History lessons for financial crisis: Act fast, act globally
European leaders call for a new Bretton Woods-type agreement as they meet in Brussels.
A global financial crisis of the current magnitude is unique. But two historic events offer lessons for a way out, say economists.Skip to next paragraph
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First, move with alacrity. During the Great Depression a protracted delay in aiding banks proved fatal – a lesson Britain and now, this week, the United States have taken on. Second, coordinate globally. The Bretton Woods agreement near the end of World War II became an effective tool for reworking a shattered world economy. Calls for a second Bretton Woods are now being sounded by such figures as Britain's Prime Minster Gordon Brown, French President Nicolas Sarkozy, and World Bank president Robert Zoellick.
Central to European leaders discussions Wednesday and Thursday in Brussels is this motto: A global crisis requires a global solution. The subtext is that much tougher regulation is required. As Mr. Brown put it Monday, "Sometimes it takes a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed. We must create a new international financial architecture for the global age."
The storied 1944 Bretton Woods conference – where some 700 delegates from 44 nations gathered at a hotel in New Hampshire – was a bold move to create the first negotiated monetary system among industrial states. The World Bank and the 185-nation International Monetary Fund emerged from that pact. The IMF has become a major source of loans for developing nations in financial trouble.
The legacy of Bretton Woods, said Mr. Zoellick in a speech this week, was that the crisis of a ravaged world created a commitment to remake institutions, to "turn the problems of an era into an opportunity."
In the past week, European nations have begun to coordinate their responses to the crisis, after initially being unwilling, or unable, to do so. The two-day meeting in Brussels, ending Thursday, is intended to solidify new measures in the wake of bank failures and credit crises from Iceland to Germany that brought near panic.
"Mechanisms for cross-border cooperation in Europe exist but they are incomplete," argued Mr. Mandelson, who joined Brown's Cabinet this week. "Internationally, the problem is even more acute...." he says, since coordinating systems are "outdated," with huge stakeholders like China not tied firmly enough into the economic order. "It is 64 years since the Bretton Woods conference put in place the basic machinery.... It is time for a Bretton Woods for this century," he wrote on Oct. 3 in The Guardian, a British newspaper.
The specter of another Great Depression of the 1920s and '30s has been raised by the speed and scope of this financial crisis. But such fears have been mitigated, for some, because Federal Reserve Chairman Ben Bernanke is himself a student of the Great Depression. He has taken the opposite approach to the Fed's cautionary policy of the '30s, when the Fed tried to slow the economy, increased interest rates, and allowed some 9,000 banks to fail.
By contrast, the Fed's response under Mr. Bernanke is entirely proactive. The Fed has cut interest rates, worked closely with the US Treasury to bail out key private firms like Bear Stearns and AIG, and flooded markets with liquidity.