An Important Holidays Wish: May An Intelligen​t Reform Be Under the Christmas Tree for the Bretton Woods Institutio​ns

A Wish for the Holidays!  For Your Entertainment (FYE) ;+)   “Today the IMF and the World Bank are much larger institutions, with a worldwide membership of 185 countries, a much larger staff and 24 executive directors each. Many of these directors answer to large bureaucracies at home, which spend their time reading Board papers, writing related memos for their upper-ranking echelons, and convening meetings with peer officials of foreign administrations. The Finance Ministers rely faithfully on the work of their own civil servants, and civil servants happily advise their own ministers on how best to exert their leadership. This arrangement has made, however, for an increasing bureaucratization of international decision making about the IMF and the World Bank. Thus, reports on quota issues prepared by the IMF got stuck in the executive board, where most board members now have little delegated authority from their own capitals, and are themselves mid-ranking officials in their national administrations, with little appetite for risk-taking or brave decisions. Their bureaucracies at home, in turn, have little interest in pursuing a “grand vision” or in striking a “grand bargain,” beyond, of course, the strict requirements of their respective administrative obligations. Not surprisingly, this system regularly short-circuits when there are political decisions to be made that go beyond the technicalities of the matter at hand. In fact, such a system does not adequately differentiate between operational decisions in the purview of national civil servants and political decisions, which should squarely fall on the shoulders of elected politicians. This spurious decision-making mechanism is exactly what has driven the recent debate on IMF reform and what appears to be driving the current process led by the G-20. The G-20 countries decided to engage at their highest levels in the reform of the Bretton Woods Institutions when, last November, their leaders convened in Washington. However, following that same meeting, we have witnessed the establishment of a number of committees and working groups comprised almost invariably of the same officials that were behind the previous, and not very productive, discussions on IMF reform. There is, thus, a clear concern that the G-20 process may not deliver on its expectations, not unless finance ministers and government leaders are willing to roll up their sleeves and genuinely take on the politics involved. Whether or not that will be the case, we will have to wait until the next G-20 Leaders Summit in April to know for sure.”   BUT:   “There are three primary approaches to viewing and understanding the global financial system. The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labelled as the Washington Consensus. This view is challenged by a social democratic front which advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution. Examples include slowing down the rate of financial transactions, or enforcing regulations on the behaviour of private firms. Outside of this contention of authority and the individual, neoMarxists are highly critical of the modern financial system in that it promotes inequality between state players, particularly holding the view that the political North abuse the financial system to exercise control of developing countries’ economies.”   “The first thing to note is that times have changed. Whatever resistance on the part of the elites to sharing power, in many cases it has diminished because the poor have already staked out a large amount of the assets. Take the example of my native Peru. Fifty years ago, private companies handled all of our urban transport needs, but today, about 80% of that transport consists of extralegal buses and taxis. In other words, what the rich haven’t given to the poor, the poor have simply taken over. My institute actually tries to spread awareness among the elites about their loss of control over markets and their limited access to consumers. The most powerful group of consumers in any developing country nowadays is from the extralegal sector—people who do not respect the law. The elites have every interest in establishing a standard legal system because that way they will have the chance to defend themselves in the face of their enormous losses.”   “Most developing countries must seek solutions to their current problems internally. There are figures indicating that most of the resources that are necessary for developing countries exist within the countries themselves. For example, my institute has produced figures indicating that worldwide, the excluded or the poor in developing countries have over 40 times more assets than all World Bank loans since its inception. And they have 50 to 60 times more assets than all foreign aid given by developed countries since the end of the Second World War. Thus what developed countries can provide in terms of material resources or political resources is truly marginal. There is very little they can do aside from putting in conditionality and incentives into their aid and loans.”   “Leading financial journalist Martin Wolf has reported that all financial crises since 1971 have been preceded by large capital inflows into affected regions. While ever since the seventies there have been numerous calls from the global justice movement for a revamped international system to tackle the problem of unfettered capital flows, it wasn’t until late 2008 that this idea began to receive substantial support from leading politicians. On September 26, 2008, French President Nicolas Sarkozy, then also the President of the European Union, said, “We must rethink the financial system from scratch, as at Bretton Woods.” On October 13, 2008, British Prime Minister Gordon Brown  said world leaders must meet to agree to a new economic system.”   “However, Brown’s approach was quite different to the original Bretton Woods system, emphasising the continuation of globalization and free trade as opposed to a return to fixed exchange rates. There were tensions between Brown and Sarkozy, who argued that the “Anglo-Saxon” model of unrestrained markets had failed. However European leaders were united in calling for a “Bretton Woods II” summit to redesign the world’s financial architecture. President Bush was agreeable to the calls, and the resulting meeting was the 2008 G-20 Washington summit. International agreement was achieved for the common adoption of Keynesian fiscal stimulus  , an area where the US and China were to emerge as the worlds leading actors. Yet there was no substantial progress towards reforming the international financial system, and nor was there at the 2009 meeting of the World Economic Forum at Davos Despite this lack of results leaders continued to campaign for Bretton Woods II. Italian Economics Minister Giulio Tremonti said that Italy would use its 2009 G7 chairmanship to push for a “New Bretton Woods.” He had been critical of the U.S.’s response to the global financial crisis of 2008, and had suggested that the dollar may be superseded as the base currency of the Bretton Woods system. Choike, a portal organisation representing southern hemisphere NGOs, called for the establishment of “international permanent and binding mechanisms of control over capital flows” and as of March 2009 had achieved over 550 signatories from civil society organisations.”   ” March 2009 saw Gordon Brown continuing to advocate for reform and the granting of extended powers to international financial institutions like the IMF at the April G20 summit in London,  and was said to have president Obama’s support . Also during March 2009, in a speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People’s Bank of China came out in favour of Keynes’s idea of a centrally managed global reserve currency. Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes’s Bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma – the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries’ demand for reserve currency. Dr Zhou proposed a gradual move towards increased used of IMF Special Drawing Rights (SDRs) as a centrally managed global reserve currency  His proposal attracted much international attention. In a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou’s suggestion or a similar change to the international monetary system would be in the United States’ best interests as well as the rest of the world’s. Leaders meeting in April at the 2009 G-20 London summit agreed to allow $250 Billion of SDRs to be created by the IMF, to be distributed to all IMF members according to each countries voting rights. In the aftermath of the summit, Gordon Brown declared “the Washington Consensus is over”. However in a book published during September 2009, Professor Robert Skidelsky, an international expert on Keynesianism, argued it was still too early to say whether a new international monetary system was emerging. On Jan 27, in his opening address to the 2010 World Economic Forum in Davos, President Sarkozy repeated his call for a new Bretton Woods, and was met by wild applause by a sizeable proportion of the audience.”   “Another analysis, different from the mainstream explanation, is that the financial crisis is merely a symptom of another, deeper crisis, which is a systemic crisis of capitalism itself. Ravi Batra’s theory is that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes. He has also suggested that a “demand gap” related to differing wage and productivity growth explains deficit and debt dynamics important to stock market developments. John Bellamy Foster, a political economy analyst and editor of the Monthly Review, believes that the decrease in GDP growth rates since the early 1970s is due to increasing market saturation. John C. Bogle wrote during 2005 that a series of unresolved challenges face capitalism that have contributed to past financial crises and have not been sufficiently addressed:

Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long…They failed to ‘keep an eye on these geniuses’ to whom they had entrusted the responsibility of the management of America’s great corporations.

Echoing the central thesis of James Burnham’s 1941 seminal book, The Managerial Revolution, Bolge cites particular issues, including: that “Manager’s capitalism” has replaced “owner’s capitalism,” meaning management runs the firm for its benefit rather than for the shareholders, a variation on the principal–agent problem; the burgeoning executive compensation; the management of earnings, mainly a focus on share price rather than the creation of genuine value; and the failure of gatekeepers, including auditors, boards of directors, Wall Street analysts, and career politicians. An analysis conducted by Mark Roeder, a former executive at the Swiss-based UBS Bank, suggested that large scale momentum, or The Big Mo “played a pivotal role” in the 2008-09 global financial crisis. Roeder suggested that “recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect. This has made the financial sector inherently unstable.” Robert Reich has attributed the current economic downturn to the stagnation of wages in the United States, particularly those of the hourly workers who comprise 80% of the workforce. His claim is that this stagnation forced the population to borrow in order to meet the cost of living.”

“The late-2000s financial crisis (often called the global recession, global financial crisis or the credit crunch) is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market had also suffered, resulting in numerous evictions, foreclosures and prolonged unemployment. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008. The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008 The collapse of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[4] Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and mid-2009. While many causes for the financial crisis have been suggested, with varying weight assigned by experts, the United States Senate issuing the Levin–Coburn Report found “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. The 1999 repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. In response to the financial crisis, both market-based and regulatory solutions have been implemented or are under consideration.”

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