US Financial Crisis: Is It the Moment for Bretton Woods II?

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US Financial Crisis: Is It theMoment for Bretton Woods II?

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Detractors, however, point out that it is not the foreign exchange regime under the informal post- BrettonWoods systemthat accounted for the financial crisis. It is rather the lack of transparent rules and regulatory laxity combined with greed of financial institutions and political push for subprime loans that contributed to the housingmuddle through excessive lending and the consequent financial mess. Hence, what is required is not the revival of the BrettonWoods system but the addressing of domestic regulatory deficiencies. What hold the key to pre-empt the crisis are keeping pace with financial innovation, putting in place effective financial regulations and the rigorous implementation thereof at national levels. Regulators ought to ensure that the financial statements of the firms must mirror an accurate picture of their activities so thatmarket participantswould not indulge in hankering after higher yieldswithout an adequate appreciation of the risks involved. Even the declaration of the G20 summit of themid-November 2008 conceded, “Regulation is first and foremost the responsibility of national regulators who constitute the first line of defence against market instability.”10

Some analysts say that since globalisation and financial integration led to the spread of a national crisis into global proportions, to overcome the crisis and to avert its recurrence, therefore, requires a coordinated effort at global level,which harks back to similar effortsmade during the original Bretton Woods conference.While giving into the need for synchronised coordination on a worldwide scale, the more perceptive analysts, however, differ on the issue of reviving Bretton Woods which was actually born out of the plan to regulate the foreign exchange rate in such a way as to secure the advantages of the gold standard while disallowing the disadvantages of the floating system. To Brown, BrettonWoods II does not mean a reinstatement of the original BrettonWoods system, but building a newBrettonWoods, “building a newinternational financial architecture to function as an earlywarning system”, which should act as “a crisis prevention mechanismfor the whole world” by monitoring “cross-border financial transactions”.¹¹ To Sarkozy, however, BrettonWoods II means replacing the dollar as the single international currency so that when the US sneezes, the rest of the worldwould be spared of catching the cold.While Brown’s proposal for regulatory and earlywarning reform makes sense, Sarkozy’s seems to be wide off the realm of reality since the euro has little presence in Asia while China does not want the yen of Japan to be the dominant currency even in Asia, not to speak of the world at large. Ironically, the US financial crisis (2008) “has, if any, strengthened the dollar as the least untrustworthy of global currencies”.¹² Behind the dollar’s surprising strength lies the fear factor. During global economic disturbances investors of emerging economies run for “safe havens like the U.S. dollar. The demand drives up the price relative to other currencies. In four of the past five recessions since the 1970s, the greenback finished the downturn higher than where it started”.¹³ Thus, there is no need to revive Bretton Woods system to ensure an accepted global currency into the role of which the dollar fits without BrettonWoods even in times of crisis. If at all BrettonWoods II is to be envisioned, it ought to be envisioned for some other purpose and not for the original foreign exchange-related issues.

That other purpose is advocated to be plugging the loopholes ofweak financial regulations relating to securitisation, CDS, capital adequacy requirements, credit rating agencies, etc., that have been blamed to have engendered the financial crisis of 2008.These loopholes are alleged to have constituted the fatal bleeding of the financial system by a thousand cuts. As followers of Hyman Minsky, the godfather of modern financial crisis hypothesis, argue, a systemic financial crisis is a normal consequence of an unregulated capitalismas it tries to achieve ever-higher growth through unfettered private financial system plying easy credit and speculative finance. This is because the vice of speculation, during an economic upswing, slowly blocks all rational thinking and brings in the economic breakdown.Hence the need is for the socialisation of the banking systemand the necessary regulation across the whole world through BrettonWoods-style concord.

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10] “G20 Declaration: Full Text”, http://news.bbc.co.uk/2/hi/business/7731741.stm, November 15th 2008
11] “Prime Minister Gordon Brown on the global economy”, http://ukinusa.fco.gov.uk/en/newsroom/?view=Speech&id=7518632, October 13th 2008
12] “Debt Man Walking: The US, China, Japan and the Foundations for a New Bretton Woods”, op.cit.
13] Reed Stanley, “Why The Dollar Is Getting Stronger”, http://www.spiegel.de/international/business/0,1518,593061,00.html, November 27th 2008