The Italianate splendor of Washington’s National Building Museum had already been the backdrop for tumultuous political events this year when Senator Hillary Rodham Clinton stood among its colossal marble pillars to announce the end of her bid for the presidency. But this week it will play host to a supercharged brainstorming session when leaders and finance ministers from a score of major countries gather to talk about how to learn the lessons of the worst financial crisis since the Great Depression.
Expectations could not be greater: As US president-elect Barack Obama selects his team in preparation for the move to Washington, politicians and campaigners from around the world have called for a “new Bretton Woods,” a successor to the agreement that set up the postwar system of fixed exchange rates and open trade.
This weekend’s summit could be both a last hurrah for US President George W. Bush and the first, faltering steps towards a new world economy.
As if to underline the seriousness of the task facing delegates, the IMF — one of the two Washington-based institutions set up under the Bretton Woods agreement — forecast last week that next year would mark the first contraction among the world’s developed economies in more than half a century, with Britain by far the worst hit.
While Britain slides into a brutal recession, Prime Minister Gordon Brown has staked his leadership on playing a major role in the global efforts to tackle the crisis abroad.
Having chaired the IMF’s key decision-making committee, the IMFC, when he was chancellor of the exchequer, he knows all the movers and shakers, and has invested time in building relationships with the Indian Prime Minister Manmohan Singh, and Chinese Premier Wen Jiabao (溫家寶), as well as German Chancellor Angela Merkel and French President Nicolas Sarkozy.
Brown hopes this unlikely grouping, once joined by Obama, will sign up to a series of reforms to the world financial system.
“It’s not a progressive alliance, but it could deliver a progressive agenda,” a London insider said.
Britain would like to see the G8 group of rich economies expanded or superseded, as developing countries play an increasingly important role in decision-making; and a beefed-up IMF given powers to warn about pending financial emergencies.
Obama’s views about how the world economy should be managed are as yet unclear. He alarmed free traders by making protectionist remarks early in his campaign, and has said he wants to renegotiate NAFTA, the US trade agreement with Canada and Mexico, and penalize firms that outsource jobs.
That sounds more like the anti-liberalization stance of Italian Finance Minister Giulio Tremonti, who hopes to use the Italian leadership of the G8 next year to forge a Bretton Woods II, than Brown’s more cautious approach.
Obama has also taken a radical stance on increasing the power of trade unions. With Congress on the warpath over Wall Street bonuses even before the Democrats increased their majority last week, there is growing grassroots pressure in the US for radical action to curb the power of financial giants.
That could leave Brown, with his record as a cheerleader for unfettered financial markets and “light touch” regulation, looking more like a representative of the old guard than a champion of change.
Lord Eatwell, professor of financial policy at Cambridge University, says the principles so far sketched by Brown, including better transparency and disclosure by financial firms, suggest he is still wedded to the received wisdom of recent decades — that unleashing the markets will provide the answers.
“In terms of what they’ve already got on the table, it’s about transparency, and disclosure. All these things say the market will do it,” Eatwell said.
“There is a mis-analysis, because the problem is not transparency, it is complexity. If you look at a standard CDS [credit default swap] contract, there will be 150 pages of information that goes with it,” he said.
He believes individual firms are not in a position to measure the risk of the financial instruments they hold in their portfolios because risk is a system-wide phenomenon. Just as a homeowner cannot assess the probability that demand for housing suddenly dries up, leaving them unable to sell their property, a bank, hedge fund or insurer cannot measure the threat that the market for the complex securities they are holding simply evaporates.
Given the dramatic impact it can have when these judgments about risk go wrong, he said regulators must test the riskiness of the system as a whole.
Another area where Brown may be left looking flat-footed by Obama is calls for an international crackdown on tax havens, where some of the more controversial financial instruments involved in the crisis have been based.
The Italians are keen to bring tax havens such as Lichtenstein and the Cayman Islands to heel, and Obama is likely to support such moves. But with many tax havens under UK jurisdiction, Britain has been skeptical about changing the rules.
There is concern within the Obama camp about the summit, which was the idea of the Bush White House.
“The UK is throwing cold water on a lot of the more imaginative proposals and the thing that makes me nervous is that the US is a lame duck with nothing to contribute,” one leading Democrat insider said.
British Trades Union Congress (TUC) general-secretary Brendan Barber has been lobbying Brown in the hope that he will sign up to a more radical package.
High-flown notions of redrawing the rules of the world financial system may seem very distant from the day-to-day concerns of workers in the UK, but Adam Lent, the TUC’s head of social policy, says the international context is critical for framing Britain’s response to recession.
“We have to find a global way forward because if you’re serious about taking a state-led approach to this problem, and essentially using the state to reflate the economy, that has to be done in the context of a global environment,” Lent said.
The unions are just one part of a broad-based coalition of anti-poverty campaigners, left-wingers and non-governmental organizations from around the world, which believe the seriousness of the crisis has created a once-in-a-lifetime opportunity to re-shape the world economy.
They would like to see an end to the “Washington consensus” — the cocktail of privatization and free market reforms imposed by the Bretton Woods institutions on countries forced to turn to them for help. Instead of strengthening the IMF, many would like to see it abolished.
The contrast between such radical proposals and Brown’s milder suggestions demonstrates just how difficult it will be to win agreement at the weekend summit to anything but a timetable for further meetings. And with Obama still waiting in the wings, many believe the less agreed the better.
Neal Lawson, of the London-based left-of-center pressure group Compass, said: “Things are moving so fast on a daily basis that I want to get people to step back and see that the repercussions of this are going to last decades, and this is an opportunity to say, ‘What sort of world do we want to live in in 30 years time, and how do we work back from that?’”
But Eatwell fears that, unlike the Bretton Woods conference, there is no overarching intellectual driving force.
“[John Maynard] Keynes particularly made the intellectual running, but White [Harry Dexter White, of the US Treasury] agreed with him, so they had an intellectual framework,” he said. “That’s the great problem: We’re going into this with [former US president] Herbert Hoover’s intellectual framework.”
And not everyone accepts the need for change at all.
Speaking at a House of Lords seminar to discuss the financial crisis, former Conservative chancellor Nigel Lawson, said of demands for a new Bretton Woods: “That’s absolute claptrap. The French are always calling for it and you just have to let it blow over. Take no notice.”
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