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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


Credit Crisis - Reform Proposals: European leaders call for a “Bretton Woods II” summit
By Finfacts Team
Oct 16, 2008 - 10:24:25 AM

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Gordon Brown, UK Prime Minister and Angela Merkel, German Chancellor at the European Summit in Brussels, Oct 15, 2008 - - a scene familiar to parents trying to get attention of their children!!

Credit Crisis - Reform Proposals: European leaders on Wednesday called for a “Bretton Woods II” summit to redesign the world’s financial architecture. The UK also said such a meeting could also be used to seal a long sought global trade deal.

In 1944, global institutions, such as the International Monetary Fund and the World Bank, were conceived by the leading allied nations at a hotel in Bretton Woods, New Hampshire. The renowned economist John Maynard Keynes led the British delegation.

"Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' European Central Bank President Jean-Claude Trichet said on Tuesday, after giving a speech at the Economic Club of New York. "It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.''

Gordon Brown, UK prime minister, said the world should turn the financial crisis into an opportunity and reform global institutions.

While Brown as Chancellor of the Exchequer, had championed reform of international institutions, he had strenuously resisted the extension of European Union regulation as he defended a more laissez-faire approach to protect the interests of the City of London.

EU officials in Brussels on Wednesday night said that the meeting could take place in New York as early as next month. According to a draft summit statement, EU leaders will echo Brown’s appeal by calling for “a genuine and complete reform” of the world’s financial architecture.

Brown said world leaders should settle the Doha round of global trade talks launched in Qatar’s capital in 2001. “We’ve seen international action to pump trillions of dollars into the global banking system in the last few days,” said one British official. “Getting a world trade deal shouldn’t be beyond us.”

The recent developments on the financial markets have led to questions about causes and possible reform proposals. Bernd Rudolph and Julia Scholz of the Institute for Capital Market Research and Financing at the University of Munich provide answers in their article in the current issue of CESifo DICE Report,a publication of Germany's leading economics institute, the Ifo Institute for Economic Research. They give an assessment of structured credit products such as the CDOs (Collaterised Debt Obligation), the role of the rating agencies, the false incentives of risk producers and the German banking system. These are the areas where reform is needed.

In the case of the still relatively young structured credit products, the risk was underestimated by the investors, partially out of ignorance. The decision to invest in these products was strongly based on the evaluations of the rating agencies. As it turned out, the rating agencies did not employ sufficient information in the assessments of the structured credit products. A second problem is the interest conflict of the rating agencies. Although they rated the credit products, at the same time they also advised the issuers of these products.

Assistant Secretary, U.S. Treasury, Harry Dexter White (left) and John Maynard Keynes, honorary advisor to the U.K. Treasury at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, US, March 8, 1946. Keynes died of a heart attack at his holiday home in Tilton, East Sussex on April 21, 1946. Photo credit: IMF

The authors also criticise the possibility the banks have of completely separating themselves from their own credit risks. They recommend that some form of retention be introduced, similar to what the German savings and co-operative bank system has.

Rudolph and Scholz agree with the appraisal of the German Council of Economic Experts that the German system of state-owned regional banks is obsolete. The structures of these banks force them to seek higher yields abroad. The high losses that these banks have suffered could be the trigger for a reform of the public banking sector in Germany.

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