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Son of Bretton Woods

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It seems our economic overlords are going ahead with something, and,

like it or not, it will redesign the playing field for us.

So I thought I'd post up news on this front here, starting with this


Bush to Host First in Series of Summits on Financial Crisis


By Roger Runningen and Gregory Viscusi

Enlarge Image/Details


Oct. 19 (Bloomberg) -- The leaders of the U.S., France and the European Commission will ask other world leaders to join in a series of summits on the global financial crisis beginning in the U.S. soon after the Nov. 4 presidential election.


President George W. Bush, French President Nicolas Sarkozy and European Commission President Jose Barroso said in a joint statement after meeting yesterday that they will continue pressing for coordination to address ``the challenges facing the global economy.''


The initial summit will seek ``agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future,'' and later meetings ``would be designed to implement agreement on specific steps to be taken to meet those principles,'' the statement said.


European leaders have pressed to convene an emergency meeting of the world's richest nations, known as the Group of Eight, joined by others such as India and China, to overhaul the world's financial regulatory systems. The meetings are to include developed economies as well as developing nations.


``The first task is to stabilize the financial markets in our own countries,'' Bush said in welcoming Sarkozy and Barroso to the Camp David presidential retreat in rural Maryland. ``Given that the world has never been more interconnected, it is essential that we work together because we're in this crisis together.''


Free Markets


He stressed that any steps to prevent future crises must maintain and strengthen the free-market system.


``It is essential we preserve the foundations of democratic capitalism,'' Bush said.


Sarkozy and Barraso are pressing Bush for a G8 agenda that includes stiffer regulation and supervision for cross-border banks, a global ``early warning'' system and an overhaul of the International Monetary Fund. Talks may also encompass tougher regulations on hedge funds, new rules for credit-rating companies, limits on executive pay and changing the treatment of tax havens such as the Cayman Islands and Monaco.


Sarkozy and Barroso, in separate statements, welcomed Bush's offer to host the first summit.


``We want to work hand in hand with the Americans to create the capitalism of the 21st century,'' Sarkozy said. ``The meeting should be held rapidly, perhaps before the end of November. Since the crisis started in New York, maybe we can find the solution in New York.''


Need for Reform


Barroso said an ``unprecedented level of global coordination'' is needed to address market instability.


``The international financial system -- its basic principles and regulations and its institutions need reform. We need a new global financial order,'' he said.


U.S. Treasury Secretary Henry Paulson and French Finance Minister Christine Lagarde also attended tonight's meeting at Camp David.


United Nations Secretary-General Ban Ki-moon today offered to host a summit at UN headquarters in New York City by early December.


The leaders decided to pursue a series of summits because the task was too ambitious to be dealt with in a single meeting, White House spokesman Tony Fratto told reporters later.


It was ``a reasonable expectation'' that the first summit would be scheduled for November though ``not necessarily'' in New York, he said. Fratto didn't name a location and said there are numerous logistics hurdles in bringing together ``a large number of countries in a very short time.''


He said it was ``premature'' to say whether a second summit would be held before Bush left office in three months.


Banking Regulation


British Prime Minister Gordon Brown is pushing for greater cross-border oversight of the global financial system. He has said each of the world's top 30 banks should be under the supervision of a panel of regulators from the countries where those institutions do business.


``The reform of the international financial system is not only necessary to prevent a crisis happening again, it is essential to end the current crisis,'' Brown said on Oct. 16.


Bush, 62, has cautioned that any revamping must not restrict the flow of trade and investment or set a path toward protectionism. The G8 nations are Britain, Canada, France, Germany, Italy, Japan, Russia and the United States. The U.S. hasn't committed itself to the sweeping terms of Europe's agenda, White House press secretary Dana Perino said yesterday.


``There are other countries that are going to have ideas, as well,'' she said.


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Mish's view ;)


Bush to Host Summit of Losers


In response to the Credit crisis president Bush is gathering up all the people who did not see what was coming, denied what was happening, and then failed to see the implications of what was indeed happening.


Bush Says He'll Host Summit Soon on Financial Crisis.


President George W. Bush said he will host a summit on the global financial crisis in the "near future" and he is confident the world's nations will weather the breakdown in credit markets.


"For this meeting to be a success, we must welcome good ideas from around the world," Bush said as he welcomed French President Nicolas Sarkozy and European Commission President Jose Barroso to Camp David, the presidential retreat in rural Maryland, for dinner and three hours of talks.


The conference agenda will include ideas on how to prevent future crises in a way that preserves the free-market system, Bush said. "It is essential we preserve the foundations of democratic capitalism," he said. He said leaders from both developed and developing nations would be included.


Sarkozy Speech


"We must reform capitalism so that the most efficient system ever created doesn't destroy its own foundations," Sarkozy, 53, said yesterday in a speech to Quebec's National Assembly. Sarkozy represents all 27 nations of the European Union.


Sarkozy and Barraso are pressing Bush for a G8 agenda that includes stiffer regulation and supervision for cross-border banks, a global "early warning" system and an overhaul of the International Monetary Fund. Talks may also encompass tougher regulations on hedge funds, new rules for credit-rating companies, limits on executive pay and changing the treatment of tax havens such as the Cayman Islands and Monaco.


Capitalism Reformed To Death


The problem with capitalism is that it has been reformed to death already. Now we see the Orwellian concept of putting in place a Brave New World To "Preserve" Free Markets.


It is a serious mistake to think we need to take over the free markets to save them. I have a better idea: why not let the free market work? Before one can fix anything one must first understand what the problem is.


The Problem


* The Fed

* Fractional Reserve Lending

* Runaway Congressional Spending



Summit of Winners


Instead of holding a summit of losers, why not hold a summit for those who saw the mess coming and are far more likely to know what to do than those who did not see this mess coming.


There is one more gotcha to the summit of winners ideas. That problem is that a few of the people that did indeed see this crisis coming are proposing the same failed Keynesian policies that brought about this crisis in the first place.


Krugman and Roubini need to be excluded from the summit of winners.


Ron Paul


At the top of my list of those who understand what the problem is and also what to do about it is Congressman Ron Paul. There are simply too many relevant articles by Ron Paul to list one of them as a highlight.


Lew Rockwell has a nice collection called The Ron Paul File that is another good starting point.


Marc Faber




Click Here For Marc Faber: Let the crisis burn itself out.


Marc Faber is second on my Winners List.


"The best thing to do is let the crisis burn itself out even if it means pain for some people. The problem is leverage, and the biggest hedge funds are Fannie Mae and Freddie Mac with leverage of 150-1, under the eyes of Congress and the SEC. Nobody did anything about it and then people go bitch about the short sellers. ... And who supplies the leverage into the system? It's called the Federal Reserve board!"


Peter Schiff


I have had and still have my differences with Peter Schiff as noted in Not Your Father's Deflation: Rebuttal and Peter Schiff Replies to Deflation Rebuttal but with the exception of an short and silly reference to Zimbabwe this is an excellent video.




Click Here For Schiff vs. Zandi.


In spite of my differences with Schiff on inflation vs. deflation in the near future, I nominate Peter Schiff to my team of winners for what to do about this problem.


Frank Shostak


I also nominate Frank Shostak to my team of winners. Please consider this audio with Austrian Economist Frank Shostak on Mises.




If you saw this crisis coming, understand that it was the Fed, the SEC, and fractional reserve lending that caused this mess (as opposed to a lack of regulation), and recognize that the best thing to do in the immediate future is nothing, then add yourself to the winners list.


In terms of what to do about the current crisis my proposed winners conference could be concluded with one word "Nothing".


However, it will take a plan and a timeframe to abolish the Fed, abolish fractional reserve lending, and return the world to a system of sound currencies backed by hard assets. I do not think that can happen overnight. How to accomplish that mission is what the economic conference should be about.


Instead, I fear we are going to see a conference of losers, sponsored by a loser, with losing solutions to the problem.


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I think we must be careful to differentiate between those who saw it coming and those who were were prepared to risk contributing to the problem by talking about it.


Mike and/or Dominic asked for questions for CMR. I can now add Mish to the list of non-interventionists including Ron Paul and Peter Shiff, my question is:


Does he envisage a non-interventionist policy resulting in widespread bankrupty, causing a massive decrease in employment and productivity on a global scale. If he does, can he explain why he prioritises the free markets over standard of living across the world. To clarify, it's not the standard of living of the elite that I'm so concerned about, it's the standard of living of the people of the world at the bottom of the chain who are already in poverty.


This is the most important question, but I've not seen any of the right wing commentators discuss it.

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US to host G20 world summit over crisis


Global stock markets plunged on Wednesday as the White House said it would invite world leaders to a global financial summit next month, 11 days after the US presidential election.


The S&P 500 fell more than 6 per cent to close at its lowest level in five years, while London’s FTSE 100 lost 4.5 per cent and Japanese stocks dropped 6.8 per cent.


Full coverage: Global financial crisis - Oct-22

Editorial Comment: Bail-out threat to free markets - Oct-22

Comment: How the financial crisis is changing China - Oct-22

Comment: The complexities of a multipolar future - Oct-22

Credit agencies ‘broke bond of trust’ - Oct-22

Overview: Fresh wave of risk aversion - Oct-22


The stock-market retreat came as prices for oil and gold fell sharply and European currencies slumped against the dollar and yen as traders bet on interest rates being slashed to offset a looming recession.


Following calls from European leaders such as Gordon Brown, British prime minister, and Nicolas Sarkozy, France’s president, the White House said it was planning a meeting of the heads of state of the G20 group of countries in Washington on November 15.


The G20 members include some of the countries most affected by the crisis in the developed world as well as emerging markets such as Brazil, China and India.


“The leaders will review progress being made to address the current financial crisis, advance a common understanding of its causes, and, in order to avoid a repetition, agree on a common set of principles for reform of the regulatory and institutional regimes for the world’s financial sectors,” said the White House.


It was not clear if the winner of the November 4 presidential election would attend but if either Barack Obama or John McCain were to participate, it would be a remarkably early first appearance on the world stage.


Mr Obama welcomed the planned summit, saying: “America must lead and other nations must be part of the solution too.” Mr Obama said he did not want to “make commitments” about attending.


At the weekend, Mr Sarkozy pushed the case for a summit at a meeting with George W. Bush at the US president’s Camp David retreat. The French president welcomed the White House announcement, pointing out that he had proposed such a summit a month ago.


Mr Brown on Wednesday said the agenda of the summit was a matter for Mr Bush but the UK prime minister has already set out a list of reforms he wants to see pursued at a so-called “Bretton Woods II” conference.


The euro was at a two-year low of $1.2849 in late London trading yesterday, down more than 2 per cent on the day. As recently as April this year, one euro was worth just under $1.60. The euro fell to a four-year low against the Japanese yen and is now only three-quarters of its value in July.

I make that 15th Nov (assuming election on 4th - is it always the 4th, why?)


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Asia on board


Full text of statement of the Seventh Asia-Europe Meeting on the Int'l Financial Situation

www.asem7.cn 2008-10-25 10:50:08


Following is the full text of the Statement of the Seventh Asia-Europe Meeting on the International Financial Situation issued in Beijing Friday.


Statement of the Seventh Asia-Europe Meeting on the International Financial Situation


Beijing, 24 October 2008


1. Leaders attending the Seventh Asia-Europe Meeting had an in-depth discussion on the current international economic and financial situation and its trend of development. They expressed concern over the impact of the spreading international financial crisis on the global economy and in particular, the severe challenges it poses to financial stability and economic development of countries in Asia and Europe.


2. Leaders believed that authorities of all countries should demonstrate vision and resolution and take firm, decisive and effective measures in a responsible and timely manner to rise to the challenge of the financial crisis. Leaders expressed full confidence that the crisis could be overcome through such concerted efforts.


3. Leaders welcomed the measures adopted by countries and organizations to ensure the smooth running of the financial system and real economy. They called on the international community to continue to strengthen coordination and cooperation and take effective and available economic and financial measures in a comprehensive way to restore market confidence, stabilize global financial markets and promote global economic growth.


4. Leaders agreed that IMF should play a critical role in assisting countries seriously affected by the crisis, upon their request.


5. Leaders were of the view that to resolve the financial crisis it is imperative to handle properly the relationship between financial innovation and regulation and to maintain sound macroeconomic policy. They recognized the need to improve the supervision and regulation of all financial actors, in particular their accountability.


6. Leaders called on all countries to pursue responsible and sound monetary, fiscal and financial regulatory policies, enhance transparency, inclusiveness, strengthen oversight, and improve crisis management mechanisms so as to maintain their own economic development and the stability of the financial markets. They agreed that the necessary and timely measures should be taken to preserve the stability of the financial system.


7. Leaders pledged to undertake effective and comprehensive reform of the international monetary and financial systems. They agreed to take quickly appropriate initiatives in this respect, in consultation with all stakeholders and the relevant international financial institutions. The International Monetary Fund and other international financial institutions should bring into play their mandated role in the international financial system, to help stabilize the international financial situation.


8. Leaders supported the convening of an international summit on 15 November in Washington D.C. to address the current crisis and principles of reform of the international financial system as well as long-term stability and development of the world economy.


9. Leaders agreed to make full use of ASEM and other cooperation mechanisms to enhance information sharing, policy exchange, and pragmatic cooperation on supervision and management in the financial sector and effectively monitor, prevent and respond to financial risks to ensure sustained, stable and sound economic growth.



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Paper gold?


Discussion on FT Alphaville:


A ‘paper-gold’ reserve system?


With the elections out of the way, attention is now re-focusing on the global financial crisis and the upcoming G20 meeting in Washington on November 15th. In that context much has been written about the need for a “new Bretton Woods” agreement, or at least, the hopes for one.


Martin Wolf makes his case in today’s FT. He outlines four main challenges a new agreement should address:


The first is the inability to gain a purchase on the policies of countries that run huge and persistent current account surpluses.


The second is that of financing countries subject to “sudden stops” in capital inflows of the kind we are seeing, as banks and other foreign-currency lenders cut off financing to a wide range of borrowers, particularly in emerging countries.


The third challenge is that of making the financial system less unstable and, above all, less vulnerable to such huge swings in risk appetite — from financing anything, however ridiculous, to financing nothing, however meritorious


The final challenge is that of making the global institutional architecture less illegitimate than today


He concludes it is not only possible but necessary to change the global architecture to reflect changing economic weights. The world must also give the IMF more financial resources in support of its new short-term lending facility.


In the original Bretton Woods, of course, it was decided member countries keep currency values pegged to the US dollar and, in the case of the United States, the value of the US dollar be pegged to gold. Those rates could be adjusted only to correct a “fundamental disequilibrium” in the balance of payments and only with the IMF’s agreement.


The system broke down when imbalances threatened to eliminate the gold reserves of the US, and Washington was forced to suspended the dollar’s convertibility into gold. So how could it work this time?


Writing in the FT last week, George Soros said it was time to start thinking about creating special drawing rights or some other form of international reserves on a large scale to sort out the crisis. This system should, he said, be subject to an American veto.


By “some other form of international reserves”, was he referring to gold once again?


And as for extending the sums of special drawing rights - how would that actually help or be achieved?


Firstly, how does an SDR - dubbed “paper gold” by some - even work? According to the IMF:


The SDR, or Special Drawing Right, is an international reserve asset that member countries can add to their foreign currency and gold reserves and use for payments requiring foreign exchange.


Its value is set daily using a basket of four major currencies: the euro, Japanese yen, pound sterling, and U.S. dollar. The IMF introduced the SDR in 1969 because of concern that the stock and prospective growth of international reserves might not be sufficient to support the expansion of world trade. (The main reserve assets at the time were gold and U.S. dollars.)


The SDR was introduced as a supplementary reserve asset, which the IMF could “allocate” periodically to members when the need arose, and cancel, as necessary. IMF member countries may use SDRs in transactions among themselves, with 16 “institutional” holders of SDRs, and with the IMF. The SDR is also the IMF’s unit of account. A number of other international and regional organizations and international conventions use it as a unit of account, or as the basis for a unit of account.


The number of SDRs in circulation currently stands at 21.4bn (a value of $31.96bn at today’s rates) with each member country allocated its own quota. That quota is determined according to many variables but very generally, the bigger the GDP and standing of the member country in the fund (in terms of economic weight, voting rights and openness), the bigger the quota.


There are provisions for the number of SDRs in the system to be extended, when needed. Any extensions are supposed to be proportional, impacting every member similarly. That’s not to say allocations for countries don’t change - the IMF reviews the quotas on a case-by-case basis every few years.


According to the IMF: most fund loans are financed out of members’ quotas. The exceptions are loans under the Poverty Reduction and Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from the IMF itself and a broad spectrum of its member countries.


So it seems extending the number of SDRs in circulation could go some way to addressing the current liquidity constraints currently plaguing the system.


Jan Randolph, head of Sovereign Risk at Global Insight explains to Alphaville :


George Soros’ latest idea here I think is really all about boosting this SDR currency’s money supply, though still restricted to sovereigns in circulation, to enable them to maintain or raise levels of liquidity and therefore conduct more international trade. It would be of special help to emerging markets that may face liquidity pressures as a result of the credit crunch and unlike an IMF loan, would have few, if any, strings attached.


The reallocation of country quotas in any significant manner could also presumably address the large surpluses built up in countries like China. At the end of the day, the solution to the global financial crisis problem is connected to restoring liquidity and confidence to the financial system. To do so, many say the solution must address the current imbalances which see vast sums of dollars stored-away on some sovereign balance sheets and not on others.


Gordon Brown said Tuesday the surplus-holding Gulf States, many of whom already peg their currencies to the dollar, were ready to extend money to an IMF bailout fund at the G20. The question is could that money be channelled through an SDR framework?


Reserves graph

SDRs potentially address another problem facing the system too. As Fred Bergsten, director of the Peterson Institute for International Economics, wrote in the FT a year ago, they could help restore faith in the dollar itself. His argument being, surplus nations in many cases have no choice but to bankroll the US debt, as diversifying into non-dollar denominated assets would have drastic consequences on their own currencies.


Many dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign dollar holdings total at least $20,000bn, even a modest realisation of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy.


He adds the problem is further heightened by the fact that none of the countries into whose currencies the diversification would take place want to receive these inflows either. Through an SDR substitution account though the following could happen:


Instead of converting dollars into other currencies through the market, depressing the former and strengthening the latter, official holders could deposit their unwanted holdings in a special account at the IMF. They would be credited with a like amount of SDR (or SDR-denominated certificates), which they could use to finance future balance-of-payment deficits and other legitimate needs, redeem at the account itself or transfer to other participants. Hence the asset would be fully liquid.


Via this system all countries would benefit, he says:


Those with dollars that they deem excessive would receive an asset denominated in a basket of currencies (44 per cent dollars, 34 per cent euros, 11 per cent each yen and sterling :blink: ), achieving in a single stroke the diversification they seek along with market-based yields. They would avoid depressing the dollar excessively, minimising the loss on their remaining dollar holdings as well as avoiding systemic disruption.


Meanwhile, the US would be spared the risk of higher inflation and potentially much higher interest rates that would stem from an even sharper decline of the dollar. As the cost of protecting against US sovereign default in credit default swaps increases, it’s certainly a case worth considering, especially as a proposal for a special one-time allocation to double the number SDR in the system is already in place. To go through, the proposal needs three fifths of IMF members (111 countries) with 85 per cent of total voting to accept it. As of March 2008, 131 members with 77.68 per cent of voting power had accepted it - reflecting the level of the demand for the measure. Approval by the US would now put the amendment into effect.




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Paper gold?


Discussion on FT Alphaville:





A rework of Special Drawing Rights (SDR)? Is that the key to global financial reform?


Special Drawing Rights (SDRs) - http://www.imf.org/external/np/exr/facts/sdr.HTM


All went wrong/got dropped when gold-backing stopped... What can put 'faith' back into the global trade/financial system? Yes, it could remain based around fiat - but who'd have any confidence in it? Would China, Russia opt in or maybe start similar on own?


Note: Jim S's Gold Certificates theory, that Canadian Geezer mentioned on here (a while back) who spoke of a new asset-backed currency(s), talk of dropping $-backed trade in commodities/between countries, talks in November, etc, etc.


The PPT use it!


From the website of:


Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220


Secretary Henry M. Paulson, Jr.

Deputy Secretary Robert M. Kimmitt



Exchange Stabilization Fund



The Exchange Stabilization Fund (ESF) consists of three types of assets: U.S. dollars, foreign currencies, and Special Drawing Rights (SDRs)1. The financial statement of the ESF can be accessed through the links on the right hand side to either "Latest Financial Reports" or "Finances & Operations."


The ESF can be used to purchase or sell foreign currencies, to hold U.S. foreign exchange and Special Drawing Rights (SDR) assets, and to provide financing to foreign governments. All operations of the ESF require the explicit authorization of the Secretary of the Treasury ("the Secretary").


The Secretary is responsible for the formulation and implementation of U.S. international monetary and financial policy, including exchange market intervention policy. The ESF helps the Secretary to carry out these responsibilities. By law, the Secretary has considerable discretion in the use of ESF resources.


The legal basis of the ESF is the Gold Reserve Act of 1934. As amended in the late 1970s, the Act provides in part that "the Department of the Treasury has a stabilization fund …Consistent with the obligations of the Government in the International Monetary Fund (IMF) on orderly exchange arrangements and an orderly system of exchange rates, the Secretary …, with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities."

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Note: Jim S's Gold Certificates theory, that Canadian Geezer mentioned on here (a while back) who spoke of a new asset-backed currency(s), talk of dropping $-backed trade in commodities/between countries, talks in November, etc, etc.


Obviously relevant here.


Sinclair's Revitalized and Modernized Federal Reserve Gold Certificate Ratio

I just don't really buy into it



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If an SDR consists of 44% USD, 34% EUR, 11% JPY and 11% GBP if they were to create more they would need deposits of these currency to create the new currency and thus expand the money supply (I assume)


My question would be where do they get the currency? Two options I guess governments (UK,US,JPY,EUR) sell bonds and transfer the proceeds to the IMF or they take the dollars and sell them in the open market for the needed currency.


I really don't see how this avoids the problem seems to just move it around.


Do SDR need the currency backing them to be constantly managed to maintain the correct weighting?


Be interesting to see what they come up with for sure.

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