Wednesday, October 5, 2016

Bretton Woods Old and New - An Interview with Richard N. Cooper

Readers here know that this blog attempts to cover the prospects for major monetary system change at some point in the future. It's interesting to see so many different points of view on the likelihood of such monetary system change coming to pass. 

Jim Rickards is on record stating that he is completely convinced such change will happen when another major crisis (worse than 2008) comes along. We have covered his thoughts on this extensively here. Potential monetary reformers such as Dr. Warren Coats and Robert Pringle believe that major monetary system change is needed but find that real support for actual proposals to do this is somewhat lacking within the present system. 

Alongside of this, we have a number of analysts and proponents for change who believe that some kind of major monetary system change is imminent. Some believe that China, Russia, and the BRICS are planning to stage what amounts to a coup and overthrow the US dollar in the near future. Others believe that elites running the present system are actually pushing the world towards another major crisis so that they can propose a global currency (along with a global government) as the solution to the crisis.

In a recent interview (Center for Financial Stability), Harvard economist Richard N. Cooper offers some comments on what he sees in terms of the status for major monetary system changes any time soon. Below are a few excerpts from his interview where he talks about prospects for change and then a few added comments.

(excerpts pick up in mid interview)

. . . . . 

Q: In 2014 you gave a presentation, "Bretton Woods @ 70: Regaining Control of the International Monetary System" at the [Austrian] Federal Ministry of Finance. Following this Bretton Woods “collapse,” what were some of the initial reactions? Some believed that the gold window would be reopened in the future (at a new peg). Was this ever a plausible belief? 

Rickard Cooper: "No. When I said gold convertibility was suspended, it was expected to be temporary. But given the subsequent circumstances, the fact that the agreed depreciation was too little, and then the general floating, it never became an issue (practically speaking, of reopening the gold window). And we actually had a big, big global effort to reform the international monetary system in ‘72 to ‘74, [which] focused on the International Monetary Fund. John Williamson has written a book on that, [which] came out in late ‘70s. The bottom line was that it was a basically a failure. Robert Solomon has also written on that. So the principals, the finance ministers of the world, with agreement of their bosses, formally amended the articles of agreement for a second time now. 

The first amendment was for the SDR in ‘67. This is the Second Amendment [to the IMF Articles of Agreement] of ‘78, which essentially changed the rules of the Bretton Woods system and acknowledged in effect [how] the gold role greatly diminished. It didn’t disappear altogether, but was greatly diminished, and the fixed exchange rate regime was over. Countries were free, subject to some general rules, to choose what exchange rate regime they wanted. So that was finally all done in ‘78. And then of course, the negotiations took place earlier and finally went into effect by ‘78. So that is the new Bretton Woods system, which we still have today.

It doesn’t work perfectly, but works reasonably well. I think there’s still an issue, which the Chinese actually raised seven years [ago] in March of 2009, about whether the system should rely on any national currency. The U.S. dollar was and is the most important, with the euro also becoming an important international currency. That issue is still under discussion, but without any real fire behind it. [Nicolas] Sarkozy when he was president of France and chairman of the G20, he said he was going to move reform of the monetary system to the top international G20 agenda. I was again involved in advising the French minister of finance, who had the operational responsibility [and] made a proposal, but [it] essentially got pushed out by other considerations. And I think it’s fair to say there’s not much enthusiasm for it anywhere. The Chinese talk about it, some French talk about it. It’s hard to find Americans besides me and few others who talk about it. John Williamson is still interested."

. . . . .

Q: Could you describe your proposal to change the current world [monetary] system?  

Richard Cooper: "Sarkozy called for a new Bretton Woods conference; I reacted very negatively to that. My view was, don’t call for a conference, make a proposal. And if you have a better way to do things, let’s discuss it. You know, [at] the official level, if it seems to pass muster with officials, then roll it out and have a big public discussion, and so forth. So, the French never came up with the proposal and so I made a proposal. First I made it to the Deputies of the G20 and I made it on several occasions. It’s been published in a journal called Central Banking, I’m thinking in 2011, which was the year of the G20. So I made a proposal and sometime later, the International Monetary Fund had a conference, maybe a year and a half ago, which I spoke [at] and talked about my proposal there, and I explained that I am not wildly enthusiastic about my proposal. I’m not a big advocate of it. It’s just the best I can think of under the circumstances, and it was really designed to get something on the table and get people thinking about it and if they don’t like it, you know what (is your) alternative? 

And my bottom line is griping does not represent a policy, and there’s been a lot of griping in recent years. If you have a proposal to make, make it. You can start with my proposal and modify it however much or you can start with something completely different. And if you don’t have a proposal, stop griping. And that’s my basic view; I do not like particularly official griping."  . . . .

 Q: Why have many leaders, like Sarkozy, not put this to the front of the agenda?

Richard Cooper: "Well, Sarkozy did try it. First he called [for] that at the World Economic Forum.11 He called for a new Bretton Woods conference, and that’s when I had the negative reaction: don’t call for a conference, make a proposal, then we’ll see if a conference is worthwhile, but make a proposal. But the French did not make a proposal. 

And then we had the G20, and it was his turn to be chairman of the G20 — this is in 2011; the Koreans had been [chairman] in 2010, the Brits had been in 2009, this year [2016] it’s China. Sarkozy said high on his agenda was going to be reform of the international monetary system, and then it was up to French Ministry of Finance to fill that out. The Ministry of Finance is first-rate, I have to say — very, very good guys. But here their boss was saying, “This is on my agenda,” and they didn’t know what to do with it, so they called me. And that’s how I got involved with it, but it didn’t go to any place

You get, again, griping by the Chinese. The Chinese had more than gripes. The first statement by Governor Zhou [Xiaochuan], of the People’s Bank of China, was a very thoughtful statement, actually. I could have written it twenty years earlier; the surprise was the source. This senior Chinese official came out with this in March of 2009, a long time ago. It’s actually a very level-headed statement, and it was not a proposal. It simply raised the issue. So it was a sophisticated gripe—again, it was not a proposal

And my proposal actually builds on that it. So the SDR plays a central role and then we need an adjustment mechanism too. There was a proposal in Korea in 2010 at the G20 on the adjustment mechanism and the threshold was, any current account surplus or deficit in excess of 4 percent should require adjustment.

The Koreans proposed it, but in consultation with the U.S., and the Americans thought (at least I’ve been told, I’m on the periphery of all this now) that the Chinese were on board. But anyway, when it got to the Seoul summit, both the Germans expectedly and the Chinese [unexpectedly] disagreed with this proposal, so it went no place. The language that came out of the Seoul summit was very general on the need to address global imbalances, but without a hint on how we’re going to address global imbalances.

So there are these two issues: One is what is the source of international liquidity, and that’s what Governor Zhou [Xiaochuan] raised back in 2009; and then [the other is] what’s the adjustment process, that was the topic of the Seoul summit. Sarkozy was supposed to cover both, but didn’t. My proposal covers both [liquidity] and the adjustment process, which I think actually is more difficult."

. . . .

Q: What is the future of international monetary agreements?

Richard Cooper: "There’s no basis at the moment, no consensus within the economic profession on these issues. In fact, there’s a big fundamental disagreement and there’s not enough urgency in the operational system to force the issue. And so the tendency of policymakers under those circumstances is to kick the can down the road, and grumble. So we have a lot of grumblers who don’t like the role the dollar. Tell me the alternative, make a proposal, that’s my refrain, and nobody comes forward with the proposal. [They] just grumble about the role of the dollar."

(note: underlines in the excerpts above are mine added for emphasis)

My added comments: These answers by Dr. Cooper are quite consistent with feedback I get from highly credible sources like Dr. Warren Coats and Robert Pringle. Both Dr. Coats and Robert Pringle are strong advocates for monetary system reform, but see no general consensus forming around any actual proposals to make such reforms at this time. Dr. Cooper clearly states this is also his view in the last answer quoted above from his interview.

All of this is why I have been writing here for some time that I believe it will take another major global financial crisis like Jim Rickards predicts to create the "sense of urgency" Dr. Cooper says does not exist right now for any major change.

When you read about all this, please keep in mind the following:

- there is no evidence that any kind of global consensus exists right now on how to reform the monetary system despite numerous calls for those reforms (note our article earlier this year along these same lines)

- for reform to happen, you have to have an actual real proposal that can be debated and voted on at IMF etc. (see our article here). Speculation on what might happen is NOT a real proposal and should be viewed for it is -- speculation.

- Dr. Cooper presents quite a different picture of where things stand in terms of agreement for monetary system change than we see in many headlines on various media today:

"There’s no basis at the moment, no consensus within the economic profession on these issues. In fact, there’s a big fundamental disagreement and there’s not enough urgency in the operational system to force the issue."

What could change things? 

The only thing I can think of is another major global crisis. But as we can see, even under those circumstances there are a lot of competing ideas on what to do. Here we will focus on what actually does happen rather than try to speculate on what might happen. If we truly have a complex system as Jim Rickards says, no one can possibly know for sure what actual proposal would be put forward or accepted by the general public in the event of another huge crisis. 

This is why staying alert and informed is important and why it is a good idea to be  aware of the various actual real proposals that do exist out there. These are more likely to be considered in my view than random ideas that have not been put into the public domain for peer review. But time will tell.

Added notes: Robert Pringle (former Group of 30) offered this comment after reading the article above:

"My only comment is that I think it is just as important (if not more so) for would-be reformers to persuade economists and policy makers that there is a connection between the current international monetary set-up and recent financial/economic currency crises as it is to agree on a specific reform proposal. Looking back to the 1960s many people were persuaded by Robert Triffin’s argument that the then-current system was doomed by its internal contradictions who did not necessarily agree on the solution."  -----  Robert Pringle

This is a comment Robert Pringle has made several times to me by email. He feels perhaps the biggest challenge to reform of the current monetary system is to convince the policy makers who would initiate reforms that the present monetary system imbalances are responsible for the periodic crises we have seen. Again, this is consistent with Richard Cooper's comment above that he sees no urgency for reform of the present system.

Also, we have these recent twitter comments by Harald Malmgren that agrees with all of the above. Please note his followup comment in the link to his twitter comments just above where he says even under crisis conditions it would be hard to get policy makers to move forward with changes.

Politically, neither US Fed/Treasury nor ECB ready to think about, much less discuss SDR's at this time in history.

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