Building an International Monetary and Financial System for the 21 Century:agenda for reform

Over the last fourteen years, The Reinventing Bretton woods
Committee has closely been involved in the debate of improving
and reforming the global financial architecture. Our name
speaks for itself. In 2008, call for a new bretton woods, Bretton
woods 2 has been mentioned by Prime Minister Gordon Brown,
President Nicolas Sarkozy among others.
Since the heads of State Summit in Washington in November
2008, the global economy is decelerating at an unprecendented
level and a sense of disarray, and a loss of confidence world wide
is now spreading. This crisis is not any more a crisis of the center
versus the periphery, it is a global crisis, economic, financial and
political. This crisis is our collective failure not to have taken
decisions to improve and change the paradigm during the period
of emerging markets crisis of the 1990’s and during the debate
of the best way to resolve the global imbalances in the world. In
fact, the external imbalance and the internal imbalance of major
countries in the world between surplus countries and deficit
countries are at the origin of this debacle. So how to explain
that Heads of state mention a new bretton woods where at the
end, there is no mention at all not even the word exchanges rates
or currencies in the G20 heads of state communique? Are we
missing something? Maybe we are realizing that the world is not
ready for globalisation. Markets went ahead believing that the
political structures will follow.
In fact, this crisis demonstrate more than ever that national
level is the only level that matters. No one is ready for a global
financial regulator, for a global central bank, for a global single
currency. So we will need to live with a patchwork of cooperation
wich are going to be more and more complicated to manage.
That transition will be complex as we don’t really have a global
financial macro theory to understand the episode of the last 12
months.
From our perspective,
1. On the architecture, G20 should serve as the forum formally for countries to agree to adopt best practices/international standards. The IMF should provide its advice, support to the G20. The Financial Stability Forum should be made into a permanent body, with a broader membership, reporting to G20.
2. On lender of last resort functions, regulators should rethink the global approach to liquidity management and develop guidelines for lender of last resort policies. There is an urgent need to clarify and institutionalize central bank swap arrangements.
3. On bank regulation, a complete revision of Basel 2 is needed, including tighter leverage ratios, and the regulatory arrangements must be made compatible with incentives to private actors to discipline the market better.
4. On exchange rates, work should begin immediately on how to restore discipline in the international monetary system.
If this is deemed to be “unrealistic”, then we have to face the fact that the world faces a succession of crises, each one worse than its predecessor, and that these are beyond out scope to manage with existing instruments. At present the stark choice is between another Great Depression, another bigger New Asset Bubble, and a return to International Socialism, including rigid controls on international exchanges and bank credit. The only way to preserve freedom for a liberal financial and trading order is to build a new financial architecture.
Marc Uzan
Founder and Executive Director
Reinventing Bretton Woods Committee