From the October 19, 2008 Sunday Times (London)
October 20, 2008
by Irwin Stelzer
Politics may make strange bedfellows, but economic crises make even stranger ones. Gordon Brown, a free trader, now finds that Nicolas Sarkozy, an arch-protectionist, has virtues he had not previously noticed. It seems that they are united by three things. First, they believe, or at least are pretending that they believe, that the current ills originated in the United States. You might remember: these are the same United States whose entrepreneurship Chancellor Brown lauded to all who would listen, before becoming prime minister and slipping easily into the anti-American mode that now dominates his public and private discourse.
Second, Brown and Sarkozy, along with their EU partners, believe that now is the time to put the former hegemon in its place. America, they believe, is paralysed by the lame-duck status of its president. It will, they reason, be forced to go along with any European proposals for what is variously called a “new financial architecture” and a “new world order”. The joy on the faces of EU leaders as they gather for their conferences can be seen in news photos. Never mind that the banking systems of their countries are on the verge of collapse, or that they are headed for a recession deeper and longer than the one the United States will suffer. Now is their chance to do things that the Americans might not like, but can’t stop.
Third, Brown, Sarkozy & Co have always done what President Ronald Reagan accused his own bureaucracy of doing: “If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidise it.” Brown, long famous for profligate spending and mindless regulations, now proposes to subsidise homebuying by first-time buyers so that they can catch the falling knife that is the house-price market. And his new-found friends in the EU have never hesitated to increase their tax-funded budgets, and draft regulations at such a rate that even the lobbying firms in Brussels cannot follow all the action.
But that’s no business of the US. Now, however, the EU 27 plan to make it America’s business. The enthusiastic response to Brown’s memorandum suggests that his partners have signed on to a regulatory scheme that they plan to put to the US on a take-it-or-leave-it basis. There will be more regulations, more regulators, more international gatherings of those regulators, perhaps a new Bretton Woods agreement with a timetable “for agreeing these proposals over the next few weeks and months”, says the prime minister.
Regulators would study the world’s economies for signs of trouble. They would supervise the impact of the financial sector on the real economy. Hedge funds would be closely regulated. Executive pay and bonuses would be limited. Offshore centres would be regulated (important to the French, who find foreign competition unpleasant). “Market participants,” Brown insists, “should develop a robust clearing facility for OTC \ credit derivatives and fulfil other commitments to achieve greater certainty in OTC deriv- ative markets.” Whatever that means, it shows that no detail is to be spared the regulator’s review. There is, alas, no mention of a commission to stimulate innovation in financial services.
But give Brown his due. He did lead the way in developing a plan to do the most important thing that could be done to bring the crisis off the boil: recapitalise the banks. That, while Hank Paulson and George Bush were talking about spending $700 billion to buy duff IOUs from the banks — which would do nothing to add to their capital unless the US Treasury overpaid, which it said it would not do. The Dutch finance minister Wouter Bos had reason to say: “The crisis showed an absence of US leadership.”
Now there is nothing wrong with greater co-ordination of economic policy among nations. It was good that the leading countries co-ordinated their recent reduction in interest rates, and it is good that there are talking shops, such as the International Monetary Fund (the US is its largest funder), where ideas can be exchanged.
But informal co-operation is not the same thing as erecting a new world order. As the British delegation to the original Bretton Woods, New Hampshire, conference in 1944 repeatedly argued, individual nations must be free to adjust to special circumstances by having “opt-outs” — the ability to flout the rules when circumstances require.
Consider the question of purchasing shares in banks. In Britain, the prime minister initially decided to attach punitive conditions to the assistance the government was offering. Preference shares were to have a 12% coupon; no dividends could be paid on common shares until the banks retired the government’s shares; there were to be no bonuses for executives.
America has something Britain does not: a large non-bank financial sector. Favour the banks, and GE and other financial firms find themselves hard put to compete for funds, which is why the Fed is buying non-banks’ commercial paper to level the playing field. Also, with no hard-left pressure to be punitive, the American administration could set earnings on its preferred shares at 5%, allow dividends on common shares, and impose less stringent limits on executive compensation. One size just does not fit all. Nor would a return to the fixed-exchange-rate regime of Bretton Woods fit today’s globalised world, no matter what Sarkozy thinks.
Sarkozy “is not going to let the Americans get in his way”, an aide said. And Brown wants to hold his big international conference after the US elections, so he can deal with the more tractable Barack Obama.
For Brown, such a Bretton Woods II would put him in the role played by John Maynard Keynes in 1944, when his biographer Robert Skidelsky reports Keynes “was the Churchill of this [financial] world, and no one could have taken his place”.
That wouldn’t be the first time, and won’t be the last time, the prime minister has likened his role in coping with the financial crisis to Churchill’s role in coping with Hitler.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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