Keynes' Ghost

I’m blogging from Bretton Woods, NH, site of the 1944 conference that reconstructed the rules for the global financial, monetary and trading system and the postwar recovery. This weekend, the world’s leading critics of the current economic mess have gathered here to discuss measures that the world’s governments should be pursuing, but lack the nerve. They are not optimistic.

The conference is being sponsored by INET, the Institute for New Economic Thinking created with a $100 million grant from George Soros. The Hew Hampshire tea party got wind of the event, and spun a conspiracy defining the meeting as a Soros coven to crash the dollar. Along the road leading to the dowager Mt. Washington Hotel were hand lettered roadside signs, “Soros Go Home,” and Soros Is Evil. At the gates of the hotel property, a polite state trooper stopped your car and asked for ID.

Rob Johnson, who directs INET, opened the conference with one of his trademark videos, showing the Japanese tsunami, with a rock track behind it (The Doors’ “Shelter from the Storm”). “That’s our music,” observed Leif Pagrotsky, a Swedish central banker and former culture minister, and a very hip Social Democrat.” It was an improbable genre for an international financial conference, but an all too apt metaphor.

The consensus so far: there is no shelter from the storm. Soros himself opened, with a very pessimistic assessment of problems unsolved – not just unsolved, but delayed while deeper problems fester. After the crisis, said Soros, “The authorities intervened, and put the system on artificial life support. They teplaced the private credit with public credit of the state. Now markets are functioning, but you are still left with the excesses and the imbalances.”

If the state of American financial reform is unfinished and courting the next crisis, the view from Europe is even worse. Europe is bifurcating into chronic creditors and chronic debtors, private banks are dictating whose belts are to be tightened, and it all adds up to a collective drag on the recovery—the polar opposite of what Keynes preached in this very hotel ballroom.

Larry Summers, now back at Harvard, was the after-dinner entertainment, interviewed by the prodigious Martin Wolf of the Financial Times, the world’s most respected financial journalist.

Summers was terrific, acknowledging that the stimulus of February 2009 was too small, that the idea of deflating our way to recovery is insane, that de-regulation had been excessive, and that much of the economics profession missed the developing crisis because its infatuation with self-correcting markets.

If only this man had been Obama’s chief economic adviser!

It reminded me a bit of Eisenhower’s farewell address, warning of a military-industrial complex, or Citizen Jimmy Carter’s sublime post-presidency. Why do these people find their consciences and souls after they give up power?

This morning’s opening session is a fine discussion of the problem of the imbalance between China and the U.S.

The echo of the original Bretton Woods conference is sublime, since Keynes’ idea was to to put pressure on creditor nations to expand and lend rather than on debtor nations to contract. This is the enduring economic conflict, Keynes’ authoritative biographer Robert Skidelsly is saying, “Who adjusts, debtors or creditors?”

In 1944, Keynes failed to persuade the Americas, then at the apex of their power, to turn over their finances over to a new international order. Nobody here is optimistic that the Chinese, the new surplus power, will allow anyone but the Beijing government to decide China’s monetary policy. The original Bretton Woods worked anyway, for a quarter century, because of the temporary supremacy of the mighty dollar.

In the end, it’s all about power. And despite the greatest crisis of financial capitalism in nearly a century, the banks have more power than ever. Thomas Carlyle called economic the dismal science because things tended to end badly. A fine mess.

You may also like