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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But the adherents of the great economic thinker Joseph Schumpeter put the counter argument that each wave of growth is characterised by financial innovations, for example, the railway age by joint stock companies, the automobile age by hire purchase and the present digital era by credit cards,mortgage securitisation, derivatives, derivatives of derivatives and a fewothers. The dynamism of deregulated financial market has made all this possible. If any regulation is injected, it would simply take away that vitality of the capitalist system. Moreover, strict regulations - contrary to intention - would greatly contribute to increasing opacity in the financial markets by forcing the disingenuous smart guys to devise devious ways to bypass the system. The apologists for regulations, however, disagree. They posit that unregulated financial capital has not only the power to create asset bubbles aswith the dotcom in the 1990s and the housing in the 2000s. It also has the propensity to pop the bubbles because of its tendency for speculativemovement.

This tendency is exemplified by a growing trend ofmovement of profits fromnon-financial sector to financial sector from 14% in 1960 to 39% in 2008with financial sector profitsmostly accruing from unproductive speculation rather than productive business. It is again the atmosphere of deregulation which had made it possible for financial egg heads to repackage the subprime assets and for the credit rating agencies to bless themwith high saleability stamp. Hence, regulation is amust; and that by an international body, since the agencies of the financialmarket have got unrestrained international presence.Moreover, in view of world’s total stock of financial assets getting three times as large as global GDP, it becomes more imperative to go for the BrettonWoods II.

The boat of BrettonWoods movement is once again on the float as the financial tsunami with its epicentre at the US has rippled across the whole world. But the question revolves around what is needed:More of the same BrettonWoods that was set up in the 1940s to deal with the protectionist foreign exchange rate chaos or a Bretton Woods-type confluence of nations to thrash out an all together a new framework of international financial architecture. It cannot be the former, for the BrettonWoods system, based on fixed rates, cannot coexist with free capitalmarkets.And if it is the latter, should it not be a misnomer to call it Bretton Woods II? Moreover, on either way, does the world really pine for a BrettonWoods moment?And if it really does,would thatmoment ever come, given the fact that “the G7 is not working” and the G20 is “too unwieldy in moving from discussion to action”, as commented by theWorld Bank President Robert Zoellick.¹⁴

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14] “International economic architecture: cleaning up the mess?”, http://www.brettonwoodsproject.org/art-563052, November 27th 2008