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A New Bretton Woods?

Battling Capital

by VIJAY PRASHAD

“Private capital tends to become concentrated in few hands, partly because of competition among the capitalists, and partly because technological development and the increasing division of labor encourage the formation of larger units of production at the expense of smaller ones. The result of these developments is an oligarchy of private capital the enormous power of which cannot be effectively checked even by a democratically organized political society.”

 – Albert Einstein, “Why Socialism?” 1949.

I. The Gouging of Greece. 

Finance controls destiny. In 2007, the Greek national debt was at 115 per cent of its Gross Domestic Product (GDP). Three years later the national debt rose to 130 per cent of Greek GDP, a high percentage but still not as high as that of Japan (226 per cent) and St. Kitts (196 per cent). These numbers are from the International Monetary Fund, which keeps a mean-spirited eye on debt to GDP ratios. No alarums went off in Tokyo or in Basseterre; they remain in a state of crisis, but no one said that they were bankrupt. Bankruptcy is not a scientific observation. It is a social determination. Those with their hands on the levers of finance decide which economies have entered into the danger zone of bankruptcy. Financiers collude to lend Greece new money at 25 per cent, a rate far higher than that charged to other countries. If Greece would be able to borrow new money at a far more reasonable rate, say 5 per cent, its debt to GDP ratio would fall to 110 per cent within a few years.

Greece’s predicament mirrors that of the Global South from the 1980s to the present. When Mexico went into its bankruptcy spiral in 1982, it was the spark that burned the prairie through Africa and into Asia. The debt crisis had many parents, but first among them was the high-octane power of finance. The oil price rise of 1973-74 earned the oil-exporting states vast sums of money, which went into the North Atlantic banks as petro-dollars. Eager to multiply as capital always is, these petro-dollars were loath to being tied into the stagnant economies of the North. It sought shelter at usurious rates in the relatively powerless countries of the South. When Paul Volcker pulled the plug on the dollar (the Volcker Shock of October 1979), the price of the debt went up astronomically.

Most dramatically, the countries of the South that once welcomed financial resources from abroad were now drained of what savings their populations garnered. As the World Bank reported in 1989, “Before 1982, the highly indebted countries received about 2 percent of GNP a year in resources from abroad; since then they have transferred roughly 3 percent of GNP a year in the opposite direction.” Since 1982, capital has hemorrhaged from the countries of the South to the banks of the North. The humdrum noises of “making poverty history” and the crocodile liberalism of Bono and Bill Clinton are irritatingly obscurantist. They say nothing of the easiest way to actually assist the South: cancel the debt.

The errant nations of Club Med, southern Europe’s band of bankruptcies, could take a few negative lessons from the Global South. In 1983, at the Non-Aligned Meeting in Delhi, Fidel Castro asked the indebted nations to stand fast. No sense in allowing the Northern countries to set the agenda. An indebted country is summoned to the French Ministry of Economy, Industry and Employment to meet with the Paris Club, the coterie of sovereign creditors, or to the London Club, the cartel of commercial creditors. At these meetings, the indebted country’s beleaguered representative is read the riot act: according to the IMF’s surveillance unit’s assessment, the country would have to conduct certain structural adjustment measures (austerity) and follow a very strict schedule for repayment. The IMF did the dirty work for the financiers, but it did not come away without its own benefits (in 1987, at the high point of the debt crisis, the IMF took in $8.6 billion more in loan repayments and in interest fees than it lent out to the Global South). Castro wanted the indebted countries to go before the London and Paris Clubs as well as the IMF as a cartel of the indebted. But he failed. The countries of the South wanted to appear responsible, which was madness in an irresponsible system. If Castro had succeeded, the Global South might have pushed back against the emergent neo-liberal order that gave finance the keys to the planet.

Greece is the 21st century’s Mexico. It, too, is being forced to conduct austerity policies that will only contract the Greek economy. Alarms bells are ringing in Madrid and in Lisbon. The Club Med does not seem to have the nerve for a joint policy vis-à-vis the European Central Bank, the European Union and of course the unlikely partnership of Germany and France. The indebted of Europe are unwilling to reveal that what appears to be a technical economic problem for central bankers and experts at stabilization funds is really a political question that once more favors Money over Well-Being. Greece will be suffocated by this austerity, and its way to growth, taking a page out of the Global South, will be through the cannibalization of its people.

II. The Mexico of This Century. 

Treasury’s Timothy Geithner tried to stem the tide of Euro-crisis onto American shores, “The direct exposure of the U. S. financial system to the countries under the most pressure in Europe is very modest.” Of course, one part of the Greek problem was manufactured in Wall Street: in 2002, Goldman Sachs helped the Greeks use fictional exchange rates to hide the total value of Greek debt, and in 2009 they tried to sell the Greeks the same formula once more. The Greeks gave up future airport fees and lottery proceeds for cash up front. Such deals bore delightful classical names, such as Aeolus, the keeper of the winds, who gives Odysseus a bag of wind in Homer’s tale so that our hero can sail home to Ithaca unscathed; Goldman’s illusionary money, it seems, was intended to send Greece home to financial stability. It did not work.

No fingers are wagging toward the 200 West Street towers (to facilitate the right-turn of its limousines off the West Side Highway, Goldman, it is said, forced the city to shift the road a few feet). It would have been too much to blame Goldman. It was simply doing its job.

And what is the job of these financial behemoths? Certainly, it is not to build equity amongst ordinary people. The “masters of the universe” participated in creating a series of asset bubbles during the 1990s that inflated their own oversize bank accounts but did not seem to build much of value in the world. The largest asset bubble that they inflated was the United States itself. Between 1991 and 2005, the market share of the United States relative to its major competitors grew by 4.2 per cent to 42.7 per cent. The real estate sector was the parking lot for this bubble; the creation of a security industry and easy refinance being the air to blow up the housing bubble. By 2004, that bubble was at its biggest – subprime loans accounted for twenty per cent of all new mortgages. It was primed to burst at any point, as it did in 2007.

The current jobless rate (9.1 per cent) is only one indicator of the social consequences of the burst bubble; the most dramatic figure is that between June 2009 and June 2011 the inflation-adjusted median household income in the United States fell by 6.7 per cent to $49,909 (during the “official” recession, between December 2007 and June 2009, the household income declined by 3.2 per cent). People who remain on the job are now earning less than they did before.

The Gini Co-efficient that tests inequality in a society shows that the United States has higher income inequality than Greece. The rate of inequality has risen steadily since 1967, leaping by bounds as a consequence of the Reagan Revolution. The U. S. government predicts that by 2043 the United States will have a much more unequal society than Mexico. The United States might end up being the 21st century’s Mexico.  This is Goldman’s job.

III. At the Mount Washington Hotel. 

Driving through the White Mountains of New Hampshire is a glorious affair, particularly in October. Between the deep notches of Franconia and Crawford in Bretton Woods sits the majestic Mount Washington Hotel (now owned and run by the less glamorous Omni Group). The Hotel still requires a jacket and tie for men, which means that people  who are allergic to such clothes are forbidden to eat the lobster ravioli. It was enough to stop beside the road and look at the vast verandah, where the mandarins of the 1940s devised the monetary order, with the IMF as its crown jewel. My trips to the region are never enough unless I torture myself in this way. The last time I was there I found out that the worst tippers at the 1944 conference were from the Chinese delegation, which was represented by H. H. Kung (whose Havana cigars stained the curtains of his stately rooms). After the 1949 revolution, Kung remained in the United States (he lived in Oyster Bay). The U. S. and Western European delegations wrote the rules for the new monetary and financial order. The Chinese and Indians came as window-dressing. The monetary and financial systems were premised on the rules of capitalism, with the advantages given to the centers in what would become the Global North. It worked well for those who gained from it; now even the winners are not sure.

No new Bretton Woods conference will be held in New Hampshire. I drove past a sign near Jackson that read, “The Republicans Have Sabotaged the Economy.” Not far from this sign is Mount Clay, which the New Hampshire government renamed Mount Reagan in 2003. The old name persists (the brakeman on the Cog Railroad up to Mount Washington mistook Henry Clay for a man of the Granite State, and beamed when he mentioned Reagan). New Hampshire’s jobless rate is remarkably low (4.8 per cent), but foreclosures are up by 21 per cent and a recent University of New Hampshire poll found that three-fourths of those asked said that a friend or relative had been laid off in the past two years (a third said that someone in their household had been without a job in that time). Tourism and proximity to the Boston high-tech universe saves the state, although it is not clear for how long the good numbers will remain.

The new Bretton Woods meeting needs to be held in the Global South. It ought to pierce the bubble of neo-liberal economics, and the assumption that capitalism’s institutions create the best institutions for a world economic order. The United Nations will need to revive UNCTAD (the UN Conference on Trade and Development) and the UNCTC (UN Commission on Transnational Corporations) – both of these would be vital technical institutions to help build a new architecture for finance and development. No financial transaction tax (Tobin Tax) or regulation of banks (Basel I and II) could work on a national level. Finance will simply escape from one regulating container and seek out another. Its ability to seek out political arbitrage must be stopped. There is a need for global rules to constrain finance on a global level. The Ecuadorian diplomat Pedro Paez Perez has been talking about the need to break down the artificial need for the dollar and to create regional monetary arrangements as a stopgap before the creation of a different world system. Such ideas from the Global South are necessary to revitalize a tired debate. A new Bretton Woods, under the aegis of the United Nations, would nudge us away from neo-liberalism.

Goldman Sachs and Morgan Stanley cannot be reformed only in Wall Street. They have to be enchained on a planetary scale. It is for that reason that the Occupy Wall Street movement needs to look across the waters at the long-standing campaigns to end the debt of the Global South and to shift the development paradigm of the World Bank. It should humbly throw itself into the work already underway from the Global South and in Southern Europe to reconstruct the architecture of global finance.

VIJAY PRASHAD is the George and Martha Kellner Chair of South Asian History and Director of International Studies at Trinity College, Hartford, CT His most recent book, The Darker Nations: A People’s History of the Third World, won the Muzaffar Ahmad Book Prize for 2009. The Swedish and French editions are just out. He can be reached at: vijay.prashad@trincoll.edu