New Bretton Woods
NBW: New Bretton Woods or No Bretton Woods? – A number of articles are written on this idea launched in
Post Bretton Woods: After that the collapse of Bretton Woods, a new system (often called a non-system) of fluctuating exchange rates was adopted. It functioned well enough for a while and has been flexible enough to deal with many economic shocks. But it has been marked by any number of exchange rate crises involving both developed and developing nation currencies.
Pending issues, building problems: Perhaps the biggest failing of the current system is that, under it’s auspices, a constellation of balance-of-payments excesses has emerged that has proved to be quite entrenched or resilient. Exchange rates as it turns out do NOT move to eradicate these imbalances. Large and growing imbalances simply persist in this system. This mixed system with some currencies fluctuating (with occasional official interventions in exchange markets) and others pegged (such as the yuan) has created a new set of tensions. The rapid movements in exchange rates have also exacerbated other problems at time as commodities are priced in dollars and their prices have been destabilized.
Then Vs Now: Until the current financial crisis, it has been in vogue to not worry about such festering problems. Faith has been – had been - that markets will deal with these issues in time. Well, Alan Greenspan applied that faith to the housing market by ignoring excesses that were brought to his attention and look what has happened. Not surprisingly some may think it is time to take a look at the world financial system and see what is going wrong and how it might be put back on track before gets too far out of hand.
There has been blood - We have in recent years seen an Asian debt crisis (1998), a hedge fund ‘unwind’ (2000) threaten the financial system, a stock market bubble collapse (2000) and a housing bubble that inflated and is now still deflating and still creating explosions in the financial markets as it has revealed other excesses (in judgment leverage and market practice) that had remained hidden. That bubble has exposed a number of financial practices that are/were ill conceived. And all the banks of all major trading countries as well as many banking groups from smaller countries have been caught in the net with the result that governments and central banks around the world are intervening in markets in various ways to prop up banks and stabilize markets. Through it all
Fix what? So now as a New Bretton Woods is being discussed different participants see different problems. They have differing objectives, just as they did in the post war period. But do they have enough in common to strike an agreement? That goal is not as clear as it was when the first Bretton Woods meeting was held. And that is the problem for anyone with high hopes.
What is the POINT? Fixing this sort of regulatory lapse that occurred is important. But Bretton Woods was about the trading/currency system. It was about exchange rate regimes and certainly the system now in place shows all the signs of building new and threatening excesses due to the lack of adjustment mechanisms in the monetary system that is in use. Foreign exchange reserves pile up in
The IMF and the
Room to Horse Trade? But
Many have called the dollar dead but one thing is clear and that is in this crisis period while many things are coming unglued the dollar is NOT ONE OF THEM. The dollar has risen in value and has been sought out above nearly all other currencies and competing ‘stores of value’ (yen-excepted) including gold, silver and other precious metals.
Mixed incentives and conflicts - China is in the WTO but the US has not used WTO claims against China (as an unfair trader using as the basis for a claim its pegging its FX rate to the dollar at too low a level). That is probably because
Bretton Woods Bartering: This is the sort of to and fro bartering that is talked about in connection with the New Bretton Woods. But none of this has been talk aimed at a new financial architecture. Is there any plan? Are the authorities ready to endorse some rules regarding fluctuating exchange rates- including rules about allowing ‘developing countries’ to peg their currencies? Are they willing to adopt some interim ranges to LIMIT FX movements? What are they willing to do? Is there a New Bretton Woods being planned or are we being led into the woods with the intent of being abandoned?
G—20: Progress unlikely
On balance I am a skeptical about progress. It’s hard to get agreement on such abstract topics. The financial crisis should be a motivator, but I still don’t think its enough. The reason is that the Fed’s actions have already been meted out and its assistance provided without any quid pro quo. Thus the