Obama’s decision to skip the first summit of leaders of the G-20 in Washington, November 15-16, 2008 reflected his understanding that the world economic order has changed. His emissaries, former secretary of state Madeleine Albright and former Congressman Jim Leach of Iowa were sent as observers. The new global players in the Group of 20, led by Brazil, China, India, and many other now powerful industrializing countries of the South will challenge Mr. Obama’s own call for change.
While the Communiqué from the leaders was guarded and polite, it clearly signaled a new economic order and launched a “Bretton Woods II process,” with the next meeting scheduled for April 30, 2009 in London. Agreements were reached, beginning with those on many needed reforms of the global financial system and the crises its lack of oversight, excessive risk-taking, leverage has caused. The ignorance of all participants was evident concerning how globalizing and interlinking all these 24/7 markets inevitably helped create chaos in the entire system. While not naming the USA, the leaders blamed the crisis on “some advanced countries” “whose policymakers, regulators and supervisors did not adequately appreciate and address the risks building up in financial markets.”
The European leaders were concerned about new regulatory action to curb speculation, leverage, hedge funds, private pools of capital and derivatives such as the some $60 trillion of credit default swaps which played a key role in the turmoil. Meanwhile, China, Brazil, India, Russia, South Africa and other powerful members of the G-20 were also concerned with “a new international financial order that is fair, just, inclusive and orderly” as stated by China’s President Hu Jintao. These countries are demanding fairer representation of voting power in the IMF, the World Bank and the WTO so as to reflect the new global reality that the USA is no longer the locomotive of the world economy. Indeed, most of today’s global GDP growth (an inadequate measure) is, nevertheless, now provided by China, India, Brazil and other emerging economies of the South. For example, the USA, the world’s largest debtor, controls 17% of the votes at the IMF, while China, the world’s largest creditor, controls only 3.66%.
An important underlying issue is how capitalism itself must evolve . The US-led model of economic growth, as measured by money-denominated GDP, the so-called “Washington Consensus” of free markets and trade, open capital accounts, floating currencies, privatization, all dominated by mostly un-regulated global financial markets, has now clearly broken down. China led the new debate by calling its summit meeting in Beijing in late October, 2008, attended by all the European countries, as well as the G-20 and other African countries as well. The Bush administration disdain for such multi-lateralism left the USA way behind the curve, not invited to such important gatherings, including the Shanghai Cooperation Organization which includes Asian and Central Asian countries, including Iran. Meanwhile China has formed close alliances worldwide, particularly with Europe, African countries and those in Latin America.
The new demands for fairness include democratization of the World Bank and the processes of the WTO. Demands for expanding the United Nations Security Council to include permanent membership for Brazil, Japan, India and important countries of the South, such as Indonesia and South Africa, also include scrapping the veto still wielded by the old “permanent five” victors of World War II.
All this is a rude awakening for many in the USA, as well as the Bush administration which believed in ignoring other countries’ interests and going it alone. Today, as the USA finds itself embroiled in the worst domestic crisis since the 1930s, most US citizens now realize that we need the world, and indeed, the global financial crisis which began on Wall Street now requires global cooperation to solve. This is the true dimension of change that President-elect Obama must now face.
As I pointed out in my “Advice To Summiteers” in early October, reforming the un-regulated global casino must be addressed promptly. The Communiqué from the November 15-16, 2008 summit clearly cited increased cooperation between nations as essential, particularly oversight of global banks and other financial players. Cooperation is necessary to avoid “beggar-thy-neighbor” policies trying to advantage any one country.
However, no mention was made of the most urgent priority: to tackle the up to $2 trillion of daily currency trading, over 90% of which is speculation. Bouncing currencies have led to much of the turbulence and excessive volatility in world markets as “contagion” spreads in minutes in this 24/7 around-the-clock trading. A small 1% or less tax on all trades has been advocated since the 1970s when it was proposed by economist James Tobin and in 1989 by former US Treasury Secretary Lawrence Summers, who also attended the Washington summit.
Such a currency-exchange tax would be simple to collect using a computerized system which can be installed on trading screens, such as the Foreign Exchange Transaction Reporting System (FXTRS). This system operates like an electronic version of Wall Street’s venerable “uptick rule,” enacted in 1934 but repealed during the Bush II administration. Today’s Wall Street traders themselves are calling for its re-instatement to curb naked short-selling. The FXTRS computerized “uptick rule” gradually raises the basic 1% tax whenever a bear raid starts attacking a weak currency. Such bear raids are rarely to “discipline” a country’s policies, as traders claim, but rather to make quick profits. In the transparent FXTRS system, traders selling falling currencies begin to see that the rising tax is cascading into the country’s currency stabilization fund and cutting into their gains. Seeing no further profit, traders can voluntarily exit the market and search for some other currency or arbitrage opportunity. The funds collected from such currency exchange taxes would raise hundreds of billions of dollars, which could, in turn, be directed to health, education, infrastructure and other public goods. (See www.HazelHenderson.com click on FXTRS.)
Hopefully, the April 30, 2009 meeting will take up such proposals and lead to the rapid implementation of other Action steps to regulate financial markets already agreed upon.
Additional steps must include:
- Criminalizing tax avoidance and tax havens and countries that do not comply with the International Financial Action Task Force (www.fatf-safi.org )
- Harmonizing of all regulations and standards between countries to prevent regulatory and tax regime arbitrage
- Repealing Basel II rules which allowed banks to assess their own risks, the failure of which helped bring on the crisis. Raise capital adequacy and reserve rations and reduce margins on all transactions.
The 800-pound elephant still not acknowledged is the need for monetary reform of fractional reserve banking itself, which allows banks to create most of a nation’s money-supply as debt – out of thin air. Restoring the right of democratic nations to coin their currency directly, as required in the US Constitution is now essential, particularly in the USA, where debt is now crushing every sector and the Federal Reserve along with the Treasury are now printing money in clear sight of taxpayers. The American Monetary Institute has introduced a bill in Congress to achieve the gradual change needed in our banking system (www.monetary.org).
More fundamentally, the failures of global monetary systems are rooted in the expansion of human knowledge and innovation as we transition from the early fossil-fueled Industrial Era to the cleaner technologies of the information-rich Solar Age. Just as the gold standard failed to provide enough “bandwidth” for all the growth, innovation and new communication and transactions of the Industrial Age, so today’s money circuits cannot provide enough bandwidth for the greatly expanded communications and trading of today’s growing Information economy.
The disruptive technologies rapidly displacing those now unsustainable, polluting Industrial Age technologies have already overflowed the existing money circuits and narrow central banking regimes. Money is merely one form of information, and now the pure information-trading platforms are providing the needed extra bandwidth for trading, e.g. e-Bay, Craigslist, Freecycle and thousands of similar electronic trading systems, cell phones, and local scrip “currencies” used to match needs and resources and clear local markets starved of credit. Wall Street’s single-minded focus on money led to its demise. Money was equated with wealth and ignored all the other forms of wealth, from human skills and ingenuity to the productive systems of nature in which all economies are embedded. Money, like gold, will remain a useful store of value and medium of exchange, but now as part of a new broader, more inclusive regime dominated by pure, information-based markets.
Hazel Henderson, author of Ethical Markets: Growing The Green Economy ( 2006) is President of Ethical Markets Media ,USA and Brazil and co-creator with the Calvert Group of the Calvert-Henderson Quality of Life Indicator www.Calvert-Henderson.com