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Reform is Needed. Reform is in the Air. We Can't Afford to Fail
The task is to build a new financial architecture. If we flunk it, the pain will strike most cruelly in the world's poorest countries
The financial crisis that began in America's sub-prime mortgage market has now become a global recession - with growth projected to be a negative 1.5%, the worst performance since the Great Depression. Even countries that had done everything right are seeing marked declines in growth rates, and even deep recessions. And much of the most acute pain will be felt by developing countries.
A UN commission of experts on reforms of the international monetary and financial system, which I chair, has just published its preliminary report. It focuses especially on the impact of the crisis on developing countries and the poor everywhere, which is likely to be severe. An estimated 30 million more people will be unemployed in 2009 compared to 2007. The increase could even reach 50 million. Progress in reducing poverty may be halted. The report warns that: "Some 200 million people, mostly in developing economies, could be pushed into poverty if rapid action is not taken to counter the impact of the crisis."
While this is a global crisis, responses are undertaken by national governments, who quite naturally look after their own citizens' interest first. Particularly invidious are protectionist measures, such as the US "buy America" provision in its stimulus package. In fact, the World Bank reports that 17 of the group of 20 countries have engaged in protectionist measures, after making a commitment not to do so in their meeting in Washington in November. By focusing on national, as opposed to global impacts, the global stimulus will be less - and the global recovery weakened.
While there is a consensus that all countries should undertake strong fiscal stimulus measures, many developing countries do not have the resources, and it calls for a concerted approach for additional funding, both for spending and liquidity support for countries and corporations in developing countries that are strained by the current credit crunch. Developed countries should contribute 1% of stimulus spending; there should be an immediate issue of special drawing rights (SDRs), the "IMF money" that can be used especially to help those facing difficulties, and an expansion of regional efforts, such as the Chang Mai initiative in Asia.
It is important that any assistance be provided without the usual strings. Conditions such as those which force developing countries to contract spending and raise interest rates are counterproductive: the intent of the assistance is to help them expand their economies, thereby assisting the global recovery. Deficiencies in current institutional arrangements for disbursing funds - for example, through the IMF - have long been noted, but the reforms so far are insufficient. Countries with funds are often reluctant to give money to institutions in which they have little voice, and which have advocated policies that they do not support; and countries are often reluctant to borrow, given the stigma associated with turning to these institutions. The commission urges the creation of a new credit facility, in which the voice of the new providers of finance and the borrowers are both better heard.
There are several important lessons to be learned from the crisis. One is that there is a need for better regulation. But reforms cannot be just cosmetic, and they have to go beyond the financial sector. Inadequate enforcement of competition laws has allowed banks to grow to be too big to fail. Inadequate corporate governance resulted in incentive schemes that led to excessive risk taking and short sighted behavior, which did not even serve shareholders well.
The Commission recommends the establishment of a Global Economic Coordinating Council, not only to co-ordinate economic policy, but to assess the economic situation, identify gaps in the global institutional arrangement, and propose solutions. For instance, there is a need for a Global Financial Regulatory Authority - without which there is a risk of regulatory arbitrage, undermining regulation, and creating a race to the bottom. There is a need for a Global Competition Authority - markets are global in scale. There is a need for a better way of handling defaults of countries, of which there may be several in this crisis. And there is a need for better ways of managing the many risks that developing countries face, especially with debt and capital account management.
The other important commission recommendation concerns the creation of a new global reserve system. The existing system, with the US dollar as reserve currency, is fraying. The dollar has been volatile. There are increasing worries about future inflationary risks. At the same time, putting so much money aside every year to protect countries against the risks of global instability creates a downward bias in - aggregate demand - weakening the global economy. Moreover, the system has the peculiar property that poor countries are lending trillions of dollars to the US, at essentially zero interest rate, while within their country there are so many needs to which the money could be put. The Commission argues that a new Global Reserve System is "feasible, non-inflationary, and could be easily implemented".
After the East Asia crisis, there was much talk of reform, of a new global financial architecture. But there was just talk; as the global economy recovered, the impetus for reform faded. This is a more severe crisis. It will last longer. Hopefully, this time, we learn our lesson.
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13 Comments so far
Show AllI liked his previous article but this one is a bit sleepy. The part about a new "reserve system" is interesting but otherwise the article is a bit vague.
"...a new "reserve system"
Meet the new fiat currency, same as the old fiat currency.
"We can't afford to fail." But what if we do? What if things are as bad or worse than the "worst case scenario" types (like me) think?
that is if america actually CARES about the rest of the world.
"WE AMERICANS CAREFULLY NURTURE A STUDIED ATTITUDE OF DETACHED INDIFFERENCE TO THE SUFFERING OF OTHERS...
..........EVEN IF WE ARE THE CAUSE OF IT"......unknown american poet.
There isnt' going to be any reform.
Obama is in the pocket of the international financial elite exemplified by Bernie Madoff and Rahm Emmanual. There will be no health care for the poor and no housing unless you give half of your income to a bank.
They are going to destroy houses rather than house the homeless.
They are going to watch the poor die from lack of food and medicines on US streets.
If you object the police will shoot you.
If you resist it's off to Gitmo with you.
Not a snowballs chance in hell there is going to be justice.
There is only one way to correctly spell "reform"...and that is r-e-v-o-l-u-t-i-o-n....nothing else will get the same results. May I refer you to a comment from a different article.....
Fred54 March 27th, 2009 9:58 am
You can only be a slave if you choose to be. Naomi Wolf so purposefully said that a protest is only effective when it stops traffic. To effect real change you have to understand the nature of laws. They are rules set down by a tiny minority to enslave the majority. We see with our own eyes today that the ruling elites aren't bound by them, are they. We are watching the middle classes wealth be stolen from them and handed up to the tiny minority. They aren't going to give it back, it has to be taken. Every middle class American should read the works of Mohandas Ghandi. He, one man took India back from the British Empire by simply refusing to cooperate with their laws. No violence, no threats just quietly and steadfastly refusing to cooperate. This whole sordid mess reminds me of an old story about 2 Roman senators. The younger one was frustrated that he couldn't find a slave when he needed one. He mused that publically marking slaves would be a good Ideal. The older wiser senator said 'Oh No" that would be a bad idea because then they would see how many of them there really are. Everyone knows injustice when they see it. Everybody knows that a hard working family thrown out on the street because of factors beyond their control isn't fair while the people responsible receive billions in taxpayer money. When enough people refuse to cooperate the ruling elite are powerless and their laws are meaningless. When you receive an eviction notice, ignore it. When the police show up be very polite and stay out of their way. As soon as they leave drill out the locks and move back in. They might be called back on a trespassing complaint but in many states will need another court order. 10 people do this and they'll ignore it. 1,000 people and they will probably try to make an example of a few. A million people do it and and the system will collapse, there aren't enough policemen. Stop paying taxes. Again, 10 people and nobody cares, thousands and they'll try and make some examples, but millions and the system collapses. You want out of Iraq and Afghanistan then stop obeying orders to deploy. 100 is business as usual with court marshal's and discharges. Thousands and there will be rumblings in the Pentagon. hundreds of thousands and the war will end immediately. Waving signs in "free speech zones" isn't going to help. The whole reason the free speech zones were created is so that you couldn't stop traffic. They are also created so the Media can point their cameras in another direction and not cover the protests. If we force the media to cover us, then all the slaves will
realize how many of us there really are.... America, if you want your country back, you have to stop traffic.
Fred in
"The whole reason the free speech zones were created is so that you couldn't stop traffic."
That is a good point. Free speech zones make a mockery out of free speech rights. The brilliance of creating "free speech zones" is that they give the illusion of free speech without providing for meaningful free speech. Many would say, and I would have to agree, that the US political system has been gamed to the point that elections in the US in the 21st Century make a mockery out of elections by only giving the illusion of a choice. One may choose between a careful polished corporatist or a reckless maniacal corporatist, but it is still always going to be a choice between two corporatists as the corporate media will make sure to eliminate the rest.
The modern US corporatists put the old Soviets and the Maoists to shame. They take away choice without the sheep even realizing it is gone.
O is right, the time for reform is long since passed. The time for resistance has arrived.
The capitalist economic system is exhausted and will soon collapse. From the time of the collapse of feudalism and its birth in the Industrial Revolution, capitalism was always destined to become a dominant global force. Globalization will be a historic marker as the zenith of its existence. But globalization robbed the system of the only thing that kept its fatal internal contradictions at bay—growth. Capitalism has conquered the planet, it has nowhere else to feed. The time of its death is now at hand.
There have been riots in Greece and Latvia that threatened to bring down the governments of both countries. There has been civil unrest in Europe and preparations for it in China, India, Russia and the United States. Skirmishes around the world are signs the two most powerful groups that capitalism creates are beginning to engage in a final battle for power. Marx called them the bourgeoisie, the ruling class, and the proletariat, the working class. It can be most simply described as the clash between the wealthy and the working people.
The fight is inevitable and it will destroy one class or the other. Then on the ruins of the old system, the class that prevails will reorganize society along the lines of their dictates. If the bourgeoisie remains on top it will not mean the restoration of capitalism to health and stability. It will mean the depopulation of the planet and the enslavement of man in a world described in the dystopian literature of Orwell, Huxley, and Atwood.
Meanwhile, on our side of the class struggle, there is admittedly no US political party or other formation which expresses the destiny of the working class to power and socialism. Class consciousness would seem to be a sentiment in short supply. But think about it, would not the United States be the last place where a consciousness of themselves as a class would seize the minds of working people? That’s what empire, that’s what imperialism, that’s what racism functions to do.
Class consciousness can develop very quickly in a people though! It is on the rise in the US right now in the reaction to the Wall Street bailouts and the banker's coup that is underway. It will accelerate as the material cocoon provided by the world’s dominant economy wears thin.
Workers, united across all artificial boundaries created by capitalism, whether nation, race, sex, or religion are the only hope now. This is the only force capable of staying the hand of the bourgeoisie and insuring the human experiment “shall not perish from the earth”, to borrow Lincoln’s phraseology.
In your circle, however large or small that may be, in everything you write and say, draw the boundary lines clearly for people between the opposing forces in this final class war. Don’t confuse them with Democrats and Republicans. The ruling class is wealthy, we work for a living. Build our forces by raising class consciousness and giving every worker the best chance of making the right decisions in the battles just over the horizon now.
The word "global" is mentioned 17 times in this article. Stiglitz is an obvious advocate for the global currency . Perhaps he is a potential chairman candidate for the "new global reserve system", an economist's wet dream come true. Grow, grow, grow.
"Hopefully, this time, we learn our lesson." Hasn't been learned before, why should this time be any different? The lesson is far from over.
A History of Interest Rates by Sidney Homer, Rutgers University Press, 1963
Credit is sometimes considered a modern device or even a modern vice. It is true that a few new credit forms have been developed in our century and statistics reflecting the growth of the volume of credit during recent decades are impressive. But a glance through the pages of financial history will dispel the notion of novelty. Credit was in general use in ancient and medieval times. Credit long antedated industry, banking and even coinage; it probably antedated primitive forms of money.
For example, about 1800 B.C., Hammurabi, a king of the first dynasty of ancient Babylonia, gave his people their earliest formal code of laws. A number of chief provisions of this code regulated the relation of debtor to creditor. The maximum rate of interest was set at 33 1/3% per annum for loans of grain repayable in kind, and at 20% per annum for loans of silver by weight.
Twelve hundred years later, around 600 B.C., the legal history of classical Greece began with the laws of Solon. Drastic reforms were then called for by an economic crisis in Athens stemming in part from excessive debt and widespread personal slavery for debt.
The Romans also began their legal history with a body of laws regulating credit. This, too, was forced by a crisis characterized by excessive debt.
These three examples from the earliest days of historic Babylon, Greece and Rome are enough to support the conclusion that credit at interest was widespread enough to create major political problems before the emergence of written history.
this guy is a Nobel Prize winner economist and he is saying the truth that we need to act globally- and we should have done this a long time ago.
However, we need to have population control. The reason why the chinese children are not starving but the Indians are is because there is just one baby in a family and even if the family is poor, they can feed one mouth and the child becomes the most valued member of the family and gets a lot of attention and care and grows up to amount to something.
PLEASE-- family planning
I don't see the point of revolution when half the population still vote Republican.
It might seem torturous but we've got a long way to go convincing the working class of the progressive agenda.
Especially with so few economists on our side.
Joseph Stiglitz omitted one thing. He says: 'Countries with funds are often reluctant to give money to institutions in which they have little voice'. He forget to add: unless they are banks, AIG.........
...Developed countries should contribute 1% of stimulus spending; there should be an immediate issue of special drawing rights (SDRs), the "IMF money" that can be used especially to help those facing difficulties, and an expansion of regional efforts, such as the Chang Mai initiative in Asia.
...
It is important that any assistance be provided without the usual strings. Conditions such as those which force developing countries to contract spending and raise interest rates are counterproductive: the intent of the assistance is to help them expand their economies, thereby assisting the global recovery.
Sometimes I think we make things too complex. How about focusing on assistance in the form of technology and materials at zero or very low cost instead of currency?
Money is simply a standardized unit of exchange. Countries can issue their own deficit spending bonds that are only valid within the country - we do not need global SDRs or any other fancy financial instrument. Technological and material assistance will allow such economies to expand, and once they stabilize, they will be more receptive to trade.
We can deal with the notion of a Global financial infrastructure as a separate issue - right now we ought to worry about getting millions of people to be productive.