Thursday, May 29, 2014

Paul Volcker's speech to the Bretton Woods Committee - Part II

In Part II we will paste some of the key comments from the Volcker speech and attempt to make some observations on how all this could impact the timing for any major monetary system change.

In the opening part of his speech, Mr. Volcker provides some history and background to Bretton Woods. He interestingly titles the speech "A New Bretton Woods???" suggesting perhaps one might be coming soon. But as we read the whole speech, we actually see quite the opposite coming through. Here are the opening paragraphs:

"Weeks ago, Dick Debs overcame my reluctance to participate 
in still another public meeting. And once that commitment was 
made, the inevitable question followed: ”Paul, we need a title 
for your remarks”. 

Well, what could I say that could be new or provocative 
amid all the conversations about the markets, financial reforms 
in all their variety, or even the Volcker Rule itself? 
Well, given the sponsorship of this meeting, what popped 
out of my mouth was, “What About a New Bretton Woods???” – with 
three question marks. 

The two words, “Bretton Woods”, still seem to invoke a 
certain nostalgia – memories of a more orderly, rule-based world 
of financial stability, and close cooperation among nations. 
Following the two disasters of the Great Depression and World 
War II that at least was the hope for the new International 
Monetary Fund, and the related World Bank, the GATT and the 

Volcker goes on to say to give a summary of history of the monetary system and some major points of change such as when the dollar went off the gold standard in 1971 and currencies "floated" against each other in value. He says things went pretty well under the existing monetary system after the stagflation in the 1970's up until the global financial crisis in 2007-2008. 

He then shifts gears to ask if the existing monetary system (because of lack of global oversight) may have contributed to the problems we are still dealing with now. He begins to suggest that lack of global oversight of the monetary system allowed for bad national economic policies to be put in place. He seems to be suggesting that more global institutional oversight is needed
(like a bigger role for the IMF).

He goes on to question how large trade imbalances such as the one between the US and China have been allowed to build up to excess and also questions if there should be just one national currency (the US dollar) as global reserve currency. Here are those comments:

"Where was an effective adjustment mechanism? (for the trade imbalances) Was the “exorbitant privilege” of the dollar as a reserve currency also a “dangerous temptation” to procrastinate - an impediment to timely policy adjustments, risking eventual breakdown?"

Later he adds this:

"Nor would I reject some re-assessment of the use of a 
single national currency as the dominant international reserve 
and trading vehicle. For instance, do we want to encourage or 
discourage so important a development as regional trade and 
currency areas?"

Here he seems to suggest multiple reserves currencies and regional trade groups (think BRICS here) should be encouraged rather than discouraged? This would lead away from a global currency centered at the IMF.

Volcker concludes the speech by making a plea for a new and improved monetary system:

"That is all a long introduction to a plea – a plea for 
attention to the need for developing an international monetary 
and financial system worthy of our time."

At this point the reader suspects he is about to lay out a scenario for sweeping change that might perhaps be coming soon. Instead here are some of his concluding remarks:

"Well, even if you agree with my concerns, you will 
reasonably ask where the analysis leads. What is the approach 
(or presumably combination of approaches) that can better 
reconcile reasonably free and open markets with independent 
national policies, maintaining in the process the stability in 
markets and economies that is in the common interest? 
 That is a question I cannot answer today with a sense of 
conviction and practicality."

And then he adds this:

"The creation of the G-20 at the exalted level of Presidents 
and Prime Ministers has been a political accomplishment. The 
agreed changes in IMF governing structure are important in 
achieving a sense of political legitimacy for its governing 
structure and decision-making. But that is not enough – it means 
little without substantive agreement on the need for monetary 
reform and practical approaches toward that end. 

We are a long way from that. . . . "

And here is more:

"A new Bretton Woods conference? We are long ways from 
that. But surely events have raised, whether we want to admit it 
or not, some fundamental questions that have been ignored for 

And finally this last paragraph:

"Can we not, in approaching that challenge, restore 
something of the spirit and conviction that characterized the 
planning, the negotiation and the management of the Bretton 
Woods System that I once knew 50 years ago? Our host today, the 
Bretton Woods Committee lights the candle, but we have a long 
way to go."

My concluding comments: 

Mr. Volcker makes it clear he is a strong believer in a global approach to managing the monetary system and makes several arguments as to why the IMF and other global institutions are important. However, what I get from this speech is a sense of frustration that things appear to be stalled and meaningful change is "a long way off".

Notice how many times he says "we are a long way from that" or "we have a long way to go".  All this seems to confirm that things have stalled out at the IMF for now. The BRIC nations seem to be going their own way. In the US and EU political winds seem to be favoring those who oppose global institutions rather than support them. 

The US and Russia are at odds and nations seem to be taking sides rather than coming together on a global basis. None of this suggests the IMF is about to step forward to lead global monetary system reform. Instead, an East versus West divide seems to be widening. 

All this is why we think unless there is some sort of major global crisis that pulls all these factions together, the trend seems to be moving away from global cooperation through the IMF. We will continue to keep an eye out for any such global crisis or change in the trend. 

But for now, it seems like change is more likely to come from the BRIC alliance working on its own to bypass the US dollar. They have stated 2015 is their target date for getting this going in a serious way. They seem to be laying the groundwork this year. 

So, perhaps the Volcker speech gives us a hint that nothing is imminent for major change within the IMF for now. Perhaps a "reset" is not imminent. Things seem a lot different than when Christine Lagarde was talking about a "reset" at the start of this year and rumors abounded that a "currency reset" was imminent.

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