Published: 19 October, 2008, 13:21
Edited: 19 October, 2008, 13:21
The world economy has reached the point of capitulation. The dire spectre of a devastating and long term global recession is staring us in the eye. The old ways of economic management are over. And so are the days of Western-backed financial institutions and approaches. As I mentioned not long ago, we are experiencing a paradigm shift.
US President George W. Bush has proposed a series of financial summits to deal with the global crisis. The G8 countries and possibly India and China are expected to assemble in the US after the November presidential election (and with the understanding that the president-elect will also be part of the discussions). According to Bush, there needs to be a consensus on “principles of reform.” The words “principles of reform” have already ignited controversy.
Standing with EU Commissioner Jose Manuel Barroso and French President Nicolas Sarkozy, Bush said any emergency bailout package should respect the principles of “democratic capitalism.” Many have argued, including Sarkozy, that it is America’s understanding of “democratic capitalism” that is at the heart of the current financial crisis.
Washington has a long history of preaching about free trade, free markets, and limited government intervention in the economy. And part of the gospel has been the desire to de-regulate industries and sectors of the economy – like banking.
Well, the mantra to let the financial markets regulate themselves has proven disastrous – to the point of lavishly rewarding those who grossly mismanaged the US financial sector. This simply must come to an end.
It is time the US learned from the rest of the world. Some of the ideas coming from the G8 and EU include:
* Increased regulation and supervision of cross-border banks
* The design and implementation of a global financial early warning system
* Refitting the International Monetary Fund and other established international lenders like the World Bank
* New regulations on hedge funds
* A serious rethink on how credit-rating companies work
* Limit the operations, and consider elimination, of offshore tax havens
* Change how the highest-paid CEOs are compensated
No doubt these are only some of the issues that need to be given serious consideration. This is just the beginning. Retooling the global financial order to 21st century realities won’t come fast or easy. And I suspect the US will drag its feet every step of the way.
Recasting the checklist above eventually requires a new distribution of global financial responsibility. We have not seen this happen since the establishment of the Bretton Woods system back in 1944.
The new economic order can no longer be determined by a small number of Western countries and led by one. Today Russia, India, China, Brazil and other countries need to be part of regulating the global financial regime. They need to be made equal shareholders. This means the US now must listen and accept the opinions – even judgments – of others. “Democratic capitalism” is in for a major make-over. The paradigm shift continues.