STAFF NEWS & ANALYSIS
Amid the Rubble of Global Finance, a Blueprint for Bretton Woods II
By - October 21, 2008

The international financial system is broken. An integrated set of reforms will be needed to achieve sustained economic growth and shared prosperity. The G8 leaders of Europe, Japan and the US have agreed on an emergency summit this autumn in New York to revamp the international system – a good idea, provided it initiates a wide-ranging set of changes rather than being a one-off meeting focused on market regulation. The G8 leaders are keen to start on regulation and that is understandable. Wall Street, the City of London and other financial centres ran wild with undercapitalized borrowing and lending stoked by over-the-top fees and bonuses. Alan Greenspan's Federal Reserve fed the financial bubble with rock-bottom interest rates and regulatory forbearance, when it had the chance to restrain it. And the derivatives market was allowed to become so vast and unwieldy that there is no clarity as to who owes what to whom in tens of trillions of dollars of credit default swaps and other derivatives. – UK Guardian

Dominant Social Theme: Here it comes. About time.

Free-Market Analysis: The leftist Guardian can't help itself of course. These plans have been circulating for months, for years, probably. Those behind them just needed one big, fat crisis. And now they have one. And they are licking their lips. Certainly Jeffrey Sachs is. One of the paper's clever young commentators, he has let the cat out of the bag. Presumably he had permission.

Using Sachs' helpful article, let's deconstruct the left's long sought globalist agenda, bearing in mind once again, that socialist solutions are being advanced to fix a problem caused by an anti-free-market banking monopoly that mostly operates under the umbrella or "color" of government.

Here, then, is an agenda for Bretton Woods II. First, we need to restructure global finance, based on an expanded system of capital adequacy standards, financial reporting, system-wide risk management, and new lender-of-last-resort capacities. Derivatives traders, hedge funds, and broker dealers would be brought under regulatory control. The IMF would be empowered to be a true global lender of last resort (as I urged a dozen years ago, warning of the threat of self-fulfilling panics). To make this possible, a small tax on financial transactions – a Tobin tax – would be implemented to expand the IMF's war chest in case of crisis and to fund other urgent international needs.

OK, we need capital adequacy, more financial reporting, system-wide risk management and a new lender of last resort. We've commented previously on the idiocy of all these fixes absent a central bank fix as well – as the central bank is at the heart of the problem. But what really flabbergasts us about Sachs' suggestion is the identify of a new lender of last resort – the IMF. No wonder the monetary elites are so upset over the latest IMF sex scandal. The last scandal was safely socked away and they were probably hoping to get at least a few months before the next one – just in time to make this widely hated and incompetent institution the backstop of the world's money supply. The insanity is only superseded by the arrogance. This truly redefines the definition of "failing upward."

Second, the new global financial structure should help to rescue the world from human-induced climate change. A straightforward tax on the carbon content of fossil fuels, levied by all countries, would do the job, and much better than the enormously cumbersome emission-trading system concocted and championed by the same financial engineers who brought us our current banking crisis. Most of the carbon-tax revenues would stay at home in each country, to help finance low-emission technologies. Some would be directed to finance three global public goods: research and development on sustainable energy; transfer of sustainable-energy technology to low-income countries; and climate-change adaptation.

Somehow, we expected this would be part of the equation. Global warming has recently been abandoned for "climate change" as parts of the world apparently seem to be cooling. (Much better to blather on about "climate change" than global warming because the climate ALWAYS changes. Safer certainly.) Who can argue about a carbon tax? Humankind absolutely produces carbon. Tax away!

Third, the World Bank should be refocused with clear goals, and accountability for their success. Specifically, the bank should have one overarching assignment: helping the poorest countries acheive the millennium development goals to reduce poverty, hunger and disease. The bank is poorly organised for such leadership today. Like any bureaucracy, it avoids being held accountable for measurable results. With a tighter focus on the MDGs, the bank should also be supported with much larger financial resources from new revenue sources (such as the Tobin tax), so that the bank can better help the poorest countries expand vital infrastructure (power, roads, water, sanitation and broadband networks).

Now comes the World Bank. Maybe those thinking of these things want to add a little levity to what has been a series of pretty grim weeks. But really, the documentation is everywhere. These agencies have failed miserably and now they are going to be re-jiggered and given tons more money? And the World Bank will do better this time round because? … Oh, it's the "tighter focus" that will do the trick. Hm-mm.

Fourth, the global trade agenda should be integrated with the finance, and environment objectives. The Doha trade round has failed because the world could not see any urgent reasons for its success. A trade agreement worthy of the effort would do two main things. Importantly, it would help the poorest countries to be more productive so that they can be full participants in the global trading system. "Aid for trade" would help these countries to build the skills, roads, bridges and clean power grids to support increased trade. In addition, global trade would promote environmental sustainability, to help enforce compliance with reduced carbon emissions and protection of endangered biodiversity.

Wow, it's not enough to call for the IMF, World Bank and a carbon tax as part of the regulatory fix; the sputtering grab bag of managed trade is also to be thrown back into the mix. Truly, the current financial crisis is the gift that keeps on giving. The world consensus on global warming went awry several years ago, as did the Doha round of world trade talks which ended in bickering and bureaucratic tears (literally). But here comes Mr. Crisis and whatever the leftist agents of the monetary elite couldn't ram through before, they'll try to incorporate now into their pretty new "framework."

It's not funny, but it's pretty damn bold. Before they are through, we wonder if the Eurocrats will try to append the much maligned EU Constitution as well. Hey, claim it is necessary to the world's further monetary functioning. Carbon is.

After Thoughts

We will close simply by noting gently (we try not to be too paranoid) that David Rockefeller of all people was instrumental in the initial Bretton Woods and in setting up the IMF and the World Bank. Now a candidate most closely identified with him and his colleagues in the US, Barack Obama, looks ready to win the next presidential election. Mr. Rockefeller is a very old man at this point, and we wish him well. But we are astounded at his tenacity and endurance.

Yes, indeed, "Rocky" has lived long enough, apparently, to see a redrawing of the financial map that he was so instrumental in drawing 50 years ago, or so. And now the man who looks to be the next president of the United States may soon be in a position to carry on his work. Despite the corrupt and incompetent track record of the IMF and World Bank, it's perfectly possible that Obama may sign on to their expanded role, especially if Bush leaves office with the matter still up in the air.

The one thing we are certain of, in all the upcoming palaver, is that the role of central banks will not be discussed, nor their endless, disastrous monetary stimulation that causes booms and busts in the first place. In fact, we'll bet that the role of central banks will be strengthened right along with the IMF and World Bank. Hey, if you're going to set up the next crisis, the one that will REALLY result in centralization, it helps to have all the firepower that you can get. You've heard of the Four Horsemen of the Apocalypse? Call them the Three Stooges of Further Globalization.

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