Working Towards a Just Peace in the Middle East
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KAIROS Policy Briefing Papers are written to help inform public debate on key domestic and foreign policy issues No. 16 February 2009 What Kind of a “New” Bretton Woods will Emerge from the Crisis? John Dillon s the world undergoes the greatest financial tutions not only failed to prevent the current crisis crisis since the 1930s, political leaders of but also contributed to it by encouraging the deregu- Avarious persuasions have been talking about lation and liberalization of financial markets. convening a new Bretton Woods conference to re- The original Bretton Woods conference estab- design the global financial system. The rhetorical lished the International Monetary Fund (IMF) to calls for a new Bretton Woods sound appealing. But oversee the financial system and the International it is not at all clear whether a new, more just and Bank for Reconstruction and Development (now sustainable order will emerge. Currently minor re- known as the World Bank) to assist with post-war forms that will only shore up an unjust economic reconstruction. Over their 64 years of existence order seem more likely. these two institutions have evolved in directions In this briefing paper we shall first look at how that would not be recognizable by their founders. the monetary system established at Bretton Woods, The IMF no longer has sufficient resources to act as New Hampshire in 1944 that had achieved relative a true lender of last resort. The World Bank has stability broke down in the early 1970s and was re- strayed from its mandate of funding genuine social placed by deregulated financial markets. Secondly, and economic development. we shall examine how the November 15, 2008, The original Bretton Woods system featured Group of Twenty (G20) leaders’ meeting in Wash- fixed, but adjustable, exchange rates and wide- ington fell far short of rhetorical calls for a new spread use of capital movement controls. It was Bretton Woods.1 Third, we shall look at another vi- based on a US dollar deemed to be “as good as sion of a new financial system that is being dis- gold”. By the late 1960s, however, the US was run- cussed within the United Nations. Finally, we shall ning huge budget and current-account deficits due describe some of the elements that civil society or- in large part to the high costs of the Vietnam War. ganizations believe should be included in a new or- European countries and Japan largely financed these der. deficits. The ensuing monetary growth led to a rise in worldwide inflation and investors became reluc- I. Bretton Woods Institutions: Handmaidens to tant to hold low-yielding dollar assets. By 1971 the Crisis these growing imbalances made the continuation of the old regime unsustainable. President Richard The multiple calls for a new Bretton Woods stem Nixon then declared the dollar would no longer be from the fact that the existing Bretton Woods Insti- redeemable for gold, effectively devaluing the dol- lar and thereby defaulting on a portion of the USA’s risk of a loan from a lender for a fee. If the loan foreign debt.2 goes into default the investor has to pay the lender The new system that evolved after 1971 was for the value of the loan and gets the devalued as- much less stable as countries adopted floating ex- sets. For the lender the payments are like an insur- change rates and abandoned capital controls. De- ance policy. There can be more than one CDS con- regulation and liberalization of finance made the tract on a single loan among parties who have no system crisis prone. There have been at least 12 ma- direct interest in the loan itself. The market for jor international financial crises and over one hun- Credit Default Swaps ballooned to an extraordinary dred minor calamities since the early 1970s. Specu- US$62 trillion in December of 2007 “while the lating on international currency markets enriched maximum amount of debt that might conceivably be money traders but left central banks with progres- insured through these derivatives was US$5 tril- sively less ability to set domestic monetary policies. lion.”5 When the US market for subprime mort- The IMF encouraged the deregulation and liberali- gages collapsed the CDS market was thrown into zation in the belief that this would promote a more turmoil as holders of CDSs faced huge paper losses. efficient allocation of investment capital. But an For example, insurance giant AIG went under be- analysis sponsored by the IMF itself concluded that cause it could not cover its exposure to CDSs. although these policies have tremendously benefited By the middle of 2007 the nominal value of out- the private sector, they have also created “fragility, standing derivatives contracts amounted to an in- instability and systemic risk.”3 credible US$516 trillion or almost ten times world Speculation in financial assets has overtaken GDP. But the “actual value … that is what the de- investments in the production of real goods and ser- rivatives would be worth if they were sold off [im- vices. Under the pre-1971 Bretton Woods system mediately] rather than their theoretical value when financial assets - that is the sum of bank deposits, trades come due in the future – was estimated in private investments and government debt – were 2007 at US$11 trillion.”6 As the 2008 market melt- approximately equal to the value of world output. down demonstrated, exotic derivatives proved to be That is to say finance functioned as a means of fa- what Warren Buffett aptly called “weapons of mass cilitating the production and exchange of real goods financial destruction.”7 and services. But during the new era of speculative capitalism global financial assets grew from 109% The Bretton Woods Institutions’ Crisis of of world Gross Domestic Product in 1980 to 316% Legitimacy of global GDP in 2005.4 They grew even larger thereafter until markets crashed in 2008. Both the Fund and the Bank are undergoing severe Speculators make huge profits by trading finan- crises of legitimacy. Their reputations are at an all cial assets instead of investing in the actual produc- time low due to the failure of the Structural Ad- tion of goods and services. As John Maynard justment Programs (SAPs) they have imposed on Keynes famously remarked concerning the perils of debtor countries to meet even their own goals. The a casino economy: “Speculators may do no harm as neoliberal economic policies imposed between 1980 bubbles on a steady stream of enterprise. But the and 2005 resulted in Southern countries experienc- position is serious when enterprise becomes the ing lower rates of economic growth and declining bubble on a whirlpool of speculation.” Nowhere is social development indicators relative to what was the domination of speculation over enterprise achieved in the two prior decades from 1960 to clearer than in the unregulated derivatives markets. 1980.8 Robin Broad and John Cavanagh succinctly Derivatives are financial contracts whose value summarize their failure: “Structural adjustment in is based on, that is derived from, the value of other practice has damaged environments, worsened contracts for tradable items such as commodities or structural inequalities, failed even in the very nar- currencies. In the current crisis the seizing up of the row goal of pulling economies forward, and by- market for one particular type of derivative, Credit passed popular participation.”9 Default Swaps, played a crucial role. Through a Credit Default Swap (CDS) an investor takes on the 2 Many countries have repaid loans form the IMF A White House spokeswoman made President in order to escape from its dictates. In 2006 Brazil Bush’s intentions clear: “The summit will provide and Argentina were the first to pay off their loans. an important opportunity for leaders to strengthen They were soon followed by Bolivia, Serbia, Indo- the underpinnings of capitalism by discussing how nesia, Uruguay and the Philippines all of whom ei- they can enhance their commitment to open, com- ther immediately repaid their debts or announced petitive economies, as well as trade and investment their intention to escape from dependence on the liberalisation.” Thus Bush was determined to pro- Fund. The trend continued into 2007 when Russia, mote the same policies of liberalized markets and Thailand and Ecuador decided to pay off what they minimal government regulation that led to the crisis owed and Angola ended talks on new loans. in the first place.12 In April of 2007 President Hugo Chavez an- Bush’s invitation to leaders from several nounced that Venezuela would stop doing business “emerging countries” to the Washington Summit with both the IMF and the World Bank. Then Bo- recognizes a geopolitical reality. The G7 industrial- livia, Nicaragua and Venezuela agreed to withdraw ized countries – Canada, France, Germany, Italy, from the International Centre for the Settlement of Japan, the UK and the USA. – need the cooperation Investment Disputes, a World Bank administered of large developing countries, deemed to be “sys- body used by transnational corporations to seek re- temically significant”, that now manage significant dress for alleged infringements on investors’ rights foreign exchange reserves. such as the reclaiming of control over their water In addition to the G7, the G20 includes Argen- supplies by the citizens of Cochabamba. tina, Australia, Brazil, China, India, Indonesia, The World Bank’s repute has also been dam- South Korea, Mexico, Russia, Saudi Arabia, South aged by its failure to heed the directives of three Africa, Turkey and the European Union. G20 Fi- major reform initiatives: the Structural Adjustment nance Ministers have met regularly G20 since 1999, Participatory Review Initiative (SAPRI); the World but this was the first time that G20 heads of gov- Commission on Dams (WCD); and the Extractive ernment ever assembled.