New World Economic Order Meeting in DC November 15th

Back to Bretton Woods
European leaders invoke historic conference to fix financial system

By William L. Watts, MarketWatch
Last update: 6:52 p.m. EDT Oct. 24, 2008

LONDON (MarketWatch) -- Forget Davos. As world leaders attempt to pick up the pieces left by the most terrifying financial crisis since the Depression, it may be time for a New Hampshire mountain resort town to reclaim the spotlight.

French President Nicolas Sarkozy and British Prime Minister Gordon Brown have sounded calls for a revisit of the 1944 Bretton Woods conference that laid the groundwork for much of the postwar financial world order.

President Bush earlier this week acquiesced to calls by Sarkozy and European Union officials, setting a Nov. 15 summit of leaders from the Group of 20 leading industrial and developing nations to be held at the National Building Museum in Washington.

While they won't be meeting at the New Hampshire resort town that gave the Bretton Woods system its name, European leaders hope the gathering will get the ball rolling on a number of potentially major reforms.

"The U.S. really is the epicenter of the crisis, so the Europeans may think they're on the moral high ground and try to lead the process of reform," said economist Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington. "We'll have to see how this turns out."
Sarkozy was the first to make a call for a new "Bretton Woods."

Last week, he told the European Parliament that the talks must aim to "overhaul capitalism," not by "questioning the idea of a market economy" but by implementing certain principles, including subjecting all financial institutions to regulation, ensuring bonuses don't provide incentives for undue risks and re-thinking the monetary system.

Not to be outdone, Brown, in an Oct. 17 op-ed in the Washington Post, also called for a "new Bretton Woods."

The same "sort of visionary internationalism is needed to resolve the crises and challenges of a different age. And the greatest of global challenges demands of us the boldest global cooperation," he wrote.

Brown declared the old postwar financial institutions "out of date" and in need of rebuilding to deal with a "wholly new era in which there is global, not national, competition and open, not closed economies." He reiterated calls for cross-border supervision of financial institutions, shared global accounting standards, "more responsible" executive pay and a role for international institutions to serve as an early-warning system.

The original Bretton Woods
Convinced that economic hardship had led to the rise of fascism, the Allies called the Bretton Woods conference in an attempt to address the causes of the Great Depression. The primary focus, economists say, was to come up with a currency system less rigid than the gold standard while providing similar stability. As part of the effort, the conference laid the foundations for the International Monetary Fund and the World Bank.

The resulting system remained in place until 1971, when the Nixon administration removed the dollar's peg to gold and allowed the greenback to float -- effectively putting an end to the fixed-rate system.

Some economists find references to Bretton Woods curious.

"Bretton Woods was about exchange-rate management and setting up facilities for country-to-country lending under duress, and that actually hasn't worked bad in this crisis," said Roger Kubarych, chief U.S. economist at UniCredit MIB and a senior fellow at the Council on Foreign Relations.

"It's mainly a banking crisis. It's not a currency crisis," Goldstein agreed.

While some emerging economies, such as Iceland and Hungary, have seen runs on their currencies, "there's been no run on the dollar, there's been no run on the major currencies," he said. Chances of a major move back toward fixed exchange rates appear quite unlikely.

But Simon Derrick, chief currency strategist at Bank of New York Mellon in London, thinks the references to Bretton Woods may point, in part, to a desire to rein in recent volatility in foreign exchange markets.

Derrick also noted that European Central Bank President Jean-Claude Trichet warned in a news conference following this month's meeting of Group of Seven finance ministers and central bankers that authorities viewed excess volatility as a problem, even though no mention of currencies was made in the G7's official communique.
"It does seem to me there's evidence to suggest that Europe's very much focused on this idea of the need for perhaps a rather more controlled currency regime than currently is the case," he said.

That doesn't mean a return to a fixed-rate regime, he said. But authorities could make the case for a move back towards more active intervention in currency markets to rein in volatility, a feature of markets well into the 1990s.

After all, the British pound has seen a record daily drops against the U.S. dollar this week and other currency pairs are also showing huge swings.

Extreme volatility "clearly has the potential to do a huge amount of damage to investors, to people who aren't properly hedged, to people who are trying to forecast budgets. That extreme volatility contains the threat of feeding back into ... asset markets," he said.

No one-day fix
Regardless, leaders aren't likely to come out of the one-day affair with anything resembling a broad plan to overhaul the world financial system. While the summit may get the ball rolling, there are a lot of very complex details that need to be ironed out. Leaders may schedule more meetings, but the nuts and bolts of any structural overhaul will be ironed out by technocrats, not presidents and prime ministers, experts said.

Moreover, the Nov. 15 conference comes shortly after the U.S. presidential election, leaving the Bush administration little leeway for serious negotiations. The White House has said it will seek "input" from the president-elect.

"I'm not sure I expect a lot out of this first meeting. I expect mostly principles and expressions of determination and cooperation," Goldstein said.

"Not all bad, I think - and much better also that they do it at the G-20 level than the G-8 level because the emerging economies have a big stake in the crisis."

William L. Watts is a reporter for MarketWatch in London.