And calls for better control of international money flows, and for the free market to become a little less free, grew even louder. Does this mean that, to ensure a better future, we should return to the post-World War II period of austerity?
According to British Prime Minister Gordon Brown, the credit crisis has brought the global financial system "grinding to a halt." The International Monetary Fund (IMF), the World Bank and the European Union all called for the development of a new financial system. World leaders are expected to meet next month to devise a new 'Bretton Woods' agreement. Because while the original agreement, devised in 1944 and intended to guarantee a stable post-war economy, has proved its worth, it's evident that it needs renovating.
Foundations
Until recently, Britain was strongly opposed to any centralised control of the financial world. But even in London, which declined to embrace the introduction of the euro to avoid just such central control, the free market couldn't manage to keep the banking world the right way up. And it's Prime Minister Brown who is now the front-runner in arguing the case for a revision of the international finance system. And European leaders such as Angela Merkel, Jose Manuel Barroso, Wouter Bos and Nicolas Sarkozy are all stumbling over each other in their attempts to keep up with him.
The core of the message is this: we've survived a period of irresponsible risks and the unsupervised pursuit of money. Now it's time for a radical approach with a heavy emphasis on regulation and control. Even Dutch Finance Minister Wouter Bos has joined the revolution. "Strong markets need strong regulation," has been one of his regular sound bites. As well as, "If banks can't come up with a solution, then we'll think of one."
Scepticism
Dutch economic analyst Sweder van Wijnbergen is strongly opposed to Prime Minister Brown's plans.
"There's no single problem in the current crisis that can be blamed on the absence of supra-national supervision. Banks failed to record crucial information in their books. Having countless supervisors would itself be a problem because each one would be sitting there trying to see what the others were doing. The real problem is that a kind of shadow banking system has evolved, and you can't solve something like that with yet another layer of bureaucracy."
There are others who support this view. "I think Bretton Woods II sounds fine," said Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund on Thursday. "But it has to be given the right interpretation." What he sees for the IMF, which grew out of the Bretton Woods agreement in 1944, is an increased role in global finance.
Orthodoxy
Yet the IMF spent the first weeks of the crisis in the background, even though this multilateral credit body with its experience in crisis management and the distribution of emergency funds would appear to have been the most obvious body to provide help. But its actions in the past few decades cost the IMF considerable authority and power. During the Asian crisis in the 1990s, for example, it continuously preached the lesson of free markets to failing economies and was even prepared to let banks fail to support that orthodoxy.
The Dutch administrator of the IMF, Age Bakker, has this to say:
"What the IMF needs is more tools to inspect and map national inspection systems. Unfortunately, the US and China are not cooperating in this yet. Government leaders really need to get their act together and hand over more of their powers."
That's a considerably more modest approach than that called for throughout Europe in the past week.
Pragmatism
This is all being presented as a Western crisis demanding a Western solution. But is that really so? In the upcoming, developing economies such as China, India and Brazil, the state has been playing an important role in the markets for years. So perhaps some Asian pragmatism has been blowing in Europe's direction. And it may well be that it's precisely these countries that need to be more closely involved in creating the scenarios that will make the chance of a repeat of the current credit crisis as small as possible.
Martijn van Tol and Laurens Nijzink
20 October 2008
Radio Netherlands
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The dust of the financial crisis still hasn't settled, as last week's events on the world's stock exchanges proved.
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