Markets Cheer Calls to Overhaul Global Finance

Markets Cheer Calls to Overhaul Global Finance
By Bruce Crumley / Paris Monday, Oct. 20, 2008

In normal times, a French President's call for an overhaul of the world's financial system would cause eye-rolling and dyspepsia among the world's free market purists. But these are not normal times: on the weekend, U.S. President George W. Bush echoed Nicolas Sarkozy's push for an international summit to that end, and on Monday world markets seemed to endorse the initiative with a positive fillip. Though the specific goals, attendees, and even exact date and venue of such a meeting have yet to be determined, the mere agreement by U.S. and European leaders to update the Bretton Woods system — which has overseen international finance for the past 64 years — reaffirmed hopes that a collective, long-term approach to the worst economic crisis since the Great Depression was on the way.

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Alongside European Commission President José Manuel Barroso, Bush and Sarkozy called world leaders to join them at a monumental summit meeting in a U.S. city — probably at the United Nations in New York — shortly after the Nov. 4 U.S. presidential election. Following their huddle at Camp David Saturday, the trio issued a statement saying the extraordinary international congress would "review progress being made to address the current crisis and to seek agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future."

That language scarcely matches the drama of the world financial crisis, but it did at least contribute to the modest optimism with which markets have attacked a new week of trading. Japan's Nikkei index climbed 3.6%, Hong Kong's Hang Seng rose 5.3%, and South Korea's Kospi jumped for the first time in a week: a 2.3% hike inspired in part by a $130 billion government assistance plan for banks announced in Seoul on Sunday.

Europe's leading bourses also began stronger, with London's FTSE 100 1.67% higher nearing mid-day Monday, while Paris CAC 40 gained 1.46% and Frankfurt's DAX up .8%. Futures trading in the U.S. similarly pointed to 2.4% opening advance Monday on Wall Street, though that early action could change as a series of company earnings figures are released, giving investors a better idea of how quickly U.S. economic growth has slowed.

Fears of a serious economic decline or even recession in the U.S. and world-wide explain the deep losses markets experienced last week after initially reacting with euphoria to the rash of government efforts to prevent finance and banking systems from imploding. As the week closed out, the global outlook was simply confused, as European indices generally finished higher, the Dow slumped 1.4%, and Asia's national markets featured both gains and losses.

Despite Monday's mostly rosier mood, there were developments that could have given markets as much to choke on than cheer about. Over the weekend the heads of French savings bank Caisses d'Epargne were forced to resign following revelations that unauthorized derivatives trading last week produced a $810 million loss. On Sunday, meanwhile, the Netherlands said it would inject a further $13.5 billion into troubled finance company ING — another indication that European banks may not yet have entirely accounted for all the toxic debt they assumed.

Still, markets were more inclined to take heart in the international summit agreement Sarkozy had obtained from Bush. Despite that advance, questions remain how much the U.S. and its free-market fans will the more invasive regulatory approach that Europe seems to favor. Even as they face dire economic crisis, Americans are quicker than Continentals to distrust perceived market "socialism." Indeed, even Bush and Sarkozy seemed to clash Saturday in how each weighed the virtues of regulation against the liberty of markets.

Not that it seemed to matter. "The fact that these are two conservative politicians that business leaders feel they can trust had a lot of impact," says French economist Bernard Maris, who also thinks markets were comforted by the decision to hold the conference in the U.S. — with an eye to historical continuity with the 1944 conference in Bretton Woods, NH, that established the International Monetary Fund. But Maris also notes those same markets — whose boom years relied largely on minimalist regulation — should logically be freaking out at Sarkozy's calls to "moralize" finance and limit pay to the world's biggest earners. So why the calm?

"For now, markets are getting into life boats on the short-term imperative of saving their lives, and will work to restore 'good old days' rules once the economy is back on solid ground," Maris says. "There is a school of thought that the best way of doing nothing at all is to demand everything be changed — and what we've been hearing from Sarkozy and Bush has been totally counter to what they'd constantly maintained before." Perhaps for that reason, the new tone hasn't struck fear into the markets, but there are still plenty of grounds for volatility as further details are worked out.



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Call for a new Bretton Woods conference in order to design a new global financial system

It takes two
Bilateral talks between China and the US are the most likely way of solving the global financial crisis and reforming the IMF
Comments (8)

Harold James
guardian.co.uk, Friday 5 December 2008 14.30 GMT

The chaotic and costly international response to the world's current financial disorder has prompted Nicolas Sarkozy, Gordon Brown and German president Horst Köhler, a former head of the International Monetary Fund, to call for a new Bretton Woods conference in order to design a new global financial system. But such a demand depends on a clear understanding of what a new agreement might provide.
It is easy to see the appeal of scrapping today's global financial architecture, because there is obviously much that is broken. The existing institutions were looking increasingly irrelevant in normal times, and ineffective in times of crisis. Although the IMF delivered some gloomily accurate figures about the likely cost of the US housing fiasco, it played almost no role in addressing the current crisis. This was the first international financial crisis since the Bretton Woods conference of 1944 in which the Fund stood on the sidelines.
The major international actor, instead, has been the G7, a grouping dominated by medium-sized European states in which Asia's dynamic emerging economies – the current source of global savings – have no representation.
The Bretton Woods conference succeeded not because it assembled every state, or because the participants engaged in an extensive pow-wow. John Maynard Keynes, an architect of Bretton Woods, believed that the true lesson of the failures of the Depression-era 1930s lay precisely in the character of the large and chaotic 1933 London world economic conference. Keynes concluded that a really workable plan could be devised only at the insistence of "a single power or like-minded group of powers."
Keynes was basically right, but he should have added that it helps when one power can negotiate with one other power. In the past, the most effective financial diplomacy occurred bilaterally, between two powerful states that stood for different approaches to the international economy.
This was true of the preparations for the Bretton Woods meeting. Although there were 44 participating countries, only two really mattered, the UK and, above all, the US. The agreement was shaped by Anglo-American dialogue, with occasional mediation from France and Canada.
Bilateral talks subsequently remained the key to every major success of large-scale financial diplomacy. In the early 1970s, when the fixed exchange-rate regime came to an end, the IMF seemed to have outlived its function. Its articles of agreement were renegotiated by the US, which was looking for more flexibility, and France, which wanted something of the solidity and predictability of the old gold standard.
Later in the 1970s, European monetary relations were hopeless when France, Germany, and Britain tried to talk about them, but were straightened out when only France and Germany took part. In the mid-1980s, when wild exchange-rate swings produced calls for new trade protection measures, the US and Japan found a solution that involved exchange-rate stabilization.
So, what form should such bilateralism take today?
In terms of countries, the obvious new pair comprises the US, the world's largest debtor, and China, its greatest saver. In terms of themes, the conference would have to solve a new type of problem: how states should deal with the large flows of capital that over the past four decades have been mediated by the private sector.
Two alternative models seemed to work until 2008. On one side was the American model, with a variety of regulated banks, lightly regulated investment banks, and largely unregulated hedge funds managing the capital flows. On the other side was the Chinese solution, with increasingly costly reserve management giving way to activist sovereign wealth funds looking for strategic participation in investments abroad.
Both approaches were flawed – and liable to produce political controversy. The American model failed because banks proved to be highly vulnerable to panic once it became clear that sophisticated new financial instruments had formed a haystack spiked with sharp, dangerous, and indigestible losses. And, inevitably, today's big bailouts have been followed by a politically fraught discussion of which banks were rescued, and whose political interests were served. Already, there is a ferocious debate about the influence of Goldman Sachs on the US Treasury. Likewise, the very large European bailouts (totaling as much as 20% of GDP in Germany) have produced controversies about the distribution of costs.
Meanwhile, the Chinese solution gave rise to nationalist fears that sovereign wealth funds might be abused to seize strategically vital businesses or whole sectors of an economy.
The original inspiration behind the creation of the IMF was that a largely automatic and rule-governed body would be a less politicised way of stabilizing markets and expectations. That remains true today: managing temporary stakes in banks in need of recapitalisation, on behalf of large providers of capital (such as the Asian surplus countries), would put a neutral, depoliticised buffer between states and private-sector institutions.
The IMF was originally conceived in 1944 in a world without major private capital flows, one in which states undertook almost all international transactions. Extending its mission to include some private-sector rescues would recognize the preponderant role that markets now play. At the same time, the involvement of a rule-bound international agency would minimise the political poison associated with bank recapitalisations and currency interventions.
In cooperation with Project Syndicate, 2008.

http://www.guardian.co.uk/commentisfree/brettonwoods
http://www.guardian.co.uk/commentisfree/2008/dec/05/global-economy-us-china-imf