The U.S. won’t stomach a new Bretton Woods
Leaders of the Group of 20 countries meeting in Washington on Nov. 15 are hoping that Americaâ€™s role in the global financial crisis will shame President George W. Bush, or maybe President-elect Barack Obama, into supporting greater international financial regulation, diminishing Americaâ€™s role in international financial institutions.
But America is unlikely to give up control over its financial sector, certainly not under Bush, and probably not even under the internationally-popular Obama.
International leaders demand a replay of the 1944 wartime conference at Bretton Woods, New Hampshire, at which delegates from 44 nations created the World Bank and the International Monetary Fund. The World Bank made loans to war-torn countries and now lends to developing countries. The IMF supervised fixed exchange rates centered on the U.S. dollar and gold, a regime abandoned in the 1970s, and made rescue loans to troubled economies, a role that continues.
When European Union leaders met in Brussels on Nov. 7 to prepare for the financial summit, they proposed a course that might be as far-reaching as Bretton Woods.
An EU statement, sweeping but vague, proposed that financial institutions of “systemic importance” be made subject “to rules or at least to oversight wherever they operate” and that â€śno market segment, no territory, and no financial institution should escape.â€ť That proposition is a dangerously empty vessel into which all manner of regulatory mischief could be poured.
Such international regulation would be unprecedented.
British Prime Minister Gordon Brown and French President Nicholas Sarkozy, now the EU president, want the IMF to enforce the new regime, building up an institution traditionally headed by a European. Standards would be promulgated and enforced by the IMF, similar to the way that the European Commission enforces rules among EU member states.
Their goal is to offer principles for a new international financial system that would be translated into workday regulations for all manner of financial institutions, even ratings agencies. Ambitiously, the Europeans want another summit in 100 days to consider draft regulations.
But itâ€™s unlikely that Congress or any American president, Bush or Obama, would sign on.
Whatever the wisdom of more far-reaching international financial regulations, many Americans donâ€™t want binding rules administered by a bureaucracy unaccountable to the public. They prefer to do the job themselves. They want sovereignty over their own affairs, and are suspicious of international organizations.
Americansâ€™ distrust of international regulation stems from international organizations that are perceived to be anti-American. For example, the United Nations Oil for Food program, intended to allow food to reach hungry Iraqis, wound up profiting Saddam Husseinâ€™s family and political supporters, leaving southern Shiites to starve.
Congress gains power by regulating the financial sector because companies donate campaign funds to members. The securities and investment industry, which stands to lose the most from international regulation, is particularly generous.
The Center for Responsive Politics reports that securities and investment houses donated over $1 million to Senator Chris Dodd, now Senate Banking Committee chairman, and over $540,000 to Alabama Republican Richard Shelby, then-chairman of the Senate Banking Committee, in 2004, the year they last ran for reelection.
Obama received $13 million from the industry for his presidential campaign, and Senator John McCain $8 million.
The fundamental question is whether more international financial regulation can resolve the current crisis and prevent another one– without hindering innovation. Since risk-taking is the engine of economic innovation, we donâ€™t want to stifle it by regulation and all financial innovations will carry some new risks.
The huge crowds that cheered Obama in Europe last summer will not persuade him to cede control over his countryâ€™s financial system to the IMF. The most that the G20 can hope for under the new president is that Congress adopts its new principles and America regulates itself.
Diana Furchtgott-Roth can be reached at email@example.com.
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