Once you have finished Krugman John, we suggest you look a bit further into what Gordon Brown is doing and suggesting.
To place this in context, can we reflect on a speech that Phil Goff gave last night. Goff was emphasising the leadership role that New Zealand has played or is playing. He talked about being to first to give women the vote (indeed pretty much every democracy has followed), he talked about our nuclear policies (who followed us there?), and he talked about our leadership on climate change where we are the only country being stupid enough to kill our economy (see for example the 300 people just fired by CHH) by making trade at risk sectors subject to cost structures that no other economy in the world is facing (once they stop laugthing no one will follow that one either).
Goff did also talk about the leadership role that New Zealand has played for many years in the WTO. He mentioned his mentor Mike Moore, Crawford Falconer and Tim Groser as examples of this leadership. We applaud his willingness to mention Groser.
Now Groser has experience that extends a bit beyond the WTO. Indeed in the early 80s he was at the heart of calls for a re-think of the Bretton Woods system. Who wrote all those speeches for Muldoon?
Put this fact together with our yearning to show international leadership, and it seems to The Hive, that National is uniquely placed to get right in behind Gordon Brown.
What is Brown saying?
The global financial system, let’s be honest, is too clouded with opacity, conflicts of interest, irresponsible risk-taking, and when problems occur countries have tended to look inwards and deal with them in isolation when it is clear that the only way forward is to look outwards and join in international cooperation.
A focus on short term rewards created risks for us all as money was lent that had almost no chance of being repaid and then was repackaged and sold on. Depositors and shareholders wrongly thought that banks would be protected by complicated but insufficiently understood financial engineering that would spread the risks across the deeper global capital markets. In the end financial engineering will not work if people cannot see or do not understand the nature of the assets and the risks they are taking on.
And this was exacerbated by deep conflicts of interest: credit rating agencies were paid by those they rated; bonuses and remuneration rewarded excess risk-taking; those who created complicated financial instruments often did so for the transaction fees that they could charge rather than the value created for those they were supposed to benefit - ordinary borrowers and savers.
So we must now put in place new structures and new rules for the future and so this cannot simply be a short term rescue that papers over the cracks, only a surgical approach that gets to the root of the problem will now work to ensure the problems do not return.
And we have to recognise that the action we need is not just national, but global. Almost exactly 10 years ago in a speech at Harvard University I made detailed proposals to reshape the international financial system for the new world, but then found it hard to persuade other countries that this was the time to adopt these changes. I said then that the institutions and initiatives of the post-war era had been shaped only to the conditions of their time, a world economy of protected national markets, limited capital flows and fixed exchange rates. I said that as the world changed, we had to change and that our aim should be an international financial system for the 21st century that recognises all the new realities, that we are open, not sheltered economies, that we have international, not national capital markets, that we have global, not local competition, and we need an international financial system that captures the full benefit of global markets and capital flows, minimises the risk of disruption and maximises opportunities for all, lifting up the most vulnerable in different parts of the world.
The founders of Bretton Woods had devised in the 1940s rules for a world of limited capital flows and we must now devise rules for a world of global capital flows.
It is true that at a difficult time during the Second World War far-sighted leaders like Roosevelt and Churchill were already thinking about the framework that would be needed for the future, whilst in the heat of battle they were taking steps to forge the reconstruction and peace that was to come. GATT, the UN, the World Bank, the IMF, they were all devised by men and women of great vision, institutions profoundly of their time but designed to help people make the most of the times to come.
It is with the same courage and foresight of these founders that we must now reform and renew the international financial system and we should do it around the agreed principles that are shared by every country of transparency, integrity, responsibility, good housekeeping and cooperation across borders.
First, we need transparency. We must now insist on openness and disclosure with an immediate adoption of the internationally agreed accounting standards, and for example the standards being brought forward for the valuation of assets. And transparency I think we all know now must extend to markets, including the trillion dollar credit insurance markets which now play a central role in shifting risk around the system.
Secondly, integrity. We must tackle once and for all these conflicts of interest which have distorted behaviour and undermine trust and now lie at the heart of public concern. This includes not just the work of credit agencies but the system of remuneration which should be founded on long term excess, not short term excessive risk-taking. And we must ensure that those who run our financial institutions have the right incentives for long term success.
And then third, responsibility. We must ensure that all board members have the competence and expertise to manage the risks and understand the risks and so effectively supervise their own institutions and do not walk away from their obligations.
And then fourth, sound banking practice. We must have supervision that looks at both solvency and liquidity and ensures adequate protection through the economic cycle to prevent speculative bubbles when markets are rising and to cushion the impact of shocks when markets are falling.
But fifth, around us we must build a new Bretton Woods, a new financial architecture for the years ahead. Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed, but we must now create the right new international financial architecture for the global age.
This crisis demonstrates beyond doubt that a global capital market requires much stronger global cooperation and supervision and we need to ensure that we have an effective global early warning system to alert us across continents to economic and financial risks, we need globally accepted standards of supervision that apply equally in all countries, we need stronger arrangements for a cross-border supervision of global firms, and if we have learned anything, much stronger institutions for cooperation and concerted action in a crisis.
So the IMF and Financial Stability Forum should act as an early warning system, focused on crisis prevention rather than crisis resolution. We need what global companies themselves have asked for - coordinated supervision to end the mis-match between global capital flows and only national supervision, and that is why by the end of the year I believe we should implement the proposals agreed by the companies themselves for colleges of supervisors to oversee cross-border financial institutions.
And action for financial stability should be accompanied by wider international cooperation on oil and energy policy and on macro-economic policy such as that which began last week with a coordinated European and American action on interest rates that should extend to Asia and to the rest of the world where it is necessary.
