Laying a new foundation for the global economy?
October 20, 2008
We have now seen first full week of trading since last weekend’s Euro-American attempt to stop the bleeding in the world’s financial markets. From any perspective, the results have been sobering.
Among the economic punditosphere, some consensus seems to be emerging (sweetheart bailouts = bad); however economists of various ideological stripes still offer competing explanations of the causes and effects of the crisis (for examples, see Tyler Cowen #1 and #2, Daniel Davies, and Arnold King), as well as a whole range of propositions about how to fix it.
Meanwhile, Mssrs. Bush and Sarkozy have announced plans to initiate a sort of Bretton Woods Redux at Camp David after the U.S. elections.
Taken together, these signs suggest that the captains of the global political economy may attempt to plot a bold new course in the coming months. Nevertheless, I remain suspicious that we’re really witnessing little more than a noisy shuffling of deck-chairs on a badly listing ship.
Certainly, the deluge of analogies linking the present era to the time when the Bretton Woods Conference was held are incomplete at best. The original conference did not happen at the first signs of global financial collapse (circa 1930-something), but rather in the midst of the resulting violence and global destruction of World War II (1944).
That era was one in which the U.S. and U.K. could quasi-legitimately claim to represent the core of the global financial system. The result was a naked demonstration of military and economic power thinly disguised as diplomacy. Richard Peet describes in his (richly detailed, but theoretically unsatisfying) book, Unholy Trinity: The IMF, World Bank and WTO how the outcomes of the New Hampshire meetings reflected their origins in back-room deals between U.S. Deputy Secretary of the Treasury Harry Dexter White and his counterparts working under Lord John Maynard Keynes. It was no coincidence that the resulting institutional arrangements so blatantly favored European and American interests. The event had been carefully engineered to ensure such an outcome.
What will the upcoming round of global economic talks look like? In a somewhat non-analytical, but nonetheless provocative piece published yesterday morning, DailyKos editor Devilstower gets to the heart of the matter. Here are three key quotes (emphasis added):
“While we are fretting about our plans to restore the broken economy, there’s one point that isn’t making the debates, and only rarely making the news. In many ways, we will no longer be the masters of our own economic ship. The factors that will most affect us in the future may no longer be under our control, or in the hands of those inclined to place our needs very high on their list of concerns.”
“After sixty years of Bretton Woods, the world is looking for a less dollar-centric alternative to our current fiscal system. And they’re not begging for our permission.”
“As the world meets in global summit to “rebuild capitalism,” the United States may host the event, but don’t expect the rest of the world to turn to America for ideas. Instead, they will try and sort out if we are AIG — salvageable, and possibly too large to fail — or Lehman Brothers — a former titan allowed to crash on the rocks.”
I agree with this assessment, although Devilstower’s claim that Europe will play a bigger role this time around ignores a more profound shift in the balance of global economic power. Given their current over-leveraged positions, the U.S. and the E.U. will be forced to cede some authority to the big players and creditors of the Global South (China, India, Brazil, Saudi Arabia, U.A.E. etc.). Thus, the analogy between the U.S. and AIG or Lehman is appropriate, but mis-specified: it will not be Europe that decides whether or not to make the call on this nation’s accumulated fiscal warrants.
My intuition is that these summits will look a lot more like the recently collapsed Doha round of negotiations at the WTO. In the foreground, the U.S. and European leaders will carry on a great shadow-play of magnanimity and cooperation. The opening gambit has already been made in the World Bank, where the U.S. has recently surrendered its long-cherished “right” to appoint the organization’s President.
At the bargaining table, however, these same U.S. and E.U. negotiators will flatly refuse to accept the fact that they are no longer the masters of the universe. Instead, they will bully, threaten, and backstab their way to a total impasse – or at best a watered-down statement of “principles” with no real institutional teeth to back it up (sound familiar?). This has been the pattern for a few years now, and I would be pleasantly surprised if it were to suddenly disappear when big issues made their way onto the table.