is that in those 67 years since Bretton Woods, capitalist corporations and a global web of financial institutions have outgrown the system of nation-states that came into existence as the result of earlier phases of social, economic and political evolution.

In O’Brien’s wordy assessment:

The crisis, speaker after speaker confirmed, was the outworking of hubris, delusion, commitment to flawed ideological constructs and inattention to history. Moreover, the policy response has legitimated socialised losses on a scale unimagined by the architects of the Bretton Woods system. It has amplified the moral hazard associated with protecting a banking industry addicted to unsustainable and undesirable leverage.

Deemed too big, too interconnected and too complex to unravel without causing systemic failure, banking has emerged as the sole winner from a crisis its funding model helped to cause. Somewhat paradoxically the banking sector has become even more concentrated, making it all but impossible for regulators to control. More perniciously, the sector has a vested interest in curtailing the co-ordination necessary to engineer meaningful change, particularly in the United States but also in Europe, now the epicentre of the financial crisis.

The complexity of the deeply integrated European and North American banks demonstrates the failure of regional and global institutions of power, flawed harmonisation agendas and weaknesses of national regulation. Wariness in advocating radical restructuring risks privileging the symbolic over the substantive. As Andrew Sheng, a senior adviser to the China Banking Regulatory Commission put it, advocating piecemeal ad hoc reform overseen by a fragmented system of national regulators is ‘like asking pygmies to hold down giants’.

Gordon Brown, who, as British chancellor was amongst the greatest enthusiasts for the financiers’ rise to power, claims that "we didn't understand just how entangled things were". This is nonsense. Many warned about the consequences of creating a financial system driven by investment banks and exotic 'products'. New Labour was just happy to rake in the tax proceeds to finance its social programmes.

Like fish in the sea, unaware of the water they live in, these academics and policy-makers breathe the air of capitalism. They have had their day. The 2011 version of Bretton Woods was effectively an epitaph for a global capitalist system founded on debt. It falls to the mass of people to create a new 'architecture' in the shape of an economic system based on need and not profit.

Gerry Gold
Economics editor
www.aworldtowin.net

Time to cut the losses

In the last week, stock markets the world over have been showing the classic signs of bipolar disorder, but in the most concentrated form. Euphoric, manic, hysterical highs followed by the deepest depression. Much of it, say some of the commentators, is internally generated, the result of speculators feeding off each other’s panic.

But as everyone else knows, there are clear external causes. The soaring highs are the direct result of a renewed series of injections, by governments and central banks, of credit – the same stuff that the world’s financial system became addicted to and wholly dependent on during the “long boom”. It doesn’t help. Yesterday, the two largest Swiss banks UBS and Credit Suisse were obliged to seek new capital in a further attempt to prevent them turning into non-banks, ceasing to exist, becoming, as Monty Python had it, dead parrots. When the Swiss banks fall, there’s nowhere safe left for your money.

The stock market lows – a five-year retreat reached in the UK and back to the 1980s in Japan – are the result of an avalanche of indications that the recession is not only with us, but will last for years. Giant corporations are bankrupt, jobs falling off a cliff, house prices dropping like a stone. Even the price of oil has fallen back, as the speculators move their money elsewhere. China, which has powered the global economy, is cutting back and shutting down factories.

The Brown-led government, which has taken on the role of street-level pushers, are looking to raise the money that they are guaranteeing to the banks by issuing more debt to the investment markets. But there’s a limit to what can be raised. The rest will come from an assault on government spending, public services, the elimination of the legal guarantee for public sector pensions, and last but not least, any measures to deal with climate change – irrespective of Miliband the Younger’s pronouncement on an 80% emissions reduction by 2050.

Early signs of the brutal reality that will result came from the news that under Brown and Darling’s control, Northern Rock has been foreclosing, repossessing and evicting at double the rate of the rest of the industry, as detailed in Andrew's post on Wednesday. So much for the benefits of “nationalisation”.

Brown knows that the bankers’ bail-out won’t stop the rot, so he’s promoting a restructuring of the world’s economy, along the lines of the Bretton Woods arrangements that laid the basis for the post-war recovery and the boom years. The Financial Times says this is premature, adding:“Lest we forget, Mr Brown himself was in charge of the IMF’s ministerial steering committee for a large part of the past decade and yet signally failed to implement the ideas he is parading. During this time, it was repeatedly explained to him that every early warning system devised by the finest minds in international economics, including those at the fund, either predicts crises that never arrive or misses those that do.”

The paper of business is correct. The basis for restoring stability after a decade and a half of the Great Depression wasn’t Keynes’s proposals, but the massive destruction of surplus productive capacity and human lives during the second world war.

A much easier, less destructive way out of the mess would be to cut the losses, admit the capitalist system is bankrupt and make the transition to a new kind of economy altogether. One based on not-for-profit production, social ownership, self-management, planned production for need, distributed via an intelligent market informed by democratic processes and expressed preferences. That’s what we will be discussing tomorrow at the Stand Up for Your Rights festival. Be there!


adapted from www.aworldtowin.net