House of Lords Grand Committee: Financial Institutions
Robert Skidelsky
Hansard: column GC63-5 | Thursday, October 30, 2008

I, too, am grateful to the noble Lord, Lord Bilimoria, for initiating this debate on international financial institutions in the middle of the biggest financial meltdown since the war.
I shall concentrate my brief remarks on the IMF. Unlike the noble Lord, Lord Desai, with whom I rarely disagree, I do not want to abolish the IMF—his suggestion that distressed borrowers come to private banks for loans is a remarkable expression of confidence in the private banking system at this moment of its performance—I want to reform it.
My reform would be based on reminding us of what it stood for: to promote a stable system of exchange rates by preventing countries from manipulating their currencies to get unfair trade advantages. Various things went with that: the commission to devalue in exceptional circumstances, short-term loans, temporary balance-of-payments difficulties, and allowing countries to prohibit imports of goods through something which the noble Lord will know about but I do not know how many others do—the never used scarce-currency clause. All this was designed to prevent the development of global imbalances of the kind that we have seen recently. It did not work out that way, however, because creditor countries such as Germany and France in the first phase of the Bretton Woods system found it more convenient to increase their dollar reserves than to revalue their currencies, and the United States could run increasing balance-of-trade deficits by printing Treasury bills.
The whole system fell down in 1971, and the main purpose of the IMF's requirement to preserve stable currencies was abolished in 1978. As we have just been told, we were on a non-system of flexible exchange rates, but this did not solve the problem of global imbalances, as it was supposed to. Since the 1980s, the problem has re-emerged in spades. China and the Far East now hold US Treasury bills in large quantities, which the United States pays out to finance its huge current account deficits of $500 billion a year, on average, for the past four or five years. This is called the savings glut in Asia, the counterpart of which is the consumption glut in the United States.
Exchange undervaluation by Asian countries has been a deliberate policy to carry out both the accumulation of reserves and their export drives. This is where we come to the connection between this world situation and our current financial crisis, because these excess Asian savings have been shovelled into the housing bubbles of both America and Britain: not directly, of course, but by enabling our Governments to pursue expansionary, monetary and fiscal policies that fuelled an unsustainable credit and housing boom. That has contributed directly to the current financial collapse.
For the past 10 years, America has in effect had no budget constraint. What is true of a country was true of lots of individuals, who piled up personal debt on the back of constantly inflating house and asset prices. The IMF, as the noble Lord, Lord Bilimoria, rightly said and as the noble Lord, Lord Desai, reiterated, has been completely marginalised in this process, because it has lost its central purpose: to prevent these huge imbalances from occurring in the first place. Any reform of the IMF must therefore start with seeing how we might reform the international payments system in order to promote a balance-of-payments adjustment. It seems obvious to me.
The clear first step is to attack the Asian fetish of building up huge reserves for crisis insurance. The best way to do that is to activate the IMF's power to create international fiat money by means of special drawing rights. The quantity of extra reserves would have to be very high, but we have been used to talking of hundreds of billions of dollars, and a few hundred billion more will not alarm us that much.
Secondly, we must find some method to prevent the pile-up of large creditor balances and their counterpart of persisting debtor balances. In other words, we need to revisit the whole question of exchange rate adjustment. A well known suggestion by the economist John Williamson is that the major countries should agree periodically on reference exchange rates which they intervene to push market exchange rates towards. That is a complicated suggestion, but it begins to address the problem of how we can keep our exchange rates more stable and prevent global imbalances building up. That would be a desirable new project for a Bretton Woods conference. We will come to that in the end. When we do, we should hold it at the Mount Washington Hotel in Bretton Woods, New Hampshire, where Keynes and Harry Dextor White hammered out the original Bretton Woods system that served the world so well for 30 years.