Soros: Reorganizing the world order

These two articles below discuss the distintegration of the global financial system and the need to reinvent a financial system beyond The Bretton Woods.

A quick overview of the Bretton Woods system (wikipedia) is important as the Global Financial Crisis was deemed by Soros as worse than the Great Depression and the Bretton Woods system was what was invented after the Second World War, as follows:

“The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments.

On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, “[t]he Bretton Woods system officially ended and the dollar became fully ‘fiat currency,’ backed by nothing but the promise of the federal government.”[1] This action, referred to as the Nixon shock, created the situation in which the United States dollar became the sole backing of currencies and a reserve currency for the member states.

George Soros: Global Financial System Has Disintegrated!

February 23rd, 2009

George Soros: Global Financial System Has Disintegrated!

At a recent private dinner held at Columbia University, two of the most high profile players on the global financial scene expressed opinions that are certain to arouse the most spine-tingling of chills. Currency speculator and billionaire investor George Soros said to his no doubt discomforted dinner colleagues that the world financial system has, in effect, “disintegrated.” He went on to relay his view that the resulting financial and economic turbulence was more severe than the levels experienced during the Great Depression.

“We witnessed the collapse of the financial system…it was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom,” stated Mr. Soros with emphasis. Not to be outdone, fellow participant at this nifty dinner pow-wow at Columbia University, former Fed Chairman and current senior advisor to President Barack Obama, the illustrious Paul Volcker, added the morose observation that, “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

http://search.japantimes.co.jp/cgi-bin/eo20091108a1.html

George Soros, opinion piece.

No Alternative to a New World Architecture

By GEORGE SOROS

NEW YORK — Twenty years after the fall of the Berlin Wall and the collapse of communism, the world faces another stark choice between two fundamentally different forms of organization: international capitalism and state capitalism.

The former, represented by the United States, has broken down, and the latter, represented by China, is on the rise. Following the path of least resistance will lead to the gradual disintegration of the international financial system. A new multilateral system based on sounder principles must be invented.

While international cooperation on regulatory reform is difficult to achieve on a piecemeal basis, it may be attainable in a grand bargain that rearranges the entire financial order.

A new Bretton Woods conference, like the one that established the international financial architecture after World War II, is needed to establish new international rules, including treatment of financial institutions considered too big to fail and the role of capital controls. It would also have to reconstitute the International Monetary Fund to reflect better the prevailing pecking order among states and to revise its methods of operation.

In addition, a new Bretton Woods would have to reform the currency system. The postwar order, which made the U.S. more equal than others, produced dangerous imbalances. The dollar no longer enjoys the trust and confidence that it once did, yet no other currency can take its place.

The U.S. ought not to shy away from wider use of IMF Special Drawing Rights. Because SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage.

The range of currencies included in the SDRs would have to be widened even if some of the newly added currencies, including the renminbi, are not fully convertible. This would let the international community press China to abandon its exchange-rate peg to the dollar and be the best way to reduce international imbalances. The dollar could still remain the preferred reserve currency, provided it is prudently managed.

One great advantage of SDRs is that they permit the international creation of money, which is particularly useful at times as now. The money could be directed to where it is most needed. A mechanism that allows rich countries that don’t need additional reserves to transfer their allocations to those that do is readily available, using the IMF’s gold reserves.

Reorganizing the world order will need to extend beyond the financial system and involve the United Nations, especially Security Council membership. That process needs to be initiated by the U.S., but China and other developing countries ought to participate as equals. They are reluctant members of Bretton Woods institutions, dominated by countries no longer dominant economically. The rising powers must be present at the creation of this new system to ensure that they will be active supporters.

The system cannot survive in its present form, and the U.S. has more to lose by not being in the forefront of reforming it. The U.S. is still in a position to lead the world, but without farsighted leadership, its relative position is likely to continue to erode. It can no longer impose its will on others, as George W. Bush’s administration sought to do, but it could lead a cooperative effort to involve both the developed and the developing world, thereby re-establishing American leadership in an acceptable form.

The alternative is frightening, because a declining superpower losing both political and economic dominance but still preserving military supremacy is a dangerous mix.

We used to be reassured by the generalization that democratic countries seek peace. After the Bush presidency, that rule no longer holds, if it ever did. In fact, democracy is in deep trouble in America. The financial crisis has inflicted hardship on a population that does not like to face harsh reality.

President Barack Obama has deployed the “confidence multiplier” and claims to have contained the recession. But if there is a “double dip” recession, Americans will become susceptible to all kinds of fear-mongering and populist demagogy. If Obama fails, the next administration will be sorely tempted to create some diversion from troubles at home.

Obama has the right vision. He believes in international cooperation, rather than the might-is-right philosophy of the Bush-Cheney era.

The emergence of the Group of 20 as the primary forum of international cooperation and the peer-review process agreed in Pittsburgh are steps in the right direction. What is lacking is a general recognition that the system is broken and needs to be reinvented.

The financial system did not collapse altogether. The Obama administration made a conscious decision to revive banks with hidden subsidies rather than to recapitalize them on a compulsory basis. Those institutions that survived will hold a stronger market position than ever, and they will resist a systematic overhaul. Occupied with many pressing problems, Obama is unlikely to give reinvention of the international financial system his full attention.

China’s leadership needs to be even more farsighted than Obama’s. China is replacing the American consumer as the motor of the world economy. Since it is a smaller motor, the world economy will grow slower, but China’s influence will rise very fast.

For the time being, the Chinese public is willing to subordinate its individual freedom to political stability and economic advancement. But that may not continue indefinitely — and the rest of the world will never subordinate its freedom to the prosperity of the Chinese state.

As China becomes a world leader, it must transform itself into a more open society that the rest of the world is willing to accept as a world leader. Military power relations being what they are, China has no alternative to peaceful, harmonious development. Indeed, the future of the world depends on it.
George Soros is chairman of Soros Fund Management and the Open Society Institute. His most recent book is “The Crash of 2008.” © 2009 Project Syndicate (www.project-syndicate.org)

When men as astute and intimately connected to global finance as Paul Volcker and George Soros are openly talking about the Global Economic Crisis as being “worse than the Great Depression” and having brought about the “disintegration” of the global financial architecture, it is clear that the most dire forecasts for the global economy can no longer be treated as uninformed hyperbole. The most knowledgeable and well-connected financiers on the planet are already preaching the gospel of economic and financial Armageddon.

Soros has also written in the Huffington Post a reflection based on simple math that outlines why the Global Economic Crisis, at least in the United States, will have an economically destructive impact that eclipses the Great Depression. He points out that at the time of the stock market crash on Wall Street in 1929, outstanding credit represented 160% of the U.S. GDP; this figure grew to 260% in 1932 as GDP contracted. Soros, however, writes that America “…entered into the Crash of 2008 at 365 percent, which is bound to rise to 500 percent or more by the time the full effect is felt.”

How should we interpret the musings of Soros and Volcker? In my view, we ignore their informed observations at our peril. Their stated views are not uninformed speculation, but rather a reflection from those in the eye of the storm of this global economic tsunami. Furthermore, despite continued happy talk from the inept political actors across the globe, those who inhabit the rarefied world of high finance, observing the Global Economic Crisis unfold from the pinnacle of power, do not harbor in the least a hint of optimism-or illusion.