City & Business: What we need now is a bit of conviction
Sunday 27 September 1998
To be sure, the news since July has rammed home the fact that the old, 20th century architecture for the global financial system is in need of reform. On Wednesday the Federal Reserve Bank chairman, Alan Greenspan, told the US Congress that the global financial crisis "has increased the possibility that the slowdown in the American economy will be more than sufficient to hold inflation in check."
The same day the New York Fed announced it was "facilitating" a $3.5bn bailout for Long Term Capital Management, a hedge fund not too far down the scale in public stature from George Soros' Quantum Fund.
We are, however, past the point of talking the markets up with sound bites about a new "21st century architecture" for international financial organisations. There is a real chance that the markets' decline will not be halted by a cut in US interest rates, possibly on Tuesday when the Fed's policy-setting open market committee meets, and possibly by a substantial three-quarters of one per cent.
So fraught has the situation become, indeed, and so pallid the policymakers' response, that people not enamoured of Lady Thatcher and Ronald Reagan are beginning to pine for the good old days.
You do not have to have agreed with the Iron Lady's convictions to remember "conviction politics" with a sneaking fondness. "Conviction politics", after all, was Eighties' shorthand for plain speaking and not mincing about with the exercise of power.
In contrast to the market research-driven, play-to-the-gallery politics of Tony Blair and Bill Clinton, Eighties conviction politics was also about history. Tony and Bill offer us the mantra of prosperity with social justice. Mrs T wanted to drag us, by our cuticles if need be, from one point (unions, state-owned assets) to another (bust unions, everything privatised).
The Prime Minister's speech to the United Nations general assembly last Monday served as a neat showcase for the new political language bearing on financial reform. It treated the financial crisis as if it were an electrical or plumbing problem. Rewire here, install a drain there, say a few kind words about the IMF while putting it out to pasture, create a new global "super agency" and voila: the panic that bloomed in Asia 15 months ago and may now be threatening the US banking system will vanish.
In keeping with the DIY language in vogue for discussing international financial reform, no-one has had the bad taste to raise the issue of power. Financial power, of course, is never easy to talk about. Drop by the Shoreham Hotel or other hotels serving as watering holes for finance ministers and private bankers in Washington this week, and what you see is a lot of out-of-shape men between 40 and 60 circulating.
It's the same for any kind of power, really. But military power is easy to imagine. The man in the suit pushes a button and off goes an Exocet. Ditto political power. The man in the suit signs a piece of paper and a bigger chunk of your pay is siphoned off by Inland Revenue.
Financial power is more abstract. You have financial power if society grants you the authority to say this man or company or nation will have spending power now because you believe he will pay back what he owes with interest later, but that man or company or nation will not have spending power.
But it is just this abstraction that the problems in Asia, Russia, and Latin America are calling into question. Sure, the IMF could have done better in Asia. Sure, it could have done better in Russia. But the IMF is ultimately the sticking plaster of the system. Blaming it for the financial crisis is like blaming the National Health Service for appendicitis.
History makes this clear. Although international finance is one of the subjects that gets hearts beating in perhaps one out of a thousand souls, the tale of the IMF, international banks, and emerging markets is actually both dramatic and straightforward.
In the 1960s banks stayed at home. They lent money and floated bonds and shares within national boundaries. Finance for the development of the Third World was supplied by Western taxpayers via their governments.
In the Seventies, politicians in London, Washington, and other Western capitals decided they could no longer subsidise Third World economic development and remain in power. So they withdrew from the arena. Into the vacuum rushed the industrial world's big commercial banks flush with petrodollars.
From 1974 to 1981 the big banks, working largely out of the City, recycled billions of petrodollars to the governments of Brazil, Argentina, Mexico, and other sovereign creditors in the form of high-margin syndicated loans.
Simultaneously, Siegmund Warburg and other City pioneers created the eurobond market. They did this by capturing the dollars US multinational companies had placed on deposit outside the US and packaging them as bonds to such borrowers as the Italian highway authority looking to raise money cheaply outside the control of national regulators.
Today's global financial regime grew out of what was once this offshore operation. Lady Thatcher and Ronald Reagan gave it every boost possible. Those dogmatically opposed to deregulation may sneer. But the regime bore fruit. Worldwide gross domestic product grew from $11,000bn (pounds 6,500bn) in 1982 to $29,000bn in 1997. Worldwide pension assets grew from $1,200bn to $9,7000bn over the same period of time.
Our quarter-century-old global financial regime began as it has gone on. In 1982, Mexico defaulted on loans it owed international banks, giving birth to the Latin American debt crisis.
Far-sighted critics wondered how the system would right itself, if there was no lender of last resort in the form of the IMF. But they also wondered how the system could function properly if every time the men with the authority to grant credit got it wrong, they were bailed out by the taxpayer.
Critics also saw that the new global financial regime put the authority to say who was credit-worthy and who was not in fewer and fewer hands. They wondered what the long-term effects of this concentration of financial power would be.
Now we are getting the answer - not because the IMF has screwed up, but because it is out of money. The system has run out of sticking plasters. The concentration of financial power, meanwhile, has brought us the hedge funds and the instability they cause.
Where we go from here will be the subject of the IMF and World Bank annual meetings in Washington and the meetings of the Group of Seven around them.
Get the men gathering for these meetings off the record, and they are brilliant, persuasive, and impassioned on the subject of the exercise of financial power. Their knowledge makes rants like this one seem superficial. Off the record, they will also ridicule the talk of a new "21st century architecture" for the international financial system.
But still they hide behind it in public. Their excuse is that international finance is all too complicated and sensitive for anyone but the experts. The reality is that the waffle hides an absence of political will to deal with the problems thrown up in the last few months.
The phrase "too little too late" comes to mind, and it has never seemed more apt - or ominous.
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