Friday, October 24, 2008

Learning lessons from history

Business Times - 24 Oct 2008


THOSE who cannot remember the past are condemned to repeat it, warned the American (Spanish-born) philosopher George Santayana. Does this mean that those who remember the lessons of history are not likely to repeat the mistakes of the past?

In their response to the current financial crisis, American and European officials seem to want to show that, indeed, they have learned the lessons of the financial crash and the ensuing Great Depression of the 1930s, and that they are doing their best not to embrace the kind of disastrous policies that their predecessors in Washington, London and Berlin had adopted at that catastrophic time in history.

Hence, Federal Reserve chairman Ben Bernanke, a student of the Great Depression, has made a special effort not to reproduce the blunders that were made by the US central bank in the 1930s when it tried to deflate the supply of money by, among other things, raising interest rates.

And like his colleagues in Britain and the European Union, Mr Bernanke understood that the long delay in providing assistance to the failing banks after the 1929 Wall Street crash accelerated the process of financial disaster. That explains why the US and the EU have moved quickly to bail out failed financial institutions this time.

Similarly, it is recognised by most economic historians today that the failure on the part American and European leaders to work together and coordinate their economic policies in the 1930s, and to pursuing instead a series of protectionist policies helped to ignite deadly trade wars that had made global economic recovery impossible.

Indeed, that last history lesson was already considered by the victorious powers in World War II when they had to establish the foundations for a new international economic system. The 1944 Bretton Woods conference, where some representatives from 44 nations gathered at a hotel in New Hampshire, helped create several multilateral institutions, including the World Bank and the International Monetary Fund (IMF) that were supposed to encourage negotiated monetary coordination among the industrialised nations and to prevent a repeat of the financial crisis of the 1930s.

And now against the backdrop of the new financial crash, several Western leaders, including British Prime Minister Gordon Brown and French President Nicolas Sarkozy, have called for reforming the Bretton Woods system and the creation of a new global monetary arrangement that would respond to the new political, economic and technological realities of the 21st century. Or as Mr Brown put it: 'We must create a new international financial architecture for the global age.'

In many respects, some of the ideas to remake the outdated post-1945 multilateral economic institutions - including by encouraging China, India and other leading emerging economies to join in the management of the new economic order - have been raised by officials and pundits even before the onset of the current financial crisis.

More controversial, at least in the US, has been the suggestion being raised in Europe that a new Bretton Woods would require additional mechanisms to 'regulate' global private financial transactions. It's not surprising perhaps that many Americans who only a while ago were celebrating the wonders of their unregulated financial systems and its many sophisticated instruments would be resistant to the notion that governments would now have to play a larger role in markets.

But for most Americans, this debate is not an academic-theoretical issue but one that has a very personal and pragmatic implication. Through their private retirement programmes, most members of the American middle class have invested their fortunes in Wall Street.

In recent weeks, many of these same middle class Americans have seen their wealth reduced by close to 30 per cent as it has been drowning in what is perceived now to be a dysfunctional financial system. These Americans would be willing to support more robust government intervention in the global financial markets as a way of protecting their investments.

Indeed, this and other ideas are going to be discussed during a global economic summit of major world powers that US President George W Bush is expected to host after the November election and before he leaves office. And notwithstanding protests by Bush administration officials, government intervention in the financial markets will be on the agenda of the summit.

In fact, after meeting with Mr Sarkozy and EU Commission President Jose Manuel Barroso, Mr Bush announced that the US and its economic partners are planning a series of summits that would continue after a new president takes over the White House next year. The first summit will involve members of the Group of Eight and leaders of the major emerging economies, including China, India, Brazil and South Korea.

In a way, the coming economic summits are expected to display, for the first time, the erosion in the geo-economic and geo-strategic power of the US that has resulted from the combined impacts of the financial crisis that originated in the US and the outcome of Iraq War.

The EU and other global players will attempt to project their power by pressing the Americans to accept far-reaching changes in the multilateral economic arrangements in a way that would place emphasis on government intervention in the financial system and would produce major restructuring of the IMF and other institutions.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

1 comment:

Anonymous said...

Everything that has happened in the global financial system seems, to me, to provide substantive reasons for arguing for a divorce of the state from the economy. But, I fear the momentum is going in the other direction. I hope and pray for numerous rebellions.