Thursday, November 13, 2008
The worst financial crisis since the 1930’s, if not ever, is shaking the world’s financial system to its core. Congress authorized the Treasury Department to spend $750 billion to support the U.S. banking system, and with the prior loans and efforts, the sum that we are warned has and will be spent is nearly $1 trillion. If published reports are accurate, the European governments are prepared to spend $2 trillion to support the European banking system. If only Carl Sagan was still here to tell us how many billions and billions that is.
The New York Times reported on October 15 that British Prime Minister Gordon Brown is calling for a “new Bretton Woods” by which he refers to the architecture of the current global financial system that was established at the conclusion of World War II. At Bretton Woods, a resort in the New Hampshire mountains, the Allied victors (meaning primarily the US and the UK) established the framework for the International Monetary Fund, whose goal was to provide international financial stability with fixed exchange rates and balance of payments assistance. In the 1950’s a development bank was formed ostensibly to assist the developing world, and it has grown into what we now know as the World Bank.
These international financial institutions were supposed to ensure stability and development, and it appears that they are no longer up to the task. The reason for the lack of stability may be as simple as the growth of technology. When they were established, money was stored in vaults and usually consisted of gold or silver, hence the Pound Sterling, and labor was involved in moving it around the world; today, money is stored in digital accounts kept on computer servers, and vast sums move from New York to London or Singapore and back with a click of the mouse. Financier George Soros demonstrated how the world had radically changed when he brought the Bank of England to its knees one night by selling British Pounds faster than the Bank could soak them up.
Or the explanation for how we got into this predicament may be as simple as the contemporary fact that the banks who loan money for things like residential mortgages sell them quickly to somebody else before payment comes due and the buyers, who may be in another part of the world, are lulled by the assurances of smooth talking brokers with the gold plated reputations of a Lehman Brothers or Goldman Sachs.
Whatever may be the explanation for how we got here, all the hullabaloo over the plight of our Western banks has pushed one other reality of the existing global financial system out of sight. According to the UK based NGO, Jubilee Debt Campaign http://www.jubileedebtcampaign.org.uk/, today developing countries’ debt stocks stand at a staggering $2.9 trillion and every day the poorest countries pay the rich world almost $100 million in debt repayments. In many of these countries millions of people live on less than $2 per day, poverty is everywhere, opportunities and choices are limited or non-existent, and we have yet to see the impact of this year’s doubling of the price of energy, which will only make matters worse.
It is true that economic growth in the developing world has lifted millions of people out of the most abject poverty, and some credit for that progress may be due to the international financial institutions’ efforts. But that success is not evenly distributed around the world and in some regions the problem is getting worse, not better.
The developed world’s Heavily Indebted Poor Counties (HIPC) Initiative was launched in 1996 and expanded in 1998, aiming to bring together the bilateral, multilateral and commercial creditors of some of the poorest countries, and to reduce their debts to a level deemed “sustainable”. In 2005, the G8 countries added the Multilateral Debt Relief Initiative. But, according to the Jubilee Debt Campaign, so far these efforts have delivered about $88 billion of irrevocable debt cancellation to 25 countries. In 10 years, a not so grand total of $88 billion in debt relief has been achieved on a debt that now totals $2.9 trillion.
Surely, if the governments of the developed world’s financial system can come up with $3 trillion in about three weeks time to take care of themselves, there can no longer be any excuse for not addressing the developing world’s $2.9 trillion problem, too. The developing country debt is every bit as toxic as any traunch of ill advised securitized residential mortgages in the developed world.
While the world’s public and private bankers are saving themselves and restructuring the global financial system with a new Bretton Woods, it would be a good time to enact comprehensive and meaningful cancellation of developing country debt.