A new financial system

The world has finally realised that something was very wrong with the way business was being conducted in the area of high finance. But it needed a financial crisis of unprecedented proportions to come to this realisation.

This lopsided financial system created in 1945, one may say with the conference at Bretton Woods that gave two major institutions - the World Bank (then known as the International Bank for Reconstruction and Development) and the International Monetary Fund (IMF) - the role to govern post-war international financial operations.

This system was dictated by the victors of the Second World War and later also joined by other industrialised countries that these victors helped to recover from the war's destruction. It seemed to work relatively well, at least for the developed countries, until recently when the excesses of a majority of the banking system, mostly in the developed countries, went unchecked until it developed into a full-scale financial crisis that quickly spread to the rest of the world.

Although many less-developed countries have been complaining that the post-war financial system was slanted against them, very little was done to correct the situation. It was only when the countries who created this system started to feel the pain themselves that a consensus developed that things needed to change and to change quickly.

The leaders of the EU summit under the French presidency, alarmed at the devastation the financial crisis was creating in their countries, rushed to the US even before it was scheduled to host the G-20 and G-8 summits last December to impress on US President George W. Bush the need for immediate action to deal with the financial crisis.

They found a receptive President, since the crisis was also creating havoc in the US, where in fact it started and where the effects were at first mostly felt.

Predictably, the EU summit, particularly British Prime Minister Gordon Brown and French President Nicolas Sarkozy, called for the reform of the international financial institutions, principally the IMF.

The US President was very receptive in principle to find a solution to the financial crisis launched by the sub-prime problems in his country, and in fact agreed to host a summit on the crisis. But he was less than enthusiastic about the specifics brought up by Brown and Sarkozy.

Bush, and this seems also to be the position of Barack Obama, immediately poured cold water on the EU proposals by saying that he would agree to discuss the problem as long as 'the foundations of democratic capitalism' were preserved.

Whatever that meant, it did not appear that the US was ready to agree to the complete overhaul of the international financial system as called for by the EU duo. In fact, it looked like the EU got the message because at the last summit in June under the Czech presidency the Union did not reiterate its call for a complete overhaul of the IMF and the other financial institutions. It only called for the overhaul of the financial supervisory machinery at national and macro level.

This is, in fact, what the current US administration is also concentrating on. It is developing new layers of institutions to monitor the financial situation in the US and abroad to prevent another similar crisis from developing.

Both the EU and the US positions are a retreat from their previous positions which called into question the efficiency and relevance of the current international financial architecture, including the institutions like the IMF.

The EU, in particular Brown, went to great pains to point out that institutions set up to deal with the situation in 1945 were no longer relevant and should be reformed to deal with today's financial reality so as to hopefully prevent another similar crisis from developing.

These latest developments appear to be a shortsighted solution to accommodate political exigencies rather than a long-term answer to safeguard the economic and financial well-being of the peoples of the world.

If the consensus was that the institutions set up in 1945 were not necessarily equipped to deal with problems of today, and if the conventional wisdom was calling for a new international financial system, it was folly to do less.