Hyperbole has become a mainstay of discourse in the US. The upcoming financial summit set for November 15 in Washington DC is being wrapped in the Bretton Woods brand, when it appears to be a different sort of beast. As a Wall Street Journal story reminds us, Bretton Woods was a three week session among 44 countries to establish a new international financial regime. The weekend-long gathering, by contrast, has ambitious, but more limited aims. and is more likely to produce an agreement to agree, that is, a consensus on a few high level issues, and some sort of road map for future meetings and initiatives for developing policies and reforms.
But the Bretton Woods label gives the misleading impression that currencies will be a major focus of these talks, and that seems unlikely. The Europeans who pushed for this session, have their own agenda, and it is long enough to difficult to tackle in the allotted time. From Bloomberg (hat tip reader Matt D):
Sarkozy is leading the 27-nation EU’s push to respond by revamping a financial system established after World War II. Leaders from around the globe will meet Nov. 15 in Washington to assess the turmoil at the urging of the EU, which has floated ideas including more bank supervision, stricter regulation of hedge funds, new rules for credit-rating companies and changes at the International Monetary Fund.
Do you see currencies on the list? No. Now of course, this forum, once established, would be the logical place to discuss how to move from the dollar as reserve currency to a new regime. The Chinese appear eager to have currency arrangements included in the talks; it will be interesting to see how much success they have.
Now we separately have a breakdown in progress of what some call the Bretton Woods II regime, or what others less elegantly call global imbalances: that China and some other economies run very large surpluses (which also means they have high savings rates and low consumption) while other countries run large trade deficits, overconsume, and undersave (in our case, run up unsustainable levels of debt). Brad Setser tells us this system is on the ropes sooner than anyone expected, not because our friendly foreign creditors have quit buying our paper, but because trade volumes, and with it, China’s large trade surplus, appear to be contracting rapidly. So events may force a discussion of the role of the dollar sooner rather than later, but it still appears unlikely to get more than a token acknowledgement next month. (This isn’t as bad a move as one might think, even if the issue does turn out to be urgent. Negotiators advise dealing with easy issues first and saving difficult, divisive ones for last so as to build a spirit of cooperation and trust).
Jeff Frankel sets forth what might come out of the November talks:
The first thing to say about the calls for a “new Bretton Woods” is that they overreach, in the sense that it is very unlikely that any changes in the structure of the international monetary or financial system will or should, at this point in history, come out of multilateral discussions that are big enough to merit comparison with the first Bretton Woods. Certainly we are not talking about fixing exchange rates, as the 1944 meeting did….
Nevertheless, it is worth taking the opportunity to consider what changes – whether more ambitious or less — might be made at the multilateral level to improve the functioning of the system….
The International Monetary Fund has been given the task of outlining what a new Bretton Woods would look like – appropriate since the IMF is one of the original Bretton Woods institutions (along with the World Bank).
o An Early Warning system is almost certain to be high on its list. But it already developed early warning indicators, after the East Asia crisis of 1997-98, and they haven’t been much help.
o Now that the financial crisis is spreading to small economies like Iceland, transition economies in easternmost Europe, and poor countries like Pakistan, the IMF country rescue programs will get back in the saddle…
o There has been a loose one-year campaign to suggest guidelines for the operations of Sovereign Wealth Funds themselves. But benefits of the SWFs may be more widely appreciated now, in the context of the current crisis than previously.
o The IMF, just as all the multilateral economic institutions, has moved far too slowly to give added representation to the newly important developing countries such as China, Brazil, Korea, India and Mexico – representation at least in proportion to their economic role, to say nothing of population…
The G-8 has been increasingly handicapped in recent years by virtue of its obsolete membership.
o How can they discuss global current account imbalances or the need for exchange rate adjustments without China and Saudi Arabia at the table? It looked like the G-20 would supplant the G-7.
o The G-7 still retains some relevance, in its role as self-appointed steering committee for world governance. After all, this financial crisis did not start in the developing countries, as it did those of 1982, 1997 and 2001.
o But they will still have to start inviting China, Saudi Arabia, and any other country that they expect to help finance any of its plans.
The most probable substantive outcome from talk of the need for a bold new multilateral initiative is that there could be a “Basel III” to replace the “Basel II” agreement.
o It would make capital requirements on banks countercyclical, rather than what has turned out to be procyclical, i.e., destabilizing, under Basel II. (Ironically economists at the BIS in Basel probably deserve credit for being the observers, in addition to Charles Goodhart, who most accurately warned of the procyclicality before the crisis.)
o A Basel III could also replace the option of self-regulation of banks (under which they could choose their own Value At Risk models) with external regulation.
o International guidelines for guaranteeing deposits (possibly reinstating a ceiling, such as $100,000, after the crisis has passed) should perhaps be coordinated, to avoid flight of the sort that Ireland’s European partners experienced.
o A more ambitious reform would be to try to agree on guidelines to extend prudential regulation from international banks to non-bank financial institutions, since the latter were such a serious part of the problem in 2008 that many either failed or were bailed out, against all expectations.
o More radically, regulation of this sort not just agreed multilaterally but carried out multilaterally, rather than at the national level, by the BIS (which now includes major emerging market countries) or a new agency.
o The IMF, Financial Stability Forum, and other institutions will vie to lead the effort.
o Other radical proposals:
A securities transactions tax, harmonized internationally, to raise revenue in a way that satisfies the public’s understandable feeling that the financial sector, which created this financial crisis, should not benefit from the solution.
Regulation of certain derivatives, such as Credit Default Swaps.
But there is a danger that derivatives regulation could do more harm than good, e.g., a ban on futures markets or short-selling.
o At the other end of the spectrum, one should consider the possibility that doing nothing might in the end be better than undertaking fundamental reforms in the international financial system