Spurred on by my recent realisation that I am better qualified for the job than Christine Lagarde, I have put together a modest proposal to resolve the turmoil in the global financial markets. Please send it around, discuss it with your friends, and most importantly: improve upon it.
The most obvious feature of the current crisis in the Eurozone, and the longer-term crisis over the rebalancing of power in the global economy between east and west, is the way that it is happening in a political vacuum. The sense of failure of politicians to manage these historic developments risks exposing us all to an extended period of chaotic change during which the vulnerable suffer.
This short statement is a summary of what it would mean for politicians to act in the interests of their electors to protect them against financial instability. It begins by listing the assumptions that are framing, and limiting in an unhelpful way, the present debate. It then moves on to propose 10 specific actions which need to be taken; further explanation for these actions and greater detail is provided in the following notes.
The most striking feature of the present crisis is the limited range of policy options that are included in the discussion. The most constructive actions are being ruled as ‘impossible’ because of a number of mistaken assumptions which should now be abandoned. These include:
• That markets are efficient while politicians are not;
• That the problem of finance is essentially technical rather than political;
• That politicians should not have a role in managing the flow of money and credit within and between national economies.
Our proposal rests on the understanding that we need politicians to take strong and wide-ranging action to support the interests of their citizens rather than responding to the increasingly incoherent and inconsistent demands of a range of financial interests.
10-point Stabilisation Plan
1. The announcement by the finance ministers of the world’s leading economies of a six-month moratorium period during which all trade in their currencies and their bonds will be suspended.
2. During the period of moratorium, the negotiation of a global international agreement to create an agreed system of political control over finance.
3. The creation of a new reserve currency instrument, not linked to any single national economy.
4. The linkage of the new reserve instrument to carbon dioxide emissions.
5. The reintroduction of national democratic control over currencies, with a system of negotiated exchange between currencies.
6. The reintroduction by national governments of strict reserve requirements on their national banks and a parallel system of rationing of consumer credit.
7. The creation of public banks to provide a safe haven for citizens’ deposits and with lending designed to facilitate the transition to a sustainable economy.
8. The creation of an independent body to undertake the monitoring of country’s sovereign debts and the rating of their credit-worthiness. The majority of the membership of this Global Audit Committee should be comprised of academics and laypeople, rather than those who work in the finance sector.
9. The creation of national Audit Committees to evaluate the process by which current debt was acquired; where this debt was acquired by a process that was not in the interests of the citizens of the country it would be possible to repudiate that debt.
10. The elimination of secondary markets trading in the debt of nation-states and the establishment of a global body to register all derivative instruments on the basis of their ability to increase social and/or environmental welfare.
Notes on the Plan
1. At present politicians are finding it impossible to act because of fear of the immediate response from the financial markets. The moratorium would give them the space to consider a policy proposal.
2. Following the last period of international financial instability in the 1930s, which ultimately led to the Second World War, a global agreement to govern international finance was signed at Bretton Woods. It was gradually abandoned following the US’s unilateral decision to cut the link between its currency and gold in 1971, however, the role of the dollar as the global reserve currency, which depended on the link with gold, has continued. The story is told by Paul Davidson in ‘Reforming the World’s International Money’.
3. The role of the dollar as a national currency of the world’s largest economy, as well as the international numeraire, is a key cause of the instability in the global financial system. Such a call was made in UNCTAD’s Trade and Development Report 2009. Earlier this year the IMF proposed that its Special Drawing Rights might play such a role (Enhancing International Monetary Stability—A Role for the SDR?), however the lack of neutrality and representativeness of the IMF undermines its credibility in making such a proposal.
4. This linkage, first suggested by Richard Douthwaite in The Ecology of Money, would enable the new reserve currency to also introduce an ecological limit on the global economy, in contrast to the current emphasis on a return to rapid economic growth whatever the environmental consequences. A discussion of the proposal can be found in Molly Scott Cato’s paper ‘A New Financial Architecture based on a Global Carbon Standard’.
5. The fact that the Chinese currency the Renbinmi is under political management by the state has attracted attention in recent discussions, but less has been made of the fact that until the 1980s most western economies also managed their currencies. The history of exchange controls in the UK between 1939 and 1979 is described in an article by Brandon Hugget in the National Archives.
6. The financial crisis of 2007/8 was clear evidence of the failure of the Basel process for determining the capital requirements for banks, which is unsurprising given the domination of the financial interest in these negotiations. Simon Johnson, former Chief Economist at the IMF, has made this case in an article ‘Capital Failure’ published in the New York Times. Since as was made clear following the crisis, the citizens of nation-states are the ultimate guarantors, it should be the role of their democratic representatives to ensure that banks do not take on more liabilities than they are able to support.
7. Such a bank could operate in a way similar to the Banco do Brasil, which is state-controlled and uses credit to support the interests of the citizens of the country, while also providing a place for them to invest their savings.
8. Such a body would replace the increasingly discredited credit-rating agencies. It has long been apparent that these agencies have fundamental conflicts of interest, since they profit from the very system that they are established to monitor. They have also faced criticism for their failure to accurately assess the risk faced by banks as a result of the range of ‘exotic’ financial products before, during and since the financial crisis of 2008. Such a crucial role as assessing the costs national governments should pay for their borrowing should be undertaken in a democratic and transparent way. President of the EU Commission Jose Manuel Barroso is one leading European politician to have challenged the role of these US-based institutions; German Chancellor Angela Merkel another.
9. The prototype for such and Audit Committee is that established by President Correa following his election as President of Ecuador in 2005. In spite of the country’s oil wealth poverty was widespread because 50% of national income was being spent on servicing foreign debt. The Audit Committee was established to investigate who the creditors were and how they had persuaded governments to take on the debt. Eventually, it found that some 70% of the debt was illegitimate and the creditors were forced to sell at reductions of around 90%. Audit Committees have now been established in Greece and Ireland.
10. Such a proposal would help to democratise this centre of power in the global economy. During the process of registration, the onus will lie on the product’s originator to demonstrate that it is beneficial and there is no alternative way of achieving the same purpose. The root cause of the financial crisis was the deliberate obfuscation on the part of financiers of the riskiness of the activities. Under this proposal, only those derived investments which can be demonstrated to have a social value, say by spreading risks over a wider group of people, would be permitted.