A look ahead to the end of this financial crisis


The global financial situation is complex and wreathed in fog, but at least two things are clear.

  1. The financial crisis consists of fore-shocks before the main event.
  2. A new geopolitical order will mark the solution of this crisis; it lies far in the distance.

This post examines the grim details of item #2.  There will be a long series of posts with good news on this site, but that time has not yet come.  But it will.

Expectations are high for a new “Bretton Woods” agreement

A 21st-Century Bretton Woods“, Wall Street Journal, 25 October 2008 — “Success at the upcoming global finance summit hinges on China’s willingness to play role once taken by US.”  This is too rich and complex to excerpt, and deserves to be read in full.

Among acts of international economic statesmanship, perhaps only the Marshall Plan has been invoked more frequently. There have been calls for a Marshall Plan for postcommunist eastern Europe, a Marshall Plan for Africa, a Marshall Plan for the inner cities. Indeed, anybody wanting Washington to splurge finds Marshall exceedingly convenient.

But Bretton Woods has a richer and more rarefied cachet. It was about reordering the international system, not just mobilizing money for an enlightened cause. And whereas the Marshall Plan was an example of the unilateralism for which the U.S. is known, the Bretton Woods conference was a triumph of multilateral coordination. It featured countries as diverse as Honduras, Liberia and the Philippines (Keynes spoke disdainfully of a “most monstrous monkey-house”), though it did not include South Korea or Japan, important voices in today’s economic summitry.

Both sides of the Bretton Woods achievement seem alluring today, yet both may be chimerical.

There are many other articles about this key moment in the crisis.  Three especially good ones are described below.  The first one goes to the heard of the mater.

A new geopolitical order lies far in the distance

Globalisation and the new nationalism collide“, Philip Stephens, Financial Times, 23 October 2008 — Excerpt:

Amid the rubble of the world’s financial markets, we can catch sight of the foundations of a new international order. The big lesson of the crisis has been learnt: we cannot escape our mutual dependence. Global markets require multilateral rules.

Why am I so upbeat? Well, only this week that great internationalist President George W. Bush announced he was summoning world leaders to Washington to “advance common understanding” of the causes of the crash. In the words of the White House, these leaders will frame “a common set of principles for the reform of the regulatory and institutional regimes for the world’s financial sectors”. That is a bit of a mouthful, I know. But, hey, multilateralism is a long word too.

Some readers, I suspect, may be a little more sceptical about the outcome of what breathless European leaders have billed as the new Bretton Woods.

… The so-called Group of 20 may be a cumbersome group, but at least it holds up something of a mirror to the world. Many of these countries lent the rich nations the money with which they financed the boom. They deserve a say when it comes to any discussion of the lessons of the bust.

… The underlying problem here is a big disconnection between an analysis that sees all these governments agree that they must work together and a politics that drives them to guard jealously their national prerogatives. Economics and finance may be global, but politics is still local.

Step back from the maelstrom, and what the financial crisis and its aftermath (though I am not sure it is over) have done is to illuminate the two forces shaping the modern world. Globalisation now co-exists, and often collides, with rising nationalisms.  These nationalisms come in different forms. On the one side there are the emerging powers – China, India and the rest – that have never really felt part of a multilateral order designed and dominated by the west. Why, at the moment when they are becoming great powers, should they surrender sovereignty to others?

Alongside them are the rich nations that, while speaking the language of mutual interest and dependency, are just as jealous of their present privileged positions. They are all for a more inclusive global order; just as long, that is, as the addition of new members to the club in no way dilutes their own authority.

By now, as you will have guessed, my optimism has been more or less drained. The financial crisis has described a much broader collision between the mutual dependence of globalisation and the rise of nationalisms. Thus far no one has owned up to the danger. The summit would be a success if the leaders did no more than reach the beginning of understanding.

Why this meeting will not result in a new agreement like Bretton Woods

This confuses the natural sequence of effects.  The Bretton Woods Conference in July 1944 (formally the United Nations Monetary and Financial Conference) was one of the great successes of the post-WWII era.  It rested on two great pillars which we lack today.

  1. Three decades of economic and geopolitical data and analysis of the modern (i.e., post-WWI) world, boiled down to a few concise and easily understood recommendations.
  2. Exhaustion and steely resolve of the world’s people following the twin disasters of the Great Depression and WWII.

Unfortunately we as yet have neither of these.  The most we can expect are bold aspirations and timid actions.

Some point to the devastation in the financial markets and the near-certainty of a severe global recession.  Certainly this must spur a quick resolution to the crisis.  To use an analogy (reluctantly — as TE Lawrence said, analogies in human things are fudge) damage alone does bring about resolution of trends.  The carnage during the first week of July 1863 — Vicksburg and Gettysburg — might have seemed to bring Civil War’s end in sight.  But only two more years of intense fighting — spilling rivers of blood — could do so, in April 1865.

At some in the future an agreement like Bretton Woods will mark the end of the crisis.  Unfortunately the time probably has not yet come for such powerful joint action by the global community of nations.

For more analysis of the opportunity offered by this summit, and why it probably will accomplish little

  • The need of the hour is Bretton Woods II“, FinanceAsia, 27 October 2008 — “Global leaders, led by Gordon Brown and Nicolas Sarkozy, are pushing for a reform of the international financial system.”
  • New world pragmatism“, Barry Eichengreen, op-ed in The Guardian, 24 October 20008 — “There will be no new financial world order on the scale of Bretton Woods in 1944. Here are some modest but important steps that leaders can take”

Originally published at Fabius Maximus and reproduced here with the author’s permission.