Boom and Bust Capitalism Won't Be Fixed
By Staff News & Analysis - September 04, 2009

Finance ministers are now simply papering over cracks having squandered the opportunity to make real changes to the way the world economy works, argues Edmund Conway. There is a hideous hissing noise escaping from the world economy, the piercing sound of deflating ambitions. Any hopes that, in this crisis, we would find an opportunity to redesign our system of capitalism and finance are all but forlorn. Any prospect that the leading nations would overhaul either the banking system or the wider framework that ties our economies together, and so prevent another crisis, has pretty much disappeared. We know this because, this weekend, finance ministers from the G20 will meet in London (ahead of a heads-of-state summit in Pittsburgh), shake hands and breathe a collective sigh of relief that the worst of the crisis is over. The world has been informed that their main order of business will be to find some way of restraining bankers' pay – rather than concentrating on the infinitely more important question of how to ensure something this horrific never happens again. Some time in the past 12 months, there was a brief window in which we really could have improved capitalism: made it less prone to boom and bust, ensured that levels of inequality would yawn no further apart. We missed it. No one is talking – as they were back in April, ahead of the last G20 meeting – about creating a "new Bretton Woods". The idea that we need a wholesale rethinking of how the world's economic parts fit together, as happened in the wake of the Second World War, has been put on the shelf. This is a tragedy. The core problem over the past few decades was not bankers' greed or the complex financial instruments that enabled them to satisfy it. It was the immense pyramids of debt built up by the Anglo-Saxon half of the world, and the equally massive mountains of savings created in the other. – Telegraph

Dominant Social Theme: Serious times, serious actions.

Free-Market Analysis: We wondered what happened to the various nostrums floated by these international meetings, the G8 and G20. Last time we focused on the topic, we were pointing out that they didn't really seem either serious or likely to produce substantive change. There was a good deal of back and forth about the possibility of a new currency (see other story) that would be lodged within the IMF. But we came to believe that had little chance of succeeding because the IMF itself is mightily mistrusted by officials with many countries that have had dealings with it.

Conway has decided as we did, that financial solutions will not likely be forthcoming at these meetings. It is one thing to structure Bretton Woods after a five-year international war that left only one country standing. It is another to try to create such a scenario with eight or 20 players, all of whom have a good deal of say, or at least appear to.

The real difference between Conway's take on all this and ours is that we don't mourn the passing of the opportunity, as Conway calls it. We actually perceived it more as a threat than an opportunity, given that nothing resembling a gold standard was likely to emerge from the hodge-podge of negotiations. There was an exciting moment, too, when there was talk of a currency backed by a basked of commodities. This would have been a step in the right direction, albeit a small one. Anything that tethers fiat currency to a physical reality is a net positive. Baby steps …

The ideal solution, painful as it would be, is the full unraveling of the international financial system, which is evidently driven by the Anglo-American West. Only if the system itself comes tumbling down – actually we would argue that in many ways it did in 2008 – will there be a real chance at change. Right now, in our humble opinion, the system is in the process of trying to regenerate itself by puffing up the financial bubble once more. In this sense we believe Conway is premature since he pretty much throws in the towel when it comes to any further unraveling. He cries game over. We beg to differ. Along with a number of our hard-money betters we believe that both commercial real-estate and the derivatives market have yet to unwind. We look for what has been called a W-shaped recovery, or even an L-shaped one.

Conway may yet get his wish for a more serious series of solutions to the financial crisis – if only because we think he is wrong in accepting that the crisis has run its course. The crisis is one of fiat money, of the dollar itself, the world's reserve currency, which has nothing backing it. The Anglo-American axis pretty much prints as much as it wants when it wants, and the world-be-damned. The plethora of dollars hurts its owns citizens and damages economies around the world. Here's some more from Conway's point of view:

No one should have let Britain run such large deficits, and the Chinese such vast surpluses, over such a long period. And yet both got away with it, in what must count as the most momentous economic policy failure in modern history.

Those imbalances (the sterile word economists use) created the mountain of money that fed the frenzy of mortgage lending and eventually caused a financial crisis. Part of the problem was that the much-mythologised Bretton Woods agreement was a botched job: it failed to stipulate that the world's big exporters and savers – China and Germany, for instance – should be just as responsible for setting right these imbalances as the debtor nations.

In order for the world economy to recover, the big savers will have to start spending, just as governments and consumers in countries such as Britain will have to borrow less. It would be nice to assume that this will happen automatically. But given the disaster our misshapen international economic system has foisted on us, we can hardly rely on such an outcome.

Opportunities to overhaul national economic policies happen every 20 years or so. Opportunities to reshape the framework that binds nations – the rules that determine the flows of capital, the behaviour of exchange rates and monetary policy – happen even less frequently, usually after a war or a financial crisis.

The G20 summits were supposed to be one of the latter moments. But with each of the meetings, first in Washington last autumn, then in London in April and again this month, the bar has been quietly lowered. When coming up with a "Bretton Woods" package became patently unrealistic, it was replaced with "macro-prudential" rules to clamp down on banks' lending during boom times. These, too, have proven too difficult to agree, so the objective this time is tougher rules on bank bonuses.

Conway writes that imbalances created "a mountain of money that fed the frenzy of mortgage lending and eventually caused a financial crisis." In order to address the crisis, "savers will have to start spending and countries such as Britain will have to borrow less." It is this sort of general statement that makes us certain that most commentators in the mainstream media have nothing more to contribute to the financial conversation than confusion. The problem patently is not one of borrowing – it is one of money stuff itself.

And what does Conway conclude at the end of this essay? "Using bonus rules, salary caps and transaction taxes to prevent bankers rewarding themselves excessively is like trying to dam a river by lobbing in stones: it's far better to seal up the source." What Conway seems to want is an international agreement that the West will spend less and a way of enforcing it through some sort of global regulatory commitment.

After Thoughts

It is no wonder the average citizen in the West is confused about the world's financial situation. In the above analysis, we have seen that a respected columnist for a major newspaper can write an entire story – even so late in the day – that lays the blame on Western borrowing rather than on the Anglo-American money structure. The problem is not borrowing per se but fiat money, unmoored from any underlying asset. It is the ability to print boatloads of unnecessary money that led to the global boom and then the global bust. The solution is not to try to restrain the West from further money printing and "borrowing" but to recognize that a free-market in money is just as important as a free-market in any other commodity. A free-market gold and silver standard is the best option. Even better, it might be adopted spontaneously if the current model continues to fail.

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