America to lose superpower status in global financial system

 

OPINION:The goal of the G20 summit in New York after the US elections will be nothing less than designing a new global financial and monetary structure to replace the expiring Bretton Woods one created back in 1944, writes Tony Kinsella

IN OCTOBER 1964 Soviet leader Nikita Khrushchev was deposed while on holidays in Abkhazia, but was allowed to live out his life in discreet retirement. Khrushchev's son, Sergei, now a professor at the US Naval War College, recalls his father describing the reality of that retirement as marking a "civilised coming of age" for the Soviet Union.

We are living through a planetary "civilised coming of age". The process whereby the structures, parameters and regulation of our global financial systems will be transformed began at the Camp David meeting last Saturday between presidents Bush, Sarkozy and Barroso.

Nicolas Sarkozy talked of a "systemic crisis" and bluntly said that ". . . hedge funds cannot continue operating as they have in the past; tax havens . . . financial institutions that are under no supervisory control - this is no longer acceptable, this is no longer possible".

George Bush, more cautiously talked of the "regulatory and institutional changes necessary to avoid a repeat of this crisis".

Washington would prefer to patch the system and return to the status quo ante with the US-centred 1944 Bretton Woods agreements and structures largely unchanged, but this is no longer on the cards. Our financial systems are in chaos, with markets see-sawing wildly. Last week wealth was being destroyed at a rate of around €250 million a second. The price of oil halved in three months, before beginning a modest recovery.

The United States put €550 billion on the table to rescue its crippled financial sector.

EU countries are offering four times that figure. Switzerland has injected €45 billion into the country's two major banks, with its federal government now owning 10 per cent of UBS. The South Korean package stands at €100 billion.

Banks have so far written off around €550 billion worth of dubious derivatives, this probably represents a quarter of their dodgy "assets". Hold on to your hats, this roller-coaster has miles to go before it sleeps.

Chaos is frightening in that it breaches bulwarks we once, just yesterday, viewed as inviolable.

It must also be temporary in that it creates a vacuum of power structures, and nature abhors a vacuum. As Henry Adams wrote just over a century ago "Chaos often breeds life, when order breeds habit."

Some questionable habits have already been decapitated, and others are securely seated in the tumbrils en route to their fate.

Financial markets had become casinos, divorced both from their essential purpose and from the basic requirements of a market - to provide capital to those with good ideas, products and projects.

Adam Smith's "invisible hand" is supposed to perfectly regulate markets. A precondition for that hand's operation is the existence of a public market where sellers offer and buyers bid. Most derivatives were never market-traded, they were rather the subject of private, even confidential, deals between financial whiz-kids. It became possible, even desirable, for the gods of these secretive financial casinos, and the chief executives who generated their gambling chips, to become seriously wealthy via their pay cheques.

Remuneration packages involving stock options, bonuses and cast iron severance payments that bore no relationship to performance, had become the unjustifiable but unquestionable norm.

Those days are thankfully going, although Wall Street persists in planning bonuses this year of some $70 billion.

Politics and political structures had become pointless since the casinos of the City and Wall Street were where the real decisions were made. So candidates were judged more on whether they would be fun to have at your barbecue rather than on their qualifications for office - which gave us all eight years of George W.

A cosmopolitan intellectual African-American is poised to sweep into the White House with an electoral college landslide. Barack Obama leads by nine points in Virginia and five in Florida, with West Virginia too close to call.

Remember that dangerous, distant, even threatening European Union that scared Irish voters into rejecting the Lisbon Treaty last June? It has now become the rock of financial and political security, and very possibly the midwife to a new structural reality, our planetary "civilised coming of age".

The new marketplaces that will emerge from today's rubble will be tightly policed, and obliged to focus on essentials. Credit-rating agencies will come in for far more scrutiny, pressure on tax havens will be intense, and liquidity standards for hedge funds and other financial bodies will be tightened.

The summit will begin in New York just after the US elections, and will involve a group, the G20, we had all better learn more about. Their goal will be nothing less than designing a new global financial and monetary structure to replace the expiring Bretton Woods one created back in 1944.

The survival of the US dollar as the reserve currency, and thus Washington's pivotal role, is questionable. Proposals for a virtual unit, possibly weighted for economic performance and balance of payments, are going to be pushed, as John Maynard Keynes tried back in 1944. The G20, founded in 1999, includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States of America and the European Union, represented by its president-in-office. The European Central Bank, the IMF and the World Bank also participate.

G20 members represent around 90 per cent of the global economy, 80 per cent of world trade, and 66 per cent of the world's population. Comparable G8 (Canada, France, Germany, Italy, Japan, Russia, UK and USA) figures are 50 per cent of our global economy and 14 per cent of the planet's population.

Brazil has foreign reserves twice those of most G8 members, excluding Japan and Russia. India's reserves almost equal US ones, while China's are five times greater.

We are witnessing the emergence of planetary political and regulatory authorities and the end of global domination by the old, largely white, imperial powers.

In the past our species has only been capable of such radical shifts in the aftermath of horrendous wars.

Now we will do so around conference tables - a collective "civilised coming of age".