First published in the Telegraph on 3 September 2009
There is a hideous hissing noise escaping from the world economy, the piercing sound of deflating ambitions. Any hopes that, in this crisis, we would find an opportunity to redesign our system of capitalism and finance are all but forlorn. Any prospect that the leading nations would overhaul either the banking system or the wider framework that ties our economies together, and so prevent another crisis, has pretty much disappeared.
We know this because, this weekend, finance ministers from the G20 will meet in London (ahead of a heads-of-state summit in Pittsburgh), shake hands and breathe a collective sigh of relief that the worst of the crisis is over. The world has been informed that their main order of business will be to find some way of restraining bankers’ pay – rather than concentrating on the infinitely more important question of how to ensure something this horrific never happens again.
Some time in the past 12 months, there was a brief window in which we really could have improved capitalism: made it less prone to boom and bust, ensured that levels of inequality would yawn no further apart. We missed it. No one is talking – as they were back in April, ahead of the last G20 meeting – about creating a “new Bretton Woods”. The idea that we need a wholesale rethinking of how the world’s economic parts fit together, as happened in the wake of the Second World War, has been put on the shelf.
This is a tragedy. The core problem over the past few decades was not bankers’ greed or the complex financial instruments that enabled them to satisfy it. It was the immense pyramids of debt built up by the Anglo-Saxon half of the world, and the equally massive mountains of savings created in the other.
Almost everything that occurred in the past couple of years was, directly or indirectly, a consequence of this.
No one should have let Britain run such large deficits, and the Chinese such vast surpluses, over such a long period. And yet both got away with it, in what must count as the most momentous economic policy failure in modern history.
Those imbalances (the sterile word economists use) created the mountain of money that fed the frenzy of mortgage lending and eventually caused a financial crisis. Part of the problem was that the much-mythologised Bretton Woods agreement was a botched job: it failed to stipulate that the world’s big exporters and savers – China and Germany, for instance – should be just as responsible for setting right these imbalances as the debtor nations.
In order for the world economy to recover, the big savers will have to start spending, just as governments and consumers in countries such as Britain will have to borrow less. It would be nice to assume that this will happen automatically. But given the disaster our misshapen international economic system has foisted on us, we can hardly rely on such an outcome.
Opportunities to overhaul national economic policies happen every 20 years or so. Opportunities to reshape the framework that binds nations – the rules that determine the flows of capital, the behaviour of exchange rates and monetary policy – happen even less frequently, usually after a war or a financial crisis.
The G20 summits were supposed to be one of the latter moments. But with each of the meetings, first in Washington last autumn, then in London in April and again this month, the bar has been quietly lowered. When coming up with a “Bretton Woods” package became patently unrealistic, it was replaced with “macro-prudential” rules to clamp down on banks’ lending during boom times. These, too, have proven too difficult to agree, so the objective this time is tougher rules on bank bonuses.
Each time, the agenda shifts further and further away from the real issue. By all means punish bankers. They bear at least a small share of responsibility for what happened, and profited massively from it. But there is no point in convincing ourselves that this will solve the broader issue – that the way we have shaped the world’s financial and economic system leaves it acutely vulnerable to these crises.
Perhaps unwittingly, the chairman of the Financial Services Authority, Lord Turner, gestured towards this last week when he suggested that bankers could be restrained by imposing a “Tobin tax” on financial transactions. The distinguished economist James Tobin proposed a levy on foreign exchange transactions in the 1970s, not as a means of slamming the rich but to try to dampen down currency movements when the original Bretton Woods system of fixed exchange rates disintegrated into the hybrid mess we have now.
Tobin’s was the wrong solution but the right objective. Lord Turner is proposing the wrong solution for the wrong objective. Using bonus rules, salary caps and transaction taxes to prevent bankers rewarding themselves excessively is like trying to dam a river by lobbing in stones: it’s far better to seal up the source.
But with the worst of the crisis apparently over, such an intimidating task seems too hard even for the Obamas of this world.