An epitaph for Bretton Woods

More than 300 economists, policymakers and academics, and a smattering of the politicians who presided over the events leading to the great crash of 2007-8, met up over the weekend at an historic location.

The conference was sponsored by the Institute for New Economic Thinking, which was set up in 2009, by George Soros one of the world’s most notorious speculators.

In 1944, at the same Mount Washington Resort in Bretton Woods, the world’s financial leaders thrashed out the architecture of a new order for the world economy to replace the one shattered by the Great Depression and World War II.

They succeeded in creating monetary agreements between nations and organisational arrangements to handle emergency funding that would enable capitalism to set out on the growth path once again.

Last weekend’s aim was to consider whether the international order remained fit for purpose ahead of the annual spring meetings of the International Monetary Fund (IMF) – one of the world level agencies set up following the 1944 gathering.

In summing up the results, Prof Justin O’Brien, director of the Centre for Law, Markets and Regulation at the University of New South Wales, asked the key question, and answered it:

“Following the catastrophic losses associated with the global financial crisis, do policymakers have either the vision or the tools to manage the politics of austerity? The unambiguous answer was no.”

The problem is that in those 67 years since Bretton Woods, capitalist corporations and a global web of financial institutions have outgrown the system of nation-states that came into existence as the result of earlier phases of social, economic and political evolution.

In O’Brien’s wordy assessment:

The crisis, speaker after speaker confirmed, was the outworking of hubris, delusion, commitment to flawed ideological constructs and inattention to history. Moreover, the policy response has legitimated socialised losses on a scale unimagined by the architects of the Bretton Woods system. It has amplified the moral hazard associated with protecting a banking industry addicted to unsustainable and undesirable leverage.

Deemed too big, too interconnected and too complex to unravel without causing systemic failure, banking has emerged as the sole winner from a crisis its funding model helped to cause. Somewhat paradoxically the banking sector has become even more concentrated, making it all but impossible for regulators to control. More perniciously, the sector has a vested interest in curtailing the co-ordination necessary to engineer meaningful change, particularly in the United States but also in Europe, now the epicentre of the financial crisis.

The complexity of the deeply integrated European and North American banks demonstrates the failure of regional and global institutions of power, flawed harmonisation agendas and weaknesses of national regulation. Wariness in advocating radical restructuring risks privileging the symbolic over the substantive. As Andrew Sheng, a senior adviser to the China Banking Regulatory Commission put it, advocating piecemeal ad hoc reform overseen by a fragmented system of national regulators is ‘like asking pygmies to hold down giants’.

Gordon Brown, who, as British chancellor was amongst the greatest enthusiasts for the financiers’ rise to power, claims that "we didn't understand just how entangled things were". This is nonsense. Many warned about the consequences of creating a financial system driven by investment banks and exotic “products”. New Labour was just happy to rake in the tax proceeds to finance its social programmes.

Like fish in the sea, unaware of the water they live in, these academics and policy-makers breathe the air of capitalism. They have had their day. The 2011 version of Bretton Woods was effectively an epitaph for a global capitalist system founded on debt. It falls to the mass of people to create a new “architecture” in the shape of an economic system based on need and not profit

Gerry Gold
Economics editor

Can we do it? Yes we must!

As the political leaders of 20 of the biggest economies gather in Washington to work out how to fix the global capitalist economy as, like a runaway train, it heads straight for the buffers, the range of “solutions” is piling up. None of them have a hope of taking off.

For outgoing US President George Bush, the oh-so-obvious answer is “sustained economic growth”. He told a New York audience that "the answer is not to try to reinvent that system” but to “make the reforms we need, and move forward with the free-market principles that have delivered prosperity and hope to people around the world".

Others are into reinvention. Gordon Brown, who until recently thought globalised capitalism could not possibly be improved upon, is now for “creating a new global financial architecture” to replace the Bretton Woods monetary system (which actually collapsed 40 years ago!). The Germans want a “new balance between market and state” while the Canadian suggestion is that "dynamic new economic players ... must be full participants at the global table".

There’s another proposal aired by Bob Geldof. He is back banging the drum for Africa, which has been left out of the discussions. Bob wants to ensure that “900 million potential producers and consumers” are drawn into “the next round of globalisation”. With the whole world diving into slump, Bob sees salvation for capitalism in Africa.

And on that he’s at one with Bush, who just yesterday received a major humanitarian award from Africare for his work in Africa. No really, it’s true. According to Voice of America White House correspondent Paula Wolfson, Bush was honoured for his efforts throughout his administration to combat disease across the continent. Bush says America has an obligation to help the people of Africa. "It is in our national security interest that we defeat hopelessness. It is in our economic interest that we help economies grow.”

The brutal truth is all these plans, pleas and proposals are non-starters. Why? Because they all look beyond the current disastrous disintegration of the global economy to a bright, newly refurbished, much more regulated, fairer, capitalist world. This is not how capitalist slumps work themselves out.

Fixing the real problem - an overhang of capacity as global production turns from recession to depression and slump - has only one solution as far as capitalism is concerned. In 1942 in the midst of the Second World War, economist Joseph Schumpeter, a critic of Keynes, but a big fan of credit-led investment, published his most famous work Capitalism, Socialism and Democracy. It was then, with the world at war, that he chose to develop his version of the concept of “creative destruction”. That is already under way, with 10 million Americans already out of work and General Motors on the edge of bankruptcy.

Bush bemoaned the fact that critics were "equating the free enterprise system with greed, exploitation and failure" and objected to it. He is right to warn against the coming assault on the citadels of capitalism. There’ll be many demonstrations and protests against the G20 over the weekend and the election of Obama last week was itself a product of the anger millions of Americans who want action against bankers and corporations.

What is urgently needed is a concept of a society beyond the private ownership and control of capital, together with the leadership and organisation to make it a reality. Can we do it? Yes we must!

Gerry Gold
Economics editor

No easy fixes

To those who have been preaching state intervention as the solution to the credit crunch and the recession it must seem as though their time has come. Out go the discredited free-market assumptions of the late 20th century and in come the theories that found favour in the late 1930s and the immediate post-war.

These were largely the work of the British economist John Maynard Keynes. He claimed that relatively low government spending and/or high taxes had contributed to and then reinforced the economic depression of the 1930s. Now New Labour has apparently gone back to Keynes in their desperation to find some answers to the lethal cocktail of a collapse in jobs, sharp falls in consumer spending and financial meltdown.

But bringing forward a few infrastructure projects does not even begin to address the enormity and breadth of what is a global economic as well as a financial catastrophe. Bringing already budgeted spending forward, funded by new borrowing but without creating new money, is at best a new twist on an old solution to a different problem.

All forms of credit and debt, including money, are promises to pay in the future, so the prescription to bring future spending forward most certainly means a massive expansion of the injections of the drug that produced the current mayhem. The system can’t survive without it. New Labour already has accumulated record debt, and some doubts have already been raised about the availability of enough lenders to fund the new borrowing needed to bail out the bankers. Where will these additional lenders be found? When they fail to materialise, will the government simply print money?

With many of world’s banks and corporate behemoths - Ford, GM, Chrysler, GE on the point of bankruptcy, and most, including Starbucks in retreat, the cost of limiting the recession and preventing or even reducing the looming prospect of a depression, will be too great. There’s simply not - and can’t be - enough real value in the economy to service the debt already accumulated during the last years of globalisation. It’s why we have the present crisis.

The vast unimaginable gulf between the value of global production, even before the recession set in ($65 trillion), and the monstrous imploding balloons of credit and debt ($550 trillion in the credit derivatives markets alone – this is a small fraction of the total) puts the few trillion guaranteed to the banks into perspective. There is not, and reflation cannot provide sufficient real value in the economy to stave off the financial hurricanes still building to force 5 and beyond.

In any case, tax rates are at rock bottom thanks to decades of Tory/New Labour policies; UK consumers are weighed down with personal debt (with millions now in negative equity); tax income from medium-sized business is falling away (the transnational corporations hardly pay any tax in Britain); and unemployment is growing rapidly throughout the world. The global crisis is now penetrating China, with that country’s export markets in a state of collapse.

The sudden infatuation with Keynes (even the right-wing Daily Mail is on board) should also come with a health warning. Claims that Keynesian policies were working before World War II are simply not true. Unemployment in the United States – where his theories were put into practice by Roosevelt – remained persistently high until the preparations for war began to reflate the economy.

A return to growth was only possible once the overcapacity produced in the speculative frenzy of the run up to the Wall Street crash 1929 was destroyed in the war itself. And then, when the orgy of destruction abated (including the slaughter of 60 million people) Keynes was once again called upon to provide a means of restarting production and capital accumulation, at Bretton Woods. And, lest we forget, that agreement broke down in crisis by the late 1960s.

What all this shows is that are no simple, state-led fixes to the recession we are now in and that leaving power in the hands of New Labour and their corporate/financial friends is a recipe for large-scale social disaster.

Gerry Gold
Economics editor

Time to cut the losses

In the last week, stock markets the world over have been showing the classic signs of bipolar disorder, but in the most concentrated form. Euphoric, manic, hysterical highs followed by the deepest depression. Much of it, say some of the commentators, is internally generated, the result of speculators feeding off each other’s panic.

But as everyone else knows, there are clear external causes. The soaring highs are the direct result of a renewed series of injections, by governments and central banks, of credit – the same stuff that the world’s financial system became addicted to and wholly dependent on during the “long boom”. It doesn’t help. Yesterday, the two largest Swiss banks UBS and Credit Suisse were obliged to seek new capital in a further attempt to prevent them turning into non-banks, ceasing to exist, becoming, as Monty Python had it, dead parrots. When the Swiss banks fall, there’s nowhere safe left for your money.

The stock market lows – a five-year retreat reached in the UK and back to the 1980s in Japan – are the result of an avalanche of indications that the recession is not only with us, but will last for years. Giant corporations are bankrupt, jobs falling off a cliff, house prices dropping like a stone. Even the price of oil has fallen back, as the speculators move their money elsewhere. China, which has powered the global economy, is cutting back and shutting down factories.

The Brown-led government, which has taken on the role of street-level pushers, are looking to raise the money that they are guaranteeing to the banks by issuing more debt to the investment markets. But there’s a limit to what can be raised. The rest will come from an assault on government spending, public services, the elimination of the legal guarantee for public sector pensions, and last but not least, any measures to deal with climate change – irrespective of Miliband the Younger’s pronouncement on an 80% emissions reduction by 2050.

Early signs of the brutal reality that will result came from the news that under Brown and Darling’s control, Northern Rock has been foreclosing, repossessing and evicting at double the rate of the rest of the industry. So much for the benefits of “nationalisation”.

Brown knows that the bankers’ bail-out won’t stop the rot, so he’s promoting a restructuring of the world’s economy, along the lines of the Bretton Woods arrangements that laid the basis for the post-war recovery and the boom years. The Financial Times says this is premature, adding:

“Lest we forget, Mr Brown himself was in charge of the IMF’s ministerial steering committee for a large part of the past decade and yet signally failed to implement the ideas he is parading. During this time, it was repeatedly explained to him that every early warning system devised by the finest minds in international economics, including those at the fund, either predicts crises that never arrive or misses those that do.” The paper of business is correct. The basis for restoring stability after a decade and a half of the Great Depression wasn’t Keynes’s proposals, but the massive destruction of surplus productive capacity and human lives during the second world war.

A much easier, less destructive way out of the mess would be to cut the losses, admit the capitalist system is bankrupt and make the transition to a new kind of economy altogether. One based on not-for-profit production, social ownership, self-management, planned production for need, distributed via an intelligent market informed by democratic processes and expressed preferences. That’s what we will be discussing tomorrow at the Stand Up for Your Rights festival. Be there!

Gerry Gold
Economics editor