This weekend, world leaders will gather in Washington to discuss the financial crisis.  After World War II and the great depression the world’s leaders recognized that the international financial system was too complex and interconnected for countries to go it alone and responded by establishing the Bretton Woods institutions.  The international financial mechanisms they created helped war-torn economies recover – and set the stage for the US economy to grow and thrive atop the global economy for the half-century that followed.  Today, we must reform and reshape international financial institutions for the 21st century – because our allies and partners around the world need their help and because our own businesses and workers need the international stability and growth that the current crisis has destroyed.  This renewal can set the stage for a new half-century of American and global prosperity – or for uncertainty and decline.   

International leaders this weekend will be working on a number of concrete steps:  first, they will be working on new institutions and mechanisms to coordinate international oversight and regulation of the world’s largest financial institutions.  This is a necessary step as most of these corporations are transnational in nature with financial assets spread around the globe.  Second, they will focus on stabilizing the emerging economies – Brazil, India, China as well as smaller dynamic nations – that did nothing to cause the crisis but have been devastated by it.  They had nothing to do with the subprime mortgage markets where the crisis began, but as investors have adjusted their portfolios to minimize risk, emerging markets have suffered disproportionately.  These economies are responsible for much of the economic growth around the world, and if they collapse the entire global economy will suffer.  Finally, the International Monetary Fund was created to act as a stabilizing agent in the global economy.  It acts as a lender of last resort to large and small countries alike.  But as international capital and lending have grown almost twenty fold since 1990s, the IMF’s reserves have not kept up.  The IMF’s role and resources need to be strengthened significantly.

No one expects these questions to be solved in one weekend.  But this conference represents a first step toward a truly international response to this crisis – one in which countries like Brazil, India, China and Russia are represented and their views carry weight; and one in which all participants recognize that our economic futures are profoundly interlinked.

The Group of 20 conference represents an opportunity to begin the process of updating Bretton Woods.  In 1944, 733 delegates from 44 nations gathered in Bretton Woods, New Hampshire in preparation for dealing with two continents devastated by war.  The intellectual planners for the original conference “brought to Bretton Woods an understanding that global finance was too big and too complex for each nation to ‘go it alone’ on economic decision making. ‘They believed we cannot have a stable international financial architecture without a will for cooperation,’ says Benjamin Cohen, a political science professor at the University of California, Santa Barbara.”  With the belief that the interconnectedness of the world economy made the depression of the 1930’s a global one and that the economic and political instability caused by the Depression led to the Second World War, world leaders sought to stabilize the global economy with lasting international institutions.  These institutions would have the mission of rebuilding the economies of countries destroyed by the war and preventing another global depression.  The lasting result was the creation of what would eventually become the World Bank, the IMF, and the World Trade Organization.  [NPR, 10/29/08]

The World Bank provides financial and technical assistance to developing countries around the world for programs to reduce poverty. It is made up of two unique development institutions owned by 185 member countries—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). [World Bank]

The International Monetary Fund (IMF) oversees the global financial system, focusing on exchange rates and balance of payments.  It is also the lender of last resort for countries in need.   The IMF is an organization of 185 countries that works to foster global growth and economic stability. It provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. [IMF] 

The World Trade Organization (WTO) promotes international trade, removing barriers between member countries. It is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. [WTO]

The Financial Stability Forum helps coordinate financial regulations around the world.  It brings together senior representatives of central banks, finance ministries, and national and international regulators to “improve the functioning of financial markets and reduce the tendency for financial shocks to propagate from country to country, thus destabilizing the world economy.”  The G-20 has asked the forum to broaden its membership to include more emerging economies, a move its chairman supports. The new college of supervisors would have its seat at the Financial Stability Forum. [Washington Post, 11/14/08]

Greater international cooperation is needed to prevent future crises. “The current global credit crisis clearly underscores the systemic dangers of sudden credit contractions in global financial markets and the concomitant need for a global institution that can help alleviate those illiquidity pressures as well as issue alarm signals about looming problems. There is also a need for better mechanisms to encourage all governments to think harder about the international implications of their domestic fiscal and monetary policy choices.”  [Center for American Progress, 4/23/08. Brookings Institution, 11/13/08]

International leaders are expected to agree on new mechanisms to coordinate international oversight and financial regulations. “Nations are close to adopting a series of measures aimed at combating a global recession and laying the groundwork for a broad reconstruction of the international financial system, as world leaders arrive in Washington for a major economic summit this weekend. Among the most notable measures would be a new body to supervise the regulation of global financial institutions. The ‘college of supervisors’ would bring together international regulators to coordinate oversight of the world's 30 largest financial institutions, according to officials familiar with the plans. The new body would be designed to add an extra level of scrutiny to the way banks are monitored and to catch excessive risk-taking of the sort that contributed to the current economic crisis. . .[It] would have its seat at the Financial Stability Forum. International regulators could compare notes on bank liquidity and risk, coordinating regulation of major global financial institutions.” [Washington Post, 11/14/08]

However, the G20 conference is not intended to completely reshape the way global finance is done.  It will provide an opportunity to take stock of how well current steps are working and will also help set the agenda for what international reforms are needed in the future.  The goals of the new financial summit are clearly not the same as they were in 1944 and it would not be possible to create institutions on the scale of Bretton Woods in a one weekend summit.  “Dan Price, a White House official who has handled U.S. preparations for the summit, said officials expected to agree on a broad action plan, including setting up working groups on such issues as overhauling financial regulations. That plan would be considered at another summit of the leaders next year -- after Obama takes office. ‘One, let us identify what needs to be done,’ Price said, summing up Bush's goals for the meeting. ‘Let us begin that task now. Let us continue that task through the future. And then, finally, let us do so against the backdrop of a commitment to open trade and investment and to meeting the needs of the least fortunate.’”  [Washington Post, 11/13/08]

The summit will also provide developing countries an opportunity to weigh in on the crisis.  The significance of the conference is that it also includes many of the emerging economies, who were not responsible for the crisis but are suffering the consequences, instead of focusing solely on the G7.  “Robert B. Zoellick, the president of the World Bank, said that the inclusion of developing countries was important. ‘It would be an error of historic proportions if developed countries put in place policies, structures and norms that undermined or excluded the interests of developing countries, said Zoellick, who will also attend the summit. ‘Many governments in developing countries have taken courageous steps over the last years to put their own houses in order, and this crisis is not of their making.’” [Washington Post, 11/13/08]

Emerging market economies play a vital role in the health of the global economy and contribute to American prosperity. Emerging markets have played an important role in recent global economic growth, and their performance is an important indicator of global economic stability and performance.  “[H]ow these countries fare will determine whether the world economy faces a mild recession or something nastier. Emerging economies accounted for around three-quarters of global growth over the past 18 months.”  The so called BRIC countries (Brazil, Russia, India, and China) have become some of the America’s most important trading partners. “Since it joined the World Trade Organization in 2001, China has also been the fastest growing major export market for American-made products.”  In fact, India, Brazil, Russia, and especially China are some of America’s most important trading partners. [The Economist, 10/23/08.  Bloomberg, 11/13/08. US Census, 2008]

Despite sound policies, emerging markets are the most susceptible to the financial and economic crisis.  Many emerging economies learned from the financial crises of the 1980s and 1990s.  Brazil, for example, “has done just about everything right, and yet it has still been whiplashed. Capital that flooded into the country during the good years promptly flooded out again because of a freak event abroad: No-doc loans in the United States rear-ended Brazil's economy.”  As a result their stock market has fallen 37 percent and currency is down 30 percent against the dollar.  Brazil and other emerging markets from South America to Asia to Eastern Europe are feeling the pain more than the industrialized countries, whose high risk activity caused the crisis.  “[E]merging-market countries are victims of a rational flight to safety, exacerbated by an irrational panic. The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between ‘safe’ and ‘risky’ assets, with emerging markets clearly in the latter category. Economic fundamentals have fallen by the wayside.”   [Business Standard, 11/12/08.  Washington Post, 11/13/08]

Economic instability leads to political instability.  As emerging market countries suffer from capital flight and government reactions are insufficient in addressing the crisis, many governments may be further destabilized.  “China, for instance, is home to over 150 million people living below the poverty line, and is sitting on several potential political land mines-unrest in Tibet and Xinjiang Province among them. The government has attempted to keep a tight rein on political dissidents, but CFR's Brian P. Klein writes in the Far Eastern Economic Review that unrest could spike if the country's growth rate falls below 8 percent. Should China's geopolitical situation break down, the economic ramifications would likely be felt broadly throughout the world's economy.  India also faced serious problems with poverty, even in happier economic times. Now analysts wonder whether unrest could broaden in an economic downturn. Another major challenge for New Delhi is neighboring Pakistan, which faces some of the most serious economic tests of any country in the region. Should Pakistan's political situation devolve, analysts anticipate damaging consequences for India. Russia, meanwhile, has been tested by falling oil prices. . . the steep recent decline could be problematic for the Kremlin, given the major role economic revitalization has played in bolstering Vladimir Putin's popularity. Declining oil and commodity prices have also tested the economic might of several of Latin America's major players, and economic uncertainty in countries like Bolivia and Argentina threatens to destabilize the region more broadly.” [CFR, 11/6/08]

The IMF is insufficiently funded to deal with today’s global economy.  “The volume of capital flooding through the world's system has increased exponentially, which makes crashes more costly. But the IMF's kitty has not kept up. In 1990, when the stock of cross-border portfolio investment stood at $171 billion, the IMF had $36 billion of lendable resources. Today, with cross-border portfolios at upward of $3 trillion, the IMF has a $201 billion war chest. The challenge has grown by a factor of 18 while the remedy has grown only sixfold. To restore the 1990 status quo, government commitments to the IMF should be tripled -- and if you take into account the vast growth of cross-border derivatives, an even larger expansion is needed.” [Washington Post, 11/13/08]

A better equipped IMF would better address the current crisis.  “If we had a bigger IMF, Brazil and similarly hit countries would borrow IMF dollars to replace the ones withdrawn by bankers who crashed their subprime go-karts. But the IMF lacks a sufficient emergency fund to deal with all the Brazils of the world. In the short term, this may mean that the credit crunch will hit emerging economies harder than it should -- and that the global recession will be worse than it needs to be. But the long-term consequences could be equally significant.” [Washington Post, 11/13/08]

America should endorse a “back to basics” approach in order to strengthen the IMF.  “The Bush administration says the IMF is fine for now, and it sees no need for an expansion. But the Obama team will soon have its hands on the controls. A bigger IMF should be on its agenda.”    The Center for American Progress has issued a three step recommendation for the next administration for a “back to basics” reform agenda.  “First, we should strengthen the IMF’s mandate and capacity to assess—publicly and privately—the appropriateness of exchange rate parities as well as facilitate macroeconomic policy coordination to prevent or redress persistent misalign¬ments. . .  Second, the next administration should also declare itself open to a significant increase in the Fund’s resources for the purpose of insuring member countries against the risk of currency crises, and re¬ducing the corresponding incentive in the international monetary system for emerg¬ing economies to run large current ac¬count surpluses. . . Third, in line with recommendations made elsewhere in this paper, the incom¬ing administration should advocate steps to place greater emphasis on domestic consumption and policymaking latitude as part of the IMF’s advice to developing countries.” [Washington Post, 11/13/08.  Center for American Progress, 12/7/08]

Quick Hits

The Eurozone is officially in a recession.

C.I.A. director Michael V. Hayden said that Iraq is no longer the central front in dealing with terrorism and al Qaeda remains the greatest threat to the United States, operating from its safe haven in the tribal areas of Pakistan.  He also said that Osama bin Laden is cut off from day-to-day al Qaeda operations, and that al Qaeda is expanding into Africa and other areas.

OPEC will meet sooner than expected to try to curb the fall of oil prices.

Two journalists were shot and wounded in a kidnapping attempt in Peshawar, Pakistan.

A suspected U.S. missile strike killed 11 near the Afghanistan-Pakistan border.

The Wall Street Journal examines how a combination of national security and economic issues make Pakistan a “big test for Obama.”

Russian members of parliament overwhelmingly backed the first reading of a bill to extend the presidential term, signaling that Vladimir Putin may return to the presidency earlier than suspected.

North Korean officials told South Korean businessmen to move their factories out of the North, signaling its seriousness about closing its side of the border.  Outsiders and intelligence agencies know little about the inside of the isolated country, which is said to be “virtually spy-proof.”

Iraqi insurgents are increasingly turning to the sticky bomb, an explosive device that be attached to a car or a tank, instead of suicide attacks “causing a lot of panic,” though casualty rates from these bombs are still low.  The pattern reflects and important shift in insurgent tactics, as sticky bombs are not lethal to the user.

Azerbaijan voted to withdraw its small peacekeeping force from Iraq.

Government troops pushed rebel forces back by 3 miles in the DR Congo as hundreds of women in Goma prepared to protest for peace and protection.

Chinese factory closures are causing unrest across the country.

Ann E. Dunwoody became the first female 4-star general in the U.S. military, being sworn in as commander of the Army Materiel Command, responsible for equipping, outfitting and arming all soldiers