The U.S. won’t stomach a new Bretton Woods

November 14, 2008

diana-furchtgott-roth1 — Diana Furchtgott-Roth,former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

Leaders of the Group of 20 countries meeting in Washington on Nov. 15 are hoping that America’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 America’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 “no market segment, no territory, and no financial institution should escape.” 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 it’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 don’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.

Americans’ 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 Hussein’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 don’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 country’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 dfr@hudson.org.

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13 comments

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So the gods have not abandoned us completely.
Bretton Woods was a tragic mistake by Keynes. Read the correspondence between him and Beaverbrook in 1945!
Bring back 1931. Let sterling collapse again! Bring back Neville Chamberlain!

Posted by Michael Moore | Report as abusive

Hmmm. Of course, Americans only think they control our regulation. It was, after all, Alan Greenspan, an unelected official, who did the most to stop regulation of new financial instruments that arguably lead to the current meltdown. The real question is: when will the rest of the world tire of American financial irresponsibility? The US might well be the 800 lb gorilla in the room but the room is full of 500 lb gorillas now. I cannot believe that the rest of the world enjoys having their economies screwed up by an irresponsible American financial system. We may be wise to start cooperating with the 500 lb gorillas before they decide to gang up on us.

Posted by jeff | Report as abusive

Dan your cynicism is piercing as it is illuminating. The big detraction to a gold standard is that a nation shouldn’t print money to navigate out of perilous times. The disadvantage of fiat money is the profiteering and arbitrary decision of the market which causes currencies to ascend or decline. Fixed monetary exchange rates promotes stable gradual growth for all nations. Floating currencies will squeeze nations out of international trade that find their currencies unable to sustain purchasing power with nations that have products they need.

I find the idea that Americans believe that they control economic regulation or are somehow sovereign to be laughable.The crucial fact of the matter is nations are too dependent upon each other for trade. If one nation enters a crisis many, if not all others, will be affected. Nations should be self sufficient so far as it relates to providing for it’s needs (clothing, food, energy…) where ever possible. Was it not Adam Smith who stated ” A nation should protect it’s monopolies”.This is a lesson our society is now learning.

Clearly globalization of markets in it’s current form has failed. The consumer economy is collapsing before our very eyes. The comparisons between now and the 1930s are to numerous to mention. The idea of a well regulated international market and investment climate should be considered by all nations thoroughly. As a nation, we should also consider becoming more self reliant as well.

Posted by Anubis | Report as abusive

end this experiment of fractional reserve banking, paper based currency and central banks!

the currency standart shall be set by market participants not “socialist” central planning institutions !

Posted by Mark | Report as abusive

Bretton Woods – and the calls for a new Bretton Woods – are much more to do with the concept, the notion of the financial experts from nations around the world gathering together in a place – away from the maddening crowds, away from the spotlight, in a place where they could really concentrate and attempt to solve problems together “not as rivals but as partners” in the words of FDR.
Those are the real reasons behind the calls for a Bretton Woods II – and why it makes rather good sense for a return to Bretton Woods, NH. It worked once – why not again.

Posted by Gordon | Report as abusive

To the leaders attending this extravagant summit, nothing makes sense except their own regurgitated mixed economy persuasions.

It is a sad commentary on our times that out of the whole group, there is not one original thinkinr, let alone haviing guts to make a difference.

It may take time, but reason will ultimately triumph over myopic range of the moment.

RM

Gordon, “It worked once – why not again?” It only seemed to work for a while. Take a look around. The global economy is collapsing.

The reason it’s collapsing is that globalization, in its current form, dependent on the U.S. sustaining an enormous trade deficit, was doomed from the beginning. Financed by a sell-off of American assets, it worked only as long as the supply of assets lasted. As the end of that supply neared, it became more dependent on riskier assets, like MBAs and CDSs. In the end, we see that “globalization” was nothing more than a trade welfare state, financed by the sell-off of America.

The first step toward rescuing globalization is a recognition that each nation needs to maintain something close to a balance of trade. Yes, this will mean huge problems for grossly overpopulated nations dependent on exports to sustain their bloated labor forces, but now we see that dumping that problem into the laps of healthy economies, namely the United States, is no solution.

This is an attempt at global government and further erosion of US national sovereignty. The solution is to eliminate the privately owned international monetary cartel known as the Federal Reserve Corporation and bring the control of the currency back to Congress.This is another attempt by the international money powers to dissolve sovereign control of finance. If you control finance you can control politics and the media! Instead of going back to Bretton Woods maybe they should even go back further and go back to the gold standard.

Posted by jay | Report as abusive

If all people in spirit would just reach out to grasp the hem of the garment of Jesus Christ and repent and cease to do evil, then would we hear from Heaven and God would heal our land. How far down does the world have to plunge before we finally see The True Light? All of these manmade solutions may work for a while but will eventually fail. I pray that someday soon all of humanity will come to realize this.

Posted by ezekiels watchman | Report as abusive

UPDATE: In the meetings yesterday, the G20 made significant progress, and talked about international coordination rather than international regulation. Leaders agreed on the importance of pro-growth policies to stimulate their economies; the regulation of all financial products; greater representation of emerging market and developing economies; free-market principles, free trade, and an avoidance of over-regulation that would hamper free markets; and the expansion of the scope of the IMF and World Bank to help the poor. They propose to meet before April 30 to implement these principles. If countries can actually stick to free-market principles and avoid protectionism we might see some progress in the global economy. The US Congress could start by voting in favor of the Colombia free trade agreement, which would give Amerian automobile companies another market for their products.

Diana

Posted by Diana Furchtgott-Roth | Report as abusive

If we don’t agree to some form of international standards in financial transparency, then the world will be wise if they treat us they same way I treat email offers from Nigerian “officials”.

Free trade only works between equals. Columbia is not an equal. Unequal trade agreements lead to degradation in the environment, slave labor camps and corrupt governments.

Posted by Greg | Report as abusive

Yes.Being a bureacrat served US government, this is natural responce to the calling of world. The outcome of the meeting is certainly encouraging than the expected. At least you are in agreement about sharing the Top Table. If you remember, the same efforts were made to expand the decision making body of IMF two years back. Then the socalled developed world stubbornly refused to do so. Even now also they are only accomodating to share the Whiteman’s burden but not really ready to share their concerns.

US is afraid to lose the supremacy of US$ it is normal, but it will soon.

Posted by Claude | Report as abusive