Summary
The global financial situation is complex and wreathed in fog, but at least two things are clear.
- The financial crisis consists of fore-shocks before the main event.
- A new geopolitical order will mark the solution of this crisis; it lies far in the distance.
This post examines the grim details of item #2. The slowdown might continue until that new order emerges. But the conditions for a new order to emerge have not yet appeared, despite hopes for big results from the upcoming summit conference.
There will be a long series of posts with good news on this site, but that time has not yet come. But it will, eventually.
Expectations are high for a new “Bretton Woods” agreement
“A 21st-Century Bretton Woods“, Wall Street Journal, 25 October 2008 — “Success at the upcoming global finance summit hinges on China’s willingness to play role once taken by US.” This is too rich and complex to excerpt, and deserves to be read in full.
Among acts of international economic statesmanship, perhaps only the Marshall Plan has been invoked more frequently. There have been calls for a Marshall Plan for postcommunist eastern Europe, a Marshall Plan for Africa, a Marshall Plan for the inner cities. Indeed, anybody wanting Washington to splurge finds Marshall exceedingly convenient.
But Bretton Woods has a richer and more rarefied cachet. It was about reordering the international system, not just mobilizing money for an enlightened cause. And whereas the Marshall Plan was an example of the unilateralism for which the U.S. is known, the Bretton Woods conference was a triumph of multilateral coordination. It featured countries as diverse as Honduras, Liberia and the Philippines (Keynes spoke disdainfully of a “most monstrous monkey-house”), though it did not include South Korea or Japan, important voices in today’s economic summitry.
Both sides of the Bretton Woods achievement seem alluring today, yet both may be chimerical.
There are many other articles about this key moment in the crisis. Three especially good ones are described below. The first one goes to the heard of the mater.
A new geopolitical order lies far in the distance
“Globalisation and the new nationalism collide“, Philip Stephens, Financial Times, 23 October 2008 — Excerpt:
Amid the rubble of the world’s financial markets, we can catch sight of the foundations of a new international order. The big lesson of the crisis has been learnt: we cannot escape our mutual dependence. Global markets require multilateral rules.
Why am I so upbeat? Well, only this week that great internationalist President George W. Bush announced he was summoning world leaders to Washington to “advance common understanding” of the causes of the crash. In the words of the White House, these leaders will frame “a common set of principles for the reform of the regulatory and institutional regimes for the world’s financial sectors”. That is a bit of a mouthful, I know. But, hey, multilateralism is a long word too.
Some readers, I suspect, may be a little more sceptical about the outcome of what breathless European leaders have billed as the new Bretton Woods.
… The so-called Group of 20 may be a cumbersome group, but at least it holds up something of a mirror to the world. Many of these countries lent the rich nations the money with which they financed the boom. They deserve a say when it comes to any discussion of the lessons of the bust.
… The underlying problem here is a big disconnection between an analysis that sees all these governments agree that they must work together and a politics that drives them to guard jealously their national prerogatives. Economics and finance may be global, but politics is still local.
Step back from the maelstrom, and what the financial crisis and its aftermath (though I am not sure it is over) have done is to illuminate the two forces shaping the modern world. Globalisation now co-exists, and often collides, with rising nationalisms. These nationalisms come in different forms. On the one side there are the emerging powers – China, India and the rest – that have never really felt part of a multilateral order designed and dominated by the west. Why, at the moment when they are becoming great powers, should they surrender sovereignty to others?
Alongside them are the rich nations that, while speaking the language of mutual interest and dependency, are just as jealous of their present privileged positions. They are all for a more inclusive global order; just as long, that is, as the addition of new members to the club in no way dilutes their own authority.
By now, as you will have guessed, my optimism has been more or less drained. The financial crisis has described a much broader collision between the mutual dependence of globalisation and the rise of nationalisms. Thus far no one has owned up to the danger. The summit would be a success if the leaders did no more than reach the beginning of understanding.
Why this meeting will not result in a new agreement like Bretton Woods
This confuses the natural sequence of effects. The Bretton Woods Conference in July 1944 (formally the United Nations Monetary and Financial Conference) was one of the great successes of the post-WWII era. It rested on two great pillars which we lack today.
- Three decades of economic and geopolitical data and analysis of the modern (i.e., post-WWI) world, boiled down to a few concise and easily understood recommendations.
- Exhaustion and steely resolve of the world’s people following the twin disasters of the Great Depression and WWII.
Unfortunately we as yet have neither of these. The most we can expect are bold aspirations and timid actions.
Some point to the devastation in the financial markets and the near-certainty of a severe global recession. Certainly this must spur a quick resolution to the crisis. To use an analogy (reluctantly — as TE Lawrence said, analogies in human things are fudge) damage alone does bring about resolution of trends. The carnage during the first week of July 1863 — Vicksburg and Gettysburg — might have seemed to bring Civil War’s end in sight. But only two more years of intense fighting — spilling rivers of blood — could do so, in April 1865.
At some in the future an agreement like Bretton Woods will mark the end of the crisis. Unfortunately the time probably has not yet come for such powerful joint action by the global community of nations.
For more analysis of the opportunity offered by this summit, and why it probably will accomplish little
- “The need of the hour is Bretton Woods II“, FinanceAsia, 27 October 2008 — “Global leaders, led by Gordon Brown and Nicolas Sarkozy, are pushing for a reform of the international financial system.”
- “New world pragmatism“, Barry Eichengreen, op-ed in The Guardian, 24 October 20008 — “There will be no new financial world order on the scale of Bretton Woods in 1944. Here are some modest but important steps that leaders can take”
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- A solution to our financial crisis
Implications for the future, about structural changes to America and the world
- Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
- Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
- Another voice warning about the nationalization of AIG, 18 September 2008
- Another step away from our Constitutional system, with applause, 19 September 2008
- America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
- Legal experts discuss if the Paulson Plan is legal, 21 September 2008
- German Finance Minister Peer Steinbrück explains how the world is changing, 30 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- America is changing. Read some chillling words from a liberal economist, 2 October 2008
from WSJ “China isn’t going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system”
Do they actually have a choice? It seems that the imbalances created by this policy have grown to the point were exports will no longer be a driving force in the Chinese economy.
One could argue that it has now become a high risk policy to lend foreign buyers the money to buy Chinese goods. The possibility of foreign default on debt has become real (not a likely event but a plausible one).
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Fabius Maximus replies: China’s growth is largely domestic-driven — not export driven. As usual for early stage economies. (Almost every study on the subject confirms this; here is the latest: “How Dependent is the Chinese Economy on Exports and in What Sense has its Growth been Export-led?“, Dong He and Wenlang Zhang, Hong Kong Monetary, 14 October 2008)
Stevens remarks about the conflict between a global economy and national politics are very good. However, he frames the position so that it appears that national politics will get in the way of a necessary global order, whereas it could be the other way around. I dont see that we all must bow down to a global economy, with its cheap consumer products and decimation of the domestic labor force. I think we must find a way to say that national politics, or national well-being, comes first.
It is and remains hypocritical to want to help the ‘poor worker’ but to limit this help within a nationalist framework — but I don’t see any honest intellectual progress towards accepting the fact that hiring 10 very poor Chinese workers to do the work of 2 working poor US workers is the main way to reduce global poverty.
The Guardian article is mostly fluff until the excellent, modest, and likely proposals:
“focus on pragmatic reforms. Clamp down on regulatory arbitrage. Raise capital requirements. Make the regulatory regime less procyclical. Use taxes and regulation to drive transactions in credit default swaps and other derivative instruments into an organised exchange.”
Not a new Bretton Woods — the crisis is not yet so great, nor is there yet enough agreement on what must be done.
Scrapping all agro-subsidies in the US and Europe, both, would be a good start towards reducing gov’t debt and freeing up markets. Might even happen in an all Dem gov’t, willing to sacrifice the farm states (for a while).
China comprises 20% of the world population, nearly five times the US population. Regionally, China is respected, but distrust persists. Han Chinese tend to feel aloof to other peoples. Internally, they experience discord with ethnic minorities such as the Tibetans and Uyghurs. Customarily, China is preoccupied by its internal affairs.
Rulers of China have two perennial worries: 1) the unification problem; 2) unwieldiness under management. In modern times, Taiwan exemplifies China’s two-state problem; the Cultural Revolution, its most recent nightmare of instability. The clampdown at T’ienanmen was severe because China’s leadership was terrified of the young running wild again.
Chinese culture is rich. Its written language, in continuous use for 4000 years, is both remarkably logical and allusive. Chinese achievements in philosophy rival the Greeks. Chinese poetic achievement is likewise deep and wide. China’s meritocratic traditions are more than 2000 years old. This Confucian ethos produces results. In such a huge population, the best are very good indeed.
China has always been a fountain of enterprise, pragmatic and shrewd. For instance, the Chinese word for business is mai-mai, literally “buy-sell.” Since Nixon, China has been adept at arranging foreign commerce on its terms, repeatedly gaining concessions with the lure of its huge market. At the same time, China has actively developed new sources of raw materials in the third world, especially in Africa. Overseas Chinese retain strong links with their homeland.
Shaped by these characteristics, China will be playing a much more prominent role in the future.
Stefan, fwliw, I heartily concur. I have been waiting for them to begin to re-integrate underlying Confucian and Daoist principles that are still very much alive in their transmitted culture into their declared ethos and culture. The results could prove extraordinary in terms of science, politics, medicine, the arts – not to mention the military!
I am very much looking forward to see what transpires with these conferences. Will they tackle monetary reform? I hope so but doubt it. If they can begin to engineer a switch away from US$ and international ‘bankster’ hegemony, though, many other things might start working themselves out. Given the sorry tale of human history, a devastating war is more likely; but let us all hope we can avoid that this time around and build on some of the good foundation work provided by the two greatly devastating but progress-engendering wars of the last century.