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A cautionary tale…
Keating: a chance to remake the global financial system
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Global financial confidence, once destroyed, requires myriad positive events and a heavy convergence of them to counter ambient pessimism and gloom. The recent series of government packages, notwithstanding their scale and speed, has had little demonstrable effect on the level of confidence or the outlook for ongoing activity. Indeed, the number of new and significant packages may begin to peter out as the public accounts of most countries can no longer cope with the growing burden of insolvency or assume further private sector risk. This context underlines the urgent need for the Group of 20 industrialised and developing nations meeting in London to construct a new paradigm to resuscitate the world financial and economic system. What is needed is a new global economic and political settlement. The first priority should be to make the G20 a permanent gathering. The leaders should meet at least once a year and, in current circumstances, twice. A permanent G20 structure, representative of the major debtor and creditor countries and the most strategically powerful ones, will sound the death knell of the Group of Seven leading industrialised nations. This is two decades too late, but better late than never. The second priority should be for future international economic policy co-ordination to be conducted by the G20 — its leaders, finance ministers and central bankers — not by the International Monetary Fund, which has failed so miserably in this task. The third priority should be radically to restructure the IMF, disbanding its board and replacing it with a governance structure that truly represents the wider world it claims to serve. The Fund should still manage its balance of payments emergency facility but under the general supervision of the G20. The Washington establishment may resist such changes, while the European members of the G7 will do all they can to hang on to the old postwar structure. Yet the utility of those arrangements began to erode when the Cold War ended and China began its rise to the powerhouse it is today. The pump-priming of government budgets through deficits and recapitalisation of banks offers only a temporary respite to the crisis. Fiscal policy has its limits. President Barack Obama is already portending a US federal deficit of $1,700bn (€1,354bn) this year, or about 13% of gross domestic product and told the US public to expect deficits in the trillions for years. In the short term the world needs the US stimulus, but the longer term antecedents of the crisis can only be dealt with when deficit countries save more and spend less and surplus countries do the opposite. This savings imbalance will not be remedied while the larger creditor states are locked out of the hierarchy of global institutions. Left to themselves, they will go back to their own defensive game. Brought into the fold, on a credible basis, they may think it is safe to change habits. For instance, the government of China has no intention of dealing with its surpluses by letting its real exchange rate redirect national resources, especially when such action risks putting it into the hands of the IMF. Following the crisis of 1997, what every Asian government fears is the political consequence of capital outflow — to wit President Suharto of Indonesia, who was forced out of office in 1998. Until international monetary governance is democratised, or at least is more representative, no major developing country, creditor or otherwise, is going to put its head into the IMF cum US Treasury noose. But to make a G20 structure that is truly dynamic, the US must answer two strategic questions. Is China a commercial competitor that has to be strategically watched or is it a building block in a new multi-faceted world? Should Russia have an organic place in a more representative world system or should it continue to be regarded as incurably untrustworthy? A positive resolution of these questions along with reform of the old Bretton Woods arrangements can usher in a more workable world structure. The question is whether Mr Obama will recognise this opportunity at the coming G20 meeting or whether the advice of old advisers will keep him, and the rest of us, in the current economic and strategic rut. A burst of inclusion is the only way to make the world anew. If it happens, the impact on confidence will be profound — outweighing all the packages put on the table to date. Paul Keating is a former Australian prime minister and a member of the international advisory council of China Development Bank. This article first appeared in the Financial Times. |
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12 Comments
Next big challenge to Australia…. how do we get PK involved in the process of reorganising the global financial system?
In so far as PK is looking at the fundaments underlying the collapse of “extreme capitalism”, why does he focus only on the economical aspects, neglecting to metion, for example:
1. The $trillions (near-$20 tillion since 1988) spent on “wars” (most amounting to killing and occupation of the “wretched of the Earth” in remote parts of the globe)
2. The degradation of the essential life support systems of the planet - air, water and soil.
3. Rampant overpopulation .
4. Lack of fundamental social justice, leading to wars.
Unless and until these issues are taken care of, no amount of economic and financial wizardy can make the difference.
Unless
Tony comments well on the sober style. But is the declaration really all it seems? Yes I know that’s cynical and that’s life.
What further declarations Mr Keating? The trouble with PK is that what he leaves out, or one suspects he leaves out, will colour ones digestion of the whole quality and value of the analysis. This continues to prove a sensible approach to old pollies.
Chinalco consultancies? Chinese coal deals in the NSW? Hob knobbing with China consultant Bob Carr, one of the 4 amigos [with Richo and Laurie] at Macquarie Bank? Who the hell would know?
Keep the salt shaker handy. This cynicism is the price PK pays for too many compromises with personal business interests in the past. Even when he looks right and sounds right that deep well of scepticism continues to bubble and froth. He’s way too cavalier with the true history of dictatorships for one - Indonesia, Singapore, China - The Big Man’s Club. The siren song of power corroding morality.
PK may well be right, but I still would like to know what’s his real interest?
Putin foreshadowed this in his entirely unreported Davos speech; a speech that was tacitly endorsed by the Chinese leaders if I read the polispeak correctly. It is a pity that Putin’s lesson in Austrian Economics was not picked up by the Australian controlled media but what do you expect? Today the talking heads are hard at it with their recession stories that they have had planned for two months and can now release. What a bunch of phoneys!
I agree with Keating that the G20 should become the authority behind the new financial system but first you have to wrest it from the Anglo-American nexus which Keating correctly sees as a roadblock. The Bush cabal is unlikely to want to give it up willingly and they have the guns! Presently the US has everybody by the covered appendages because the world’s SWF’s (whatever their form) are locked into dollar based assets that they cannot divest without destroying their own futures. It is a bit of a stalemate and because the G18 don’t have enough firepower to strongarm the other two I think we are headed for a long and drawn out situation. Putin’s suggestion that the backing for a new global exchange rate should be a basket of commodities including gold, iron ore, oil and other such items bodes extremely well for Australia long term. However, until someone tells the truth about the Emperor’s sartorial situation G20 will be nothing more than just another talkfest. I continue to wonder how long the Americans can print money before someone says drop dead!
This is what we used to enjoy from PJK - the ‘vision thing’. Sigh.
I suppose there’s no chance that our Kevin will take time out from organising the tuck shop roster to lift his head and see where we’re going.
………………….”Global financial confidence, once destroyed, requires myr iad positive events and a heavy convergence of them to counter ambient pessimism and gloom.”……………..
Dammit man! stop making sense!
Spot on PK! Pity we can’t have you representing our interests at the upcoming G20 meeting.
Is representation at the G7 / G20 based on;
1. Historical status (who’s version?)
2. First come, first to lead (Where fools rush in)
3. The size of the country’s GDP (There are 3 versions at ; http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
4. The population of the country (I hope you look good in red)
5. The military firepower of the country (no comment)
6. Entries in the Guiness Book of Records (Guess who?)
I can’t work it out.
So until there is an agreed and transparent formula for representation at any summit it will remain an arm wrestling competition.
PK’s real democratisation cannot exist until the rules are established.
International Arm Wrestling Comp, round two, go!
Keating for world president! We need someone with fresh ideas to crash through …..give this bloke a run.
I’m afraid I agree with Tony. This sounds way too sensible.
And, being sensible, it’s almost guaranteed that the exact opposite will probably happen and we’ll all be screwed.
I hate that.
Wow, this is more than a little disappointing. I like articles by PK because they are usually full of crazy-old-man ranting and “back in my day” rose coloured hindsight. This had neither. Just a solid, sensiblle, informed, interesting opinion frm a man who sounds like he knows what he’s talking about.
I hate that.
It is unfortunate that neither Rudd, Turnbull or Costello have the insight to raise these sorts of issues and position themselves as real economic heavy weights. As PK has pointed out, whether the stimulus package is $20B, $30B or $42 B is meaningless when the world’s largest economies are in such decline; he would say the same of the question of the trillions spent on wars and the environmental issues; they pale into nothing on the grand scale of the world’s capitalist economies being shaken at their very foundations by the failure of many of the world’s largest banks whose balance sheets have been poisoned by these toxic assets. And he’s right… unless the net surplus countries start spending then little will change; although, countries such as China will see this as an opportunity to claim the economic mantle and will probably hold back on budgetting for a deficit. This could be the beginning of a major shift in economic wealth.
And it’s so refreshing to have an article with a point of view way above the level of opportunists like Rudd, Turnbull and Costello. Even little Johnny has waded in on a partisan basis. Only Keating has taken the discussion to another level.