Originally published on the CGS blog on October 24, 2008.
This month’s near-breakdown of the global financial system is a classic example of a pattern that has occurred periodically since the eighteenth century, though not at this magnitude since the Great Depression – an unsustainable investment bubble followed by inevitable collapse and panicky selling of depreciating assets. The results are massive debt, banks (those which have survived) reluctant to lend, job availability plummeting, and 401K retirement plan balances shrinking.
Since much of the regulation designed during the Depression to moderate such declines was jettisoned during the Reagan years, the United States and other countries find themselves more overwhelmed than at any time since the thirties. The key questions are what can be done to keep the present crisis from reprising that dire decade, and how to build up better safeguards to protect us in the future.
Some global financial leaders are confident that the crisis can be contained. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), said last week that “the world is a very different place now from the ’30s. We have learned from the mistakes of the past, and we have learned from each other’s experiences. We have tools to manage markets and economies now that we did not have then. We have the will to use them. I am confident that we can emerge from this crisis with our economies and our societies intact.” There seems to be general consensus that a much higher level of regulation of banks and other corporations is justified.
Strauss-Kahn went on to endorse a G-7 action plan which includes support of key financial institutions, guarantees for bank deposits, and restarting mortgage markets. He also announced that the IMF would “take the lead in drawing lessons from the crisis and in recommending actions to restore confidence and stability.”
Many critics question whether the IMF is a sufficiently democratic institution to be trusted with this responsibility. Bill Pace, General Secretary of the World Federalist Movement (WFM), challenges the IMF’s “one dollar/one vote” decision-making system, which puts most of the power in the hands of rich countries. The Washington Post’s Sebastian Mallaby would give more clout to China and India.
WFM recommends moving discussion of a new global regulatory system out of the IMF altogether, switching the debate to the UN General Assembly, which allots equal voting power to each one of its members. I question whether the General Assembly’s track record as a decision-maker is good enough to suddenly give it so much responsibility, but clearly the voting structure in the IMF would have to be radically reformed to provide an adequate alternative.
Wherever the conversation about the future of the world’s financial institutions takes place, a crucial opportunity for CGS and other advocates of global decision-making structures is a growing acceptance of problem-solving at the world level. As The Christian Science Monitor wrote last week, “ΓǪleaders are learning that they can pull together constructive initiatives in the face of danger. And if they can save banks, why not the environment? If they can stop the spread of shareholder panic, why can’t they stop the spread of nuclear weapons?”
If the present crisis can lead to a new appreciation of global solutions for global problems, perhaps enhanced by a more enlightened foreign policy in the next U.S. administration, the temporary financial pain most of us are feeling may be a small price to pay.
(Scott Hoffman is the Director of CGS’s World Federalist Institute. The views expressed here are his own. Lenka Andrysova helped do research for this article.)
