Did you see Newsnight on BBC2 yesterday evening? If you did, were you a little wound up by the comments made by the well-known US economist Irwin Stelzer? The gist of his argument was this. Gordon Brown and Nick Sarkozy may be trying to organise this G20 summit with the hope of creating an international solution to the economic crisis, but it was a complete waste of time. It was a waste, because the timing was all wrong – Barack Obama does not become president until January 20, and in the meantime the US has a lame duck president. Nothing can be agreed. In effect he was saying “all the other boys and girls who make up the G20 should go home, and wait until Daddy decides it’s time to talk.”
So, let’s all just wait until the US says it’s ready. In the meantime, who cares if the result is a deepening economic crisis? The speed by which a solution is determined should have nothing to do with the urgency of the matter; rather, the key determining factor should be the workings of the US constitution.
It’s a good job Japan didn’t invade Pearl Harbour between presidents. Or maybe Japan would never have done this. After all, even World War must come second to the US constitution.
It is time now to look at how it was a similar attitude from the US in 1944, at the last big summit of this type at Bretton Woods, that arguably laid the foundations for this crisis. Maybe the world should come up with its own agreement, and when the US, which after all is in a bigger economic mess than most, decides it’s ready, it will just have to apply to join.
You may recall from your history how, in Ancient Greece, when Persia invaded Athens for the first time, the city state under attack sent a runner to Sparta – the local superpower of the day – asking for help. The reply came back that Sparta was in the middle of a religious festival – and that she would send an army when it had ended. Unfortunately, the Persians were rather unsporting about the whole thing, and said sorry, no can do, kick off tomorrow at 3pm, if you please. But, then it went against the script. Athens won the battle at Marathon, and history changed from that moment, as Athens discovered a new self-confidence that underpinned the cultural revolution that followed over the following century or two. In as much that that period of Athenian history underpinned all Western civilization since that date, then we can say Sparta’s intransigence was a crucial moment in settling the course of history.
In 1944 it was different. The problem wasn’t timing, it was something else. Back then, the UK was on her knees. The Second World War was nearly over, but how could Britain pay her way? Fortunately, Britain had one thing going for her, she had Keynes.
But the Bretton Woods agreement didn’t go the way Keynes wanted. He wanted to see the emergence of a new international currency, and a system in which countries with balance of payment surpluses imported goods and services from countries with large deficits. In short, he wanted to bring stability to the world.
The Americans didn’t like the idea. For one thing, the British fellow representing British interests was too clever by half, for another thing the Americans were suspicious of the idea. They saw Keynes’s plan as being far too soft on Britain, which, after all, owed America an awful of lot of money.
The IMF and World Bank were really compromises. The dollar became the world’s currency. But when the international currency also happens to be the currency pertaining to the only economic superpower, things are different. The US was able to use the position of the dollar as the world’s currency to fund its overseas activities, including for example the war in Vietnam.
To begin with, the dollar was fixed to gold, but in 1971 this broke down, and from that moment on, markets determined just about everything.
In a way, then, you can trace the current economic crisis to 1971, and the collapse of the Bretton Woods system of fixed exchange rates, or even to 1944, when the Keynes plan was rejected.
Ironically, although Keynes’s idea was distrusted by America, which at the time was the world’s creditor and enjoyed a massive balance of payments surplus, in today’s environment, the US would have been the big beneficiary of the Keynes proposal.
And that brings us to today, and the new world order.
Another economist in the Newsnight debate yesterday evening said that it should be the big creditor countries, China, India and Japan, which set the agenda. If you want a loan, you go to the bank and make lots of nice noises and then hope the bank agrees. Instead, we are seeing the debtor countries set the pace.
In other words, we are seeing a re-run of 1944 Bretton Woods, but this time it’s the likes of China and Japan which should be calling the shots.
It is a bit rich, though, for the country which invented subprime mortgages and mortgage securitization to think she can set the agenda.
Let’s hope the G20 grow up, stand on their on feet and do what is right, when it is right, regardless of whether it inconveniences the US.
I don’t think you can realistically expect a consensus to emerge without the participation of the US.
Just a note that mortgage securitisation has existed in Germany for over 200 years in the form of Pfandbriefe. It may seem like a moot point and Gordon Brown loves to point the finger at US subprime as the cause of our woes - pablum for the masses. Let’s hope they have it right in the backroom discussions.
The real cause of the current crisis is over-leveraging. Leverage is like uranium where regulation acts like the rods that control the chain reaction. Remove the rods and the counterparty risks all connect. What we are witnessing is that chain-reaction as the default of one counterparty results in the default of another.
With respect to leverage, European banks and UK consumers are worse offenders. Let’s hope the powers-that-be have the true cause in mind otherwise they will likely get the cure wrong.